NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19,
2006, originally under the name “Kerrisdale Mining Corporation”. On September 24, 2009, the Company changed its name
to “China Jo-Jo Drugstores, Inc.” in connection with a share exchange transaction as described below.
On
September 17, 2009, the Company completed a share exchange transaction with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”),
whereby 7,900,000 shares of common stock were issued to the stockholders of Renovation in exchange for 100% of the capital stock
of Renovation. The completion of the share exchange transaction resulted in a change of control. The share exchange transaction
was accounted for as a reverse acquisition and recapitalization and, as a result, the consolidated financial statements of the
Company (the legal acquirer) are, in substance, those of Renovation (the accounting acquirer), with the assets and liabilities,
and revenues and expenses, of the Company being included effective from the date of the share exchange transaction. Renovation
has no substantive operations of its own except for its holdings of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin
Management”), Zhejiang Shouantang Medical Technology Co., Ltd. (“Shouantang Technology”) and Hangzhou Jiutong
Medical Technology Co., Ltd (“Jiutong Medical”), its wholly-owned subsidiaries.
The
Company is a retail, both online and offline, and wholesale distributor of pharmaceutical and other healthcare products in the
People’s Republic of China (“China” or the “PRC”). The Company’s offline retail business is
comprised primarily of pharmacies, a majority of which are operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou
Pharmacy”), a company that the Company controls through contractual arrangements.
The
Company’s offline retail business also includes four medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional
and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou
Service”), both of which are also controlled by the Company through contractual arrangements. On December 18, 2013, Jiuzhou
Service established, and held 51% of, Hangzhou Shouantang Health Management Co., Ltd. (“Shouantang Health”), a PRC
company licensed to sell health care products. Shouantang Health was closed in April 2015.
The
Company’s online pharmacy license remains with Jiuzhou Pharmacy and its online retail pharmacy business was primarily conducted
through Zhejiang Quannuo Internet Technology Co., Ltd. (“Quannuo Technology”), which provided technical, sales and
logistic support. In May 2015, the Company established Zhejiang Jianshun Network Technology Co. Ltd, a joint venture with Shanghai
Jianbao Technology Co., Ltd. (“Jianshun Network”), in order to develop its online pharmaceutical sales from large
commercial medical insurance companies. On September 10, 2015, Renovation set up a new entity named Hangzhou JiuYi Medical Technology
Co. Ltd. (“Jiuyi Technology”) to provide additional technical support such as webpage development to our online pharmacy
business. In November 2015, the Company sold all of the equity interests of Quannou Technology to six individuals for approximately
$17,121 (RMB107,074). After the sale, its technical support function has been transferred back to Jiuzhou Pharmacy, which hosts
our online pharmacy.
The
Company’s wholesale business is primarily conducted through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”),
which is licensed to distribute prescription and non-prescription pharmaceutical products throughout China. Jiuzhou Pharmacy acquired
Jiuxin Medicine on August 25, 2011.
The
Company’s herb farming business is conducted by Hangzhou Qianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”),
a wholly-owned subsidiary of Jiuxin Management, which operates a cultivation project of herbal plants used for traditional Chinese
medicine (“TCM”).
The
accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
Entity
Name
|
|
Background
|
|
Ownership
|
Renovation HK
|
|
●
Incorporated in Hong Kong SAR on September 2, 2008
|
|
100%
|
|
|
|
|
|
Jiuxin Management
|
|
●
Established in the PRC on October 14, 2008
●
Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law
●
Registered capital of $4.5 million fully paid
|
|
100%
|
|
|
|
|
|
Shouantang
Technology
|
|
●
Established in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
●
Registered capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid
●
Deemed a WFOE under PRC law
●
Invests and finances the working capital of Quannuo Technology
|
|
100%
|
|
|
|
|
|
Qianhong
Agriculture
|
|
●
Established in the PRC on August 10, 2010 by Jiuxin Management
●
Registered capital of RMB 10 million fully paid
●
Carries out herb farming business
|
|
100%
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
●
Established in the PRC on September 9, 2003
●
Registered capital of RMB 5 million fully paid
●
Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
Jiuzhou Clinic
(1)
|
|
●
Established in the PRC as a general partnership on October 10, 2003
●
Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
Jiuzhou Service
(1)
|
|
●
Established in the PRC on November 2, 2005
●
Registered capital of RMB 500,000 fully paid
●
Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
Jiuxin
Medicine
|
|
●
Established in PRC on December 31, 2003
●
Acquired by Jiuzhou Pharmacy in August 2011
●
Registered capital of RMB 10 million fully paid
●
Carries out pharmaceutical distribution services
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiutong
Medical
|
|
●
Established in the PRC on December 20, 2011 by Renovation
●
Registered capital of $2.6 million fully paid
●
Currently has no operation
|
|
100%
|
|
|
|
|
|
Shouantang
Bio
|
|
●
Established in the PRC in October, 2014 by Shouantang Technology
●
100% held by Shouantang Technology
●
Registered capital of RMB 1,000,000 fully paid
●
Sells nutritional supplements under its own brand name
|
|
100%
|
|
|
|
|
|
Jianshun Network
|
|
●
Established in the PRC in May, 2015
●
35% held by Jiuzhou Pharmacy
●
Manages sales on official website of the online pharmacy
|
|
Joint
Venture 35% owned by Jiuzhou Pharmacy
|
|
|
|
|
|
Jiuyi
Technology
|
|
●
Established in the PRC on September 10, 2015
●
100% held by Renovation
●
Technical support to online pharmacy
|
|
100%
|
(1)
|
Jiuzhou
Pharmacy, Jiuzhou Clinic and Jiuzhou Service have been under the common control of the three shareholders of Renovation (the
“Owners”) since their respective establishment dates, pursuant to agreements among the Owners to vote their interests
in concert as memorialized in a voting agreement. Based on such voting agreement, the Company has determined that common control
exists among these three companies. Operationally, the Owners have operated these three companies in conjunction with one
another since each company’s respective establishment date. Jiuxin Medicine is also deemed under the common control
of the Owners as a subsidiary of Jiuzhou Pharmacy.
|
(2)
|
To
comply with certain foreign ownership restrictions of pharmacy and medical clinic operators, Jiuxin Management entered into
a series of contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service on August 1, 2009. These contractual
arrangements are comprised of five agreements: consulting services agreement, operating agreement, equity pledge agreement,
voting rights agreement and option agreement. As a result of these agreements, which obligate Jiuxin Management to absorb
all of the risks of loss from the activities of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and enable the Company
(through Jiuxin Management) to receive all of their expected residual returns, the Company accounts for all three companies
(as well as subsidiaries of Jiuzhou Pharmacy) as a variable interest entity (“VIE”) under the accounting standards
of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Jiuzhou Pharmacy,
Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiary under the control of Jiuzhou Pharmacy, Jiuxin Medicine and Shouantang
Bio are consolidated into the financial statements of the Company.
|
Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and consolidation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles (“US GAAP”) for complete
financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. These condensed consolidated financial statements and notes should be read
in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report
on Form 10-K for the fiscal year ended March 31, 2016 filed with the SEC on June 28, 2016. Operating results for the three months
ended June 30, 2016 may not be necessarily indicative of the results to be expected for the full year.
The
condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs. All
significant inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation.
Consolidation
of variable interest entities
In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders
lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting
purposes.
The
Company has concluded, based on the contractual arrangements, that Jiuzhou Pharmacy (including its subsidiaries and controlled
entities), Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly-owned subsidiary, Jiuxin Management,
absorbs a majority of the risk of loss from the activities of these companies, thereby enabling the Company, through Jiuxin Management,
to receive a majority of their respective expected residual returns.
Additionally,
as Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are under common control, the consolidated financial statements have been
prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial
statements.
Control
and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members
who hold more than 50 percent of the voting ownership interest of each entity.” Because the Owners collectively own 100%
of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and have agreed to vote their interests in concert since the establishment
of each of these three companies as memorialized the Voting Rights Proxy Agreement, the Company believes that the Owners collectively
have control and common control of the three companies. Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic
and Jiuzhou Service were constructively held under common control by Jiuxin Management as of the time the Contractual Agreements
were entered into, establishing Jiuxin Management as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation,
which is owned by the Company.
Risks
and Uncertainties
The
operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results
of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of
the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These include risks associated with, among others, the political,
economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes
in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations
and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in
Note 1, this may not be indicative of future results.
The
Company has significant cash deposits with suppliers in order to obtain and maintain inventory. The Company’s ability to
obtain products and maintain inventory at existing and new locations is dependent upon its ability to post and maintain significant
cash deposits with its suppliers. In the PRC, many vendors are unwilling to extend credit terms for product sales that require
cash deposits to be made. The Company does not generally receive interest on any of its supplier deposits, and such deposits are
subject to loss as a result of the creditworthiness or bankruptcy of the party who holds such funds, as well as the risk from
illegal acts such as conversion, fraud, theft or dishonesty associated with the third party. If these circumstances were to arise,
the Company would find it difficult or impossible, due to the unpredictability of legal proceedings in China, to recover all or
a portion of the amount on deposit with its vendors or landlords.
Members
of the current management team own controlling interests in the Company and are also the Owners of the VIEs in the PRC. The
Company only controls the VIEs through contractual arrangements which obligate it to absorb the risk of loss and to receive the
residual expected returns. As such, the controlling shareholders of the Company and the VIEs could cancel these agreements
or permit them to expire at the end of the agreement terms, as a result of which the Company would not retain control of the VIEs.
Use
of estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant
estimates made in the preparation of the accompanying unaudited condensed consolidated financial statements relate to the assessment
of the carrying values of accounts receivable, advances to suppliers and related allowance for doubtful accounts, useful lives
of property and equipment, and fair value of its purchase option derivative liability. Because of the use of estimates inherent
in the financial reporting process, actual results could materially differ from those estimates.
Fair
value measurements
The
Company has adopted ASC Topic 820, “Fair Value Measurement and Disclosure,” which defines fair value, establishes
a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new
fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and
unobservable inputs, which may be used to measure fair value and include the following:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The Company's financial assets and liabilities,
which include financial instruments as defined by ASC 820, include cash and cash equivalents, accounts receivable, accounts payable,
long-term debt and derivatives. The carrying amounts of cash and cash equivalents, Financial assets available for sales, accounts
receivable, notes receivables, and accounts payable are a reasonable approximation of fair value due to the short maturities of
these instruments (Level 1). The carrying amount of notes payable approximates fair value based on borrowing rates of similar bank
loan currently available to the Company (Level 2) (See Note 13). The carrying amount of the Company's derivative instruments is
recorded at fair value and is determined based on observable inputs that are corroborated by market data (Level 2). As of June
30, 2016 and March 31, 2016, the fair values of our derivative instruments that were carried at fair value (See Note 17).
|
|
Active Market
for Identical
Assets
(Level 1)
|
|
|
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value
|
|
Cash and cash equivalents
|
|
|
5,058,091
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,058,091
|
|
Financial assets available for sale
|
|
|
451,512
|
|
|
|
-
|
|
|
|
-
|
|
|
|
451,512
|
|
Notes payable
|
|
|
-
|
|
|
|
11,573,880
|
|
|
|
-
|
|
|
|
11,573,880
|
|
Warrants liability
|
|
|
-
|
|
|
|
668,497
|
|
|
|
-
|
|
|
|
668,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,509,603
|
|
|
|
12,242,377
|
|
|
|
-
|
|
|
|
17,751,980
|
|
Revenue
recognition
Revenue
from sales of prescription medicine at the drugstores is recognized when the prescription is filled and the customer picks
up and pays for the prescription.
Revenue
from sales of other merchandise at the drugstores is recognized at the point of sale, which is when a customer pays for and receives
the merchandise. Sales of drugs reimbursed by the local government medical insurance agency and receivables from the agency are
recognized when a customer pays for the drugs at a store. Based on historical experience, a reserve for potential loss from denial
of reimbursement on certain unqualified drugs is made to the receivables from the government agency.
Revenue
from medical services is recognized after the service has been rendered to a customer.
Revenue
from online pharmacy sales is recognized when merchandise is delivered to customers. While most deliveries take one day, certain
deliveries may take longer depending on a customer’s location. Any loss caused in a shipment will be reimbursed by the Company’s
courier company. In addition, a proper sales discount is made to account for the potential loss from returns from customers. Historically,
sales returns have been minimal.
Revenue
from sales of merchandise to non-retail customers is recognized when the following conditions are met: (1) persuasive evidence
of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement);
(2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received
by the customer at its designated location in accordance with the sales terms; (3) the sales price is fixed or determinable; and
(4) collectability is probable. Historically, sales returns have been minimal.
The
Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to
the sales of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying
consolidated balance sheets until it is paid to the relevant PRC tax authorities.
Restricted
cash
The
Company’s restricted cash consists of cash in a bank as security for its notes payable. The Company has notes payable outstanding
with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable
are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified
as a current asset.
Accounts
receivable
In the Company’s retail pharmacy
business, accounts receivable represents the following: (1) amounts due from banks relating to retail sales that are paid or settled
by the customers’ debit or credit cards, (2) amounts due from government social security bureaus and commercial health insurance
programs relating to retail sales of drugs, prescription medicine, and medical services that are paid or settled by the customers’
medical insurance cards, (3) amounts due from non-bank third party payment instruments such as Alipay from certain e-commerce platforms
and (4) amounts due from non-retail customers for sales of merchandise.
Accounts
receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts,
as necessary. In the Company’s retail business, accounts receivable mainly consist of reimbursements due from the government
insurance bureaus and commercial health insurance programs and are usually collected within two or three months. The Company directly
writes off delinquent account balances, which is determined to be uncollectible after confirming with the appropriate bureau or
program each month. Additionally, the Company also makes estimated reserves on related outstanding accounts receivable based on
historical trend.
In
the Company’s online pharmacy business, accounts receivables primarily consist of amounts due from non-bank third party
payment instruments such as Alipay from certain e-commerce platforms. To purchase pharmaceutical products from the e-commerce
platforms such as Tmall, customers are required to pay to certain non-bank third party payment instruments such as Alipay, which,
in turn, will reimburse the Company within seven days to a month. Except for customer returns of sold products, the receivables
from these payments instruments are rarely uncollectible.
In
its wholesale business, the Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances.
Under the aging method, bad debt percentages are determined by management, based on historical experience and the current
economic climate, are applied to customers’ balances categorized by the number of months the underlying invoices have remained
outstanding. At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the aging
method. When facts subsequently become available to indicate that the allowance provided requires an adjustment, a corresponding
adjustment is made to the allowance account as a change in estimate.
Advances
to suppliers
Advances
to suppliers consist of prepayments to our vendors such as pharmaceutical manufacturers and other distributors. Since the acquisition
of Jiuxin Medicine, we have transferred almost all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou Pharmacy
only makes purchase on certain non-medical products such as sundry. As a result, almost all of advance to suppliers balances are
with Jiuxin Medicine.
Advances
to suppliers for our drug wholesale business consist of prepayments to our vendors such as pharmaceutical manufacturers and other
distributors. We typically receive products from vendors within three to nine months after making prepayments. We continuously
monitor delivery from and payments to our vendors while maintaining a provision for estimated credit losses based upon historical
experience and any specific supplier issues such as discontinuing of inventory supply that have been identified. If we are
having difficulty receiving products from a vendor, we take the following steps: cease purchasing products from the vendor, ask
for return of our prepayment promptly, and if necessary, take legal actions. If all of these steps are unsuccessful, management
then determines whether or not the prepayments should be reserved or written off.
Inventories
Inventories are stated at the lower
of cost or market value. Cost is determined using the first in first out (FIFO) method. Market value is the lower of replacement
cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse
location. Herbs that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer,
and labor costs that are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development
cost. All the costs are accumulated until the time of harvest and then allocated to harvested herbs costs when they are sold. The
Company periodically reviews its inventory and records write-downs to inventories for shrinkage losses and damaged merchandise
that are identified. The Company provides a reserve for estimated inventory obsolescence or excess quantities on hand equal to
the difference, if any, between the cost of the inventory and its estimated realizable value.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold
improvements are amortized over the shorter of lease term or remaining lease period of the underlying assets. Following are the
estimated useful lives of the Company’s property and equipment:
|
|
|
Estimated
Useful Life
|
|
Leasehold
improvements
|
|
|
3-10
years
|
|
Motor
vehicles
|
|
|
3-5
years
|
|
Office
equipment & furniture
|
|
|
3-5
years
|
|
Buildings
|
|
|
35
years
|
|
Maintenance,
repairs and minor renewals are charged to expenses as incurred. Major additions and betterment to property and equipment are capitalized.
Intangible
assets
Intangible
assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost
of a group of assets acquired in a transaction is allocated to the individual assets based on their relative fair values.
The
estimated useful lives of the Company’s intangible assets are as follows:
|
|
|
Estimated
Useful Life
|
|
Land
use right
|
|
|
50
years
|
|
Software
|
|
|
3
years
|
|
The
Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might
be impaired.
Impairment
of long lived assets
The Company evaluates long lived tangible
and intangible assets for impairment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows. Recoverability is measured by comparing the assets’ net book value to the related projected
undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted
cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. There were
no fixed assets and farmland assets impaired for the three months ended June 30, 2016 (See Note 6 and 9).
Notes
payable
During
the normal course of business, the Company regularly issues bank acceptance bills as a payment method to settle outstanding accounts
payables with various material suppliers. The Company records such bank acceptance bills as notes payable. Such notes payable
are generally short term in nature due to their short maturity period of six to nine months.
Income
taxes
The Company follows FASB ASC Topic 740,
“Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
The
Company has adopted FASB ASC Topic 740-10-25, which provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company performed self-assessment and the
Company’s liability for income taxes includes the liability for unrecognized tax benefits, interest and penalties which
relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations
has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for
a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could
be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results
of operations for the given period. As of June 30, 2016 and March 31, 2016, the management of the Company considered that the
Company had no additional liabilities for uncertain tax positions affecting its consolidated financial position and results of
operations or cash flows, and will continue to evaluate for any uncertain position in the future. There are no estimated interest
costs and penalties provided in the Company’s consolidated financial statements for the three months ended June 30, 2015
and 2016, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant
tax authorities and the major one is the China Tax Authority.
Value
added tax
Sales
revenue represents the invoiced value of goods, net of VAT. All of the Company’s products are sold in the PRC and are subject
to a VAT on the gross sales price. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be
offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished
products. The Company recorded a VAT payable net of payments in the accompanying financial statements.
The accounting standards clarify the
accounting and disclosure requirements for uncertain tax positions and prescribe a recognition threshold and measurement attribute
for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also
provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. No
significant penalties, uncertain tax provisions or interest relating to income taxes were incurred during the periods ended June
30, 2016 and 2015.
Stock
based compensation
The
Company follows the provisions of ASC 718, “Compensation — Stock Compensation,” which establishes accounting
standard for non-employee and employee stock-based awards. Under the provisions of ASC 718, the fair value of stock issued is
used to measure the fair value of services received as the Company believes such approach is a more reliable method of measuring
the fair value of the services. For non-employee stock-based awards, fair value is measured based on the value of the Company’s
common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s
performance is complete. The fair value of the equity instrument is calculated and then recognized as compensation expense over
the requisite performance period. For employee stock-based awards, share-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense with graded vesting on a straight–line basis over the
requisite service period for the entire award.
Advertising
and promotion costs
Advertising
and promotion costs are expensed as incurred and amounted to $68,849 and $63,166 for the three months ended June 30, 2016 and
2015, respectively. Such costs consist primarily of print and promotional materials such as flyers to local communities.
Operating
leases
The
Company leases premises for retail drugstores, offices and wholesale warehouse under non-cancelable operating leases. Operating
lease payments are expensed over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 8-year
term with a renewal option upon the expiration of the lease; the wholesale warehouse lease has a 10-year term with a renewal option
upon the expiration of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the
terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease. Land
leased from the government is amortized on a straight-line basis over a 30-year term.
Foreign
currency translation
The
Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The
Company’s subsidiaries and VIEs maintain their books and records in their functional currency the Renminbi (“RMB”),
the currency of the PRC.
In
general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows
are translated at average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported
on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity
accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the subsidiaries
and VIEs are recorded as accumulated other comprehensive income.
The
balance sheet amounts, with the exception of equity, at June 30, 2016 and March 31, 2016 were translated at 1 RMB to $0.1505 USD
and at 1 RMB to $0.1551 USD, respectively. The average translation rates applied to income and cash flow statement amounts for
the three months ended June 30, 2016 and 2015 were at 1 RMB to $0.1531 USD and at 1 RMB to $0.1638 USD, respectively.
Concentrations
and credit risk
Certain
financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company
has cash balances at financial institutions located in Hong Kong and PRC. Balances at financial institutions in Hong Kong may,
from time to time, exceed Hong Kong Deposit Protection Board’s insured limits. Since March 31, 2015, balances at financial
institutions and state-owned banks within the PRC are covered by insurance up to RMB 500,000 (USD 77,050) per bank. As of June
30, 2016 and March 31, 2016, the Company had deposits totaling $10,580,915 and $19,956,275 that were covered by insurance,
respectively. To date, the Company has not experienced any losses in such accounts.
For
the three months ended June 30, 2016, two vendors collectively accounted for 36.2% of the Company’s total purchases and
two vendors collectively accounted for 24.6% of total advances to suppliers. For the three months ended June 30, 2015, one vendor
accounted for 16.5% of the Company’s total purchases and one vendor accounted for 11.2% of total advances to suppliers.
For
the three months ended June 30, 2016 and 2015, no customer accounted for more than 10% of the Company’s total sales or accounts
receivable.
Recent
Accounting Pronouncements
Measurement
of Credit Losses on Financial Instruments
In
June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU")
2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
This ASU introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial
instruments, including trade receivables. The estimate of expected credit losses will require considerations of historical information,
current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users
of financial statements to understand the assumptions, models and methods for estimating expected credit losses. This ASU is effective
for the Company beginning in the first quarter of 2020 and allows for early adoption beginning in the first quarter of 2019. The
Company is currently evaluating the impact the ASU will have on its Consolidated Financial Statements.
Improvements
to Employee Share-Based Payment Accounting
In
March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting,” requiring the recognition of the income tax effects of stock awards in the income statement when the
awards are settled and allowing the Company to repurchase more of an employee's shares than allowed under current guidance, without
triggering liability accounting. This ASU also addresses simplifications related to statement of cash flows classification and
accounting for forfeitures. This ASU is effective for the Company beginning in the first quarter of 2017 and allows for early
adoption. The Company is currently evaluating the impact this ASU will have on its Consolidated Financial Statements.
Balance
Sheet Classification of Deferred Taxes
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,”
simplifying the presentation of deferred income taxes by requiring all deferred taxes to be presented as noncurrent in the balance
sheet. In the first quarter of 2016, the Company elected to early adopt ASU 2015-17 on a prospective basis. The adoption of this
standard did not have a material impact on the Company's Consolidated Financial Statements.
Simplifying
the Measurement of Inventory
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” amending
the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value instead
of the lower of cost or market value. This ASU is effective for the Company beginning in the first quarter of 2017, allows for
early adoption and must be applied prospectively after the date of adoption. This ASU is not expected to have a material impact
on the Company’s Consolidated Financial Statements.
Revenue
Recognition
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” replacing most existing
revenue recognition guidance under GAAP and eliminating industry specific guidance. The core principle of the new guidance is
that an entity should recognize revenue for the transfer of goods and services equal to an amount it expects to be entitled to
receive for those goods and services.
In
August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective
Date,” deferring the effective date by one year.
In
March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Gross versus Net),” clarifying the principal versus agent guidance in the new revenue recognition standard, by
revising the indicators to focus on evidence that the company is a principal.
In
April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing,” reducing the complexity when applying the guidance for identifying performance obligations and clarifying
how to determine whether revenue related to a performance obligation for an intellectual property license is recognized over time
or at a point in time.
In
May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients,” clarifying certain core recognition principles including collectability, sales tax presentation,
noncash consideration, contract modifications and completed contracts at transition.
These
ASUs are effective for the Company beginning in the first quarter of 2018, allow for early adoption in the first quarter of 2017
and may be applied using either a full retrospective approach or a modified retrospective approach. The Company is currently evaluating
the method of adoption and the impact these ASUs will have on its Consolidated Financial Statements.
NOTE
3 – FINANCIAL ASSETS AVAILABLE FOR SALE
As
of June 30, 2016 and March 31, 2016, financial assets available for sale amounted to $451,512 (RMB 3,000,000)
and $465,165 (RMB 3,000,000), respectively. On March 28, 2016, the Company purchased from Bank of Hangzhou a wealth-management
product called “Lehui 2016”, which bears an annual interest rate of 4.15% and is due on September 26, 2016. The total
principal is $451,512 (RMB 3,000,000).
NOTE
4 – TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consisted of the following:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Accounts receivable
|
|
$
|
10,926,999
|
|
|
$
|
10,153,840
|
|
Less: allowance for doubtful accounts
|
|
|
(2,065,115
|
)
|
|
|
(2,099,243
|
)
|
Trade accounts receivable, net
|
|
$
|
8,861,884
|
|
|
$
|
8,054,597
|
|
For
the three months ended June 30, 2016 and 2015, $32,592 and $60,332 in accounts receivable were directly written off, respectively.
Additionally, for the three months ended June 30, 2016 and 2015, no accounts receivable were written off against previous allowance
for doubtful accounts, respectively.
Note
5 – OTHER CURRENT ASSETS
Other
current assets consisted of the following:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Prepaid rental expenses(1)
|
|
$
|
1,203,308
|
|
|
$
|
1,052,196
|
|
Prepaid and other current assets(2)
|
|
|
677,935
|
|
|
|
465,852
|
|
Total
|
|
$
|
1,881,243
|
|
|
$
|
1,518,048
|
|
(1)
|
Represents store and office rental expenses that were usually prepaid and amortized over the prepayment period.
|
|
|
(2)
|
The increase represents certain employee health insurance premium payment incurred in April 2016.
|
Note 6
– PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Building
|
|
$
|
1,613,714
|
|
|
$
|
1,662,510
|
|
Leasehold improvements
|
|
|
11,973,018
|
|
|
|
12,308,190
|
|
Farmland development cost
|
|
|
1,799,936
|
|
|
|
1,854,364
|
|
Office equipment and furniture
|
|
|
5,406,189
|
|
|
|
5,560,171
|
|
Motor vehicles
|
|
|
605,912
|
|
|
|
624,235
|
|
Total
|
|
|
21,398,769
|
|
|
|
22,009,470
|
|
Less: Accumulated depreciation
|
|
|
(13,958,965
|
)
|
|
|
(14,138,992
|
)
|
Impairment*
|
|
|
(2,259,090
|
)
|
|
|
(2,327,402
|
)
|
Property and equipment, net
|
|
$
|
5,180,714
|
|
|
$
|
5,543,076
|
|
*The variance of impairment from March
31, 2016 to June 30, 2016 is solely caused by exchange rate variance.
Total
depreciation expense for property and equipment was $239,010 and $411,793 for the three months ended June 30, 2016 and 2015, respectively.
There were no fixed assets impaired in the three months ended June 30, 2016 and 2015.
Note 7
– ADVANCES TO SUPPLIERS
Advances
to suppliers consist of deposits with or advances to outside vendors for future inventory purchases. Most of the Company’s
vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchase
on a timely basis. This amount is refundable and bears no interest. As of June 30, 2016 and March 31, 2016, advance
to suppliers consist of the following:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Advance to suppliers
|
|
$
|
4,804,452
|
|
|
$
|
4,336,207
|
|
Less: allowance for doubtful accounts
|
|
|
(112,457
|
)
|
|
|
(105,542
|
)
|
Advance to suppliers, net
|
|
$
|
4,691,995
|
|
|
$
|
4,230,665
|
|
For
the three months ended June 30, 2016 and 2015, none of the advances to suppliers were written off against previous allowance for
doubtful accounts, respectively.
Note
8 – INVENTORY
Inventory
consisted of finished goods, which were $10,732,441 and $10,802,691 as of June 30, 2016 and March 31, 2016, respectively. The
Company constantly monitors its potential obsolete products and is allowed to return products close to expiration dates to its
suppliers. Any loss on damaged items is immaterial and will be recognized immediately. As a result, no reserves were made as of
June 30, 2016 and March 31, 2016.
Note
9 – FARMLAND ASSETS
Farmland
assets are ginkgo trees planted in 2012 and expected to be harvested and sold in several years. As of June 30, 2016 and March
31, 2016, farmland assets consisted of the following:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2016
|
|
Farmland assets
|
|
$
|
2,397,749
|
|
|
$
|
2,346,209
|
|
Less: Impairment*
|
|
|
(760,992
|
)
|
|
|
(784,004
|
)
|
Farmland assets, net
|
|
$
|
1,636,757
|
|
|
$
|
1,562,205
|
|
*
The estimated fair value is estimated to be lower than its investment value in fiscal 2015 and 2016.
Note 10
– LONG TERM DEPOSITS, LANDLORDS
As
of June 30, 2016 and March 31, 2016, long term deposits amounted to $2,380,086 and $2,452,056, respectively. Long term deposits
are money deposited with or advanced to landlords for securing retail store leases for which the Company does not anticipate applying
or being returned within the next twelve months. Most of the Company’s landlords require a minimum of nine months’
rent being paid upfront plus additional deposits.
Note 11
– OTHER NONCURRENT ASSETS
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2016
|
|
Prepayment for headquarter office(1)
|
|
$
|
352,179
|
|
|
$
|
-
|
|
Prepayment for lease of land use right(2)
|
|
|
2,518,960
|
|
|
|
2,595,129
|
|
Other noncurrent assets
|
|
$
|
2,871,139
|
|
|
$
|
2,595,129
|
|
(1) As of June 30, 2016, a total
of $586,966 (RMB3,900,000) was prepaid as headquarter office rental for five years from January 1, 2016 to December 31, 2020.
As of June 30, 2016, prepaid rental for less than one year was classified as current assets, the remaining balance of
$352,179 was classified as noncurrent assets.
(2) The prepayment for lease of land use
right is a payment made to a local government in connection with entering into a 30-year operating land lease agreement. The
land is currently used to cultivate Ginkgo trees. This prepayment includes a deposit of $1,053,528, which will be refundable
on the due date. Based on expected output from planted Gingko trees such as expected fruit production and tree market value,
the fair value of the lease prepayment was lower than carrying cost. As a result, the Company recorded impairment on the
lease prepayment.
The
amortization of the prepayment for the lease of land use right was approximately $15,805 and $15,949 for the three months ended
June 30, 2016 and 2015, respectively.
The
Company’s amortizations of the prepayment for lease of land use right for the next five years and thereafter are as follows:
Years ending June 30,
|
|
Amount
|
|
2017
|
|
$
|
63,221
|
|
2018
|
|
|
63,221
|
|
2019
|
|
|
63,221
|
|
2020
|
|
|
63,221
|
|
2021
|
|
|
63,221
|
|
Thereafter
|
|
|
1,149,323
|
|
Note 12–
INTANGIBLE ASSETS
Net
intangible assets consisted of the following at:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
License (1)
|
|
$
|
1,446,343
|
|
|
$
|
1,482,492
|
|
Land use rights (2)
|
|
|
1,467,647
|
|
|
|
1,512,027
|
|
Total intangible assets
|
|
|
2,913,990
|
|
|
|
2,994,519
|
|
Less: accumulated amortization
|
|
|
(78,536
|
)
|
|
|
(65,740
|
)
|
Intangible assets, net
|
|
$
|
2,835,454
|
|
|
$
|
2,928,779
|
|
Amortization
expense of intangibles for the three months ended June 30, 2016 and 2015 amounted to $7,490 and $8,013, respectively.
(1)
|
This
represents the fair value of the licenses of insurance applicable drugstores acquired from Sanhao Pharmacy. The licenses allow
patients to pay by insurance cards at stores and the stores can get reimbursed from the Human Resource and Social Security
Department of Hangzhou City.
|
|
|
(2)
|
In
July 2013, the Company purchased the land use right of a plot of farmland in Lin’ an, Hangzhou, intended for the establishment
of an herb processing plant in the future. However, as our farming business in Lin’an has not grown, the Company does
not expect completion of the plant in near future.
|
Note 13
– NOTES PAYABLE
The
Company has credit facilities with Hangzhou United Bank (“HUB”), Bank of Hangzhou (“BOH”), Industrial
and Commercial Bank of China (“ICBC”) and Zhejiang Tailong Commercial Bank (“ZTCB”) that provided working
capital in the form of the following bank acceptance notes at June 30, 2016 and March 31, 2016:
|
|
|
|
|
Origination
|
|
|
Maturity
|
|
|
June 30,
|
|
|
March 31,
|
|
Beneficiary
|
|
Endorser
|
|
|
date
|
|
|
date
|
|
|
2016
|
|
|
2016
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
04/22/15
|
|
|
|
04/21/16
|
|
|
|
-
|
|
|
|
1,550,550
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
04/29/15
|
|
|
|
04/28/16
|
|
|
|
-
|
|
|
|
3,333,683
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
10/09/15
|
|
|
|
04/09/16
|
|
|
|
-
|
|
|
|
1,708,706
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
11/02/15
|
|
|
|
05/02/16
|
|
|
|
-
|
|
|
|
2,553,756
|
|
Jiuzhou Pharmacy(2)
|
|
|
BOH
|
|
|
|
12/27/15
|
|
|
|
05/27/16
|
|
|
|
-
|
|
|
|
1,592,415
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
12/28/15
|
|
|
|
06/28/16
|
|
|
|
-
|
|
|
|
2,741,372
|
|
Jiuzhou Pharmacy(2)
|
|
|
BOH
|
|
|
|
12/29/15
|
|
|
|
06/29/16
|
|
|
|
-
|
|
|
|
58,913
|
|
Jiuzhou Pharmacy(3)
|
|
|
ICBC
|
|
|
|
02/03/16
|
|
|
|
08/03/16
|
|
|
|
1,268,749
|
|
|
|
1,307,114
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
03/07/16
|
|
|
|
09/07/16
|
|
|
|
2,668,436
|
|
|
|
2,749,125
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
04/05/16
|
|
|
|
10/05/16
|
|
|
|
1,285,304
|
|
|
|
-
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
05/06/16
|
|
|
|
11/06/16
|
|
|
|
1,607,977
|
|
|
|
-
|
|
Jiuzhou Pharmacy(2)
|
|
|
BOH
|
|
|
|
06/06/16
|
|
|
|
12/06/16
|
|
|
|
2,136,685
|
|
|
|
-
|
|
Jiuzhou Pharmacy(4)
|
|
|
ZTCB
|
|
|
|
06/24/16
|
|
|
|
12/24/16
|
|
|
|
602,016
|
|
|
|
-
|
|
Jiuzhou Pharmacy(2)
|
|
|
BOH
|
|
|
|
06/27/16
|
|
|
|
12/27/16
|
|
|
|
752,520
|
|
|
|
-
|
|
Jiuzhou Pharmacy(1)
|
|
|
HUB
|
|
|
|
06/29/16
|
|
|
|
12/29/16
|
|
|
|
1,252,193
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,573,880
|
|
|
$
|
17,595,634
|
|
(1)
|
As
of March 31, 2016, the Company had $14,696,105 (RMB94,779,950) of notes payable from HUB. The Company is required to hold
restricted cash of $11,278,693 (RMB72,739,950) with HUB as collateral against these bank notes. As of June 30, 2016, the Company
had $6,813,910 (RMB 45,273,947) of notes payable from HUB. The Company is required to hold restricted cash of $3,397,469 (RMB22,573,947)
with HUB as collateral against these bank notes.
|
|
|
(2)
|
As
of March 31, 2016, the Company had $1,592,415 (RMB10,270,000) of notes payable from BOH. The land use right of the farmland
in Lin’An, Hangzhou is pledged as collateral for these bank acceptance notes (see Note 12). The Company is required
to hold restricted cash of $480,671 (RMB3,100,000) with BOH as collateral against these bank notes. As of June 30, 2016, the
Company had $2,889,205 (RMB 19,196,865) of notes payable from BOH. The land use right of the farmland in Lin’An, Hangzhou
is pledged as collateral for these bank acceptance notes (see Note 12). The Company is required to hold restricted cash of
$1,444,602 (RMB 9,598,432) with BOH as collateral against these bank notes.
|
|
|
(3)
|
As
of March 31, 2016, the Company had $1,307,114 (RMB 8,430,000) of notes payable from ICBC, with restricted cash of $928,051
(RMB5,985,300) held at the bank. As of June 30, 2016, the Company had $1,268,749 (RMB 8,430,000) of notes payable from ICBC,
with restricted cash of $900,812 (RMB5,985,300) held at the bank.
|
|
|
(4)
|
As
of June 30, 2016, the Company had $602,016 (RMB 4,000,000) of notes payable from ZTCB, with restricted cash of $301,008 (RMB2,000,000)
held at the bank.
|
As of June 30, 2016, the Company had
a credit line of approximately $12.28 million in the aggregate from HUB, BOH, ICBC and ZTCB. By putting up the restricted
cash of $6.04 million deposited in the banks, the total credit line was $18.32 million. As of June 30, 2016, the Company had approximately
$11.57 million of bank notes payable and approximately $6.75 million bank credit line was still available for further borrowing.
The bank notes are also secured by buildings owned by the Company’s major shareholders, land use rights of Jiutong Medical,
a shop of Jiuzhou Pharmacy, and guaranteed by Jiuxin Medical.
Note 14
– TAXES
Income
tax
The
Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each
entity is domiciled.
Entity
|
|
Income Tax
Jurisdiction
|
Jo-Jo Drugstores
|
|
United States
|
Renovation
|
|
Hong Kong, PRC
|
All other entities
|
|
Mainland, PRC
|
The
following table reconciles the U.S. statutory tax rates with the Company's effective tax rate for the three months ended June
30, 2016 and 2015:
|
|
For the three months
ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China income taxes
|
|
|
25.0
|
|
|
|
25.0
|
|
Change in valuation allowance
|
|
|
(3.7
|
)
|
|
|
(25.0
|
)
|
Others (1)
|
|
|
(3.5
|
)
|
|
|
42.6
|
|
Effective tax rate
|
|
|
17.8
|
%
|
|
|
42.6
|
%
|
(1)
|
The
3.5% for the three months ended June 30, 2016 primarily represents profit incurred in certain subsidiaries that are not taxable
due to accumulated loss in the prior years. The 42.6% for the three months ended June 30, 2015 represents loss incurred in
unprofitable subsidiaries that are not deductible for profitable subsidiaries as these subsidiaries filed tax returns separately
in China, and expenses incurred by the Company that were not deductible for PRC income tax.
|
Jo-Jo Drugstores is incorporated in
the U.S. and incurred a net operating loss for income tax purposes for the three months ended June 30, 2016 and 2015. As
of June 30, 2016, the estimated net operating loss carry forwards for U.S. income tax purposes amounted to $1,503,000 which may
be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized by 2032.
Management believes that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s
limited operating history and continuing losses for U.S. income tax purposes. Accordingly, the Company has provided
a 100% valuation allowance at June 30, 2016. There was no net change in the valuation allowance for the three months
ended June 30, 2016 and 2015. Management reviews this valuation allowance periodically and makes adjustments as necessary.
Taxes
payable at June 30, 2016 and March 31, 2016 consisted of the following:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
VAT
|
|
$381,542
|
|
|
$422,804
|
|
Income tax
|
|
|
22,305
|
|
|
|
10,880
|
|
Others
|
|
|
26,315
|
|
|
|
50,086
|
|
Total taxes payable
|
|
$
|
430,162
|
|
|
$
|
483,770
|
|
Note 15 – POSTRETIREMENT
BENEFITS
Regulations in the PRC require the Company
to contribute to a defined contribution retirement plan for all permanent employees. The contribution for each employee is based
on a percentage of the employee’s current compensation as required by the local government. The Company contributed $247,900
and $223,011 in employment benefits and pension for the three months ended June 30, 2016 and 2015, respectively.
Note 16 – RELATED PARTY
TRANSACTIONS AND ARRANGEMENTS
Amounts payable to related parties are
summarized as follows:
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
Due to cofounders (1):
|
|
$
|
576,818
|
|
|
$
|
576,818
|
|
Due to a director and CEO (2):
|
|
|
1,639,405
|
|
|
|
1,622,957
|
|
Total
|
|
$
|
2,216,223
|
|
|
$
|
2,199,775
|
|
(1)
|
As of June 30, 2016 and March 31, 2016, amount due to cofounders represents contributions from the Owners to Jiuxin Management to enable Jiuxin Management to meet its approved PRC registered capital requirements.
|
(2)
|
Due to foreign exchange restrictions, the Company’s director and CEO, Mr. Lei Liu personally lent U.S. dollars to the Company to facilitate its payments of expenses in the United States.
|
As of June 30, 2016 and March 31, 2016,
notes payable totaling $6,163,733 and $5,302,881 were secured by the personal properties of certain of the Company’s shareholders,
respectively.
The Company leases from Mr. Lei Liu
a retail space which expires in September 2016. Rent expense amounted to $4,593 and $24,570 for the three months ended June 30,
2016 and 2015, respectively. The amounts were not paid to Mr. Liu as of June 30, 2016.
Note 17 – WARRANTS
On September 26, 2013, as annual compensation
for its financial advisory service, the Company issued a warrant to a financial consulting firm to purchase up to 150,000 shares
of common stock at $1.20 per share. The warrant is exercisable from September 26, 2013 to September 25, 2016.
The warrant does not trade in an active
securities market, and as such, the Company estimates its fair value using the Black-Scholes Model on the date that the warrant
was originally issued and as of June 30, 2016 using the following assumptions:
|
|
Common Stock
Warrants
|
|
|
Common Stock
Warrants
|
|
|
|
June 30,
2016 (1)
|
|
|
March 31,
2016
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
1.82
|
|
|
$
|
1.60
|
|
Exercise price
|
|
$
|
1.20
|
|
|
$
|
1.20
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years)
|
|
|
0.24
|
|
|
|
0.49
|
|
Risk-free interest rate
|
|
|
0.26
|
%
|
|
|
0.39
|
%
|
Expected volatility
|
|
|
44.37
|
%
|
|
|
68.36
|
%
|
(1)
|
As of June 30, 2016, the warrant had not been exercised.
|
On September 26, 2013, the issuance
date of the warrant, the Company classified its fair value as a liability of $33,606. The Company recognized a loss of $16,973
and $42,840 from the change in fair value of the warrant liability for the three months ended June 30, 2016 and June 30, 2015,
respectively. As a result, the warrant liability is carried on the consolidated balance sheets at the fair value of $106,970 and
$89,997 as of June 30, 2016 and March 31, 2016, respectively.
In connection with the registered direct
offering closed on July 19, 2015, the Company issued to an investor warrants to purchase up to 600,000 shares of common stock at
an exercise price of $3.10 per share. The options are exercisable commencing on January 19, 2016 and will expire on January 18,
2021. In connection with the offering, the Company also issued warrants to its placement agent of this offering, which can purchase
an aggregate of up to 6% of the aggregate number of shares of common stock sold in the offering, i.e. 72,000 shares. These warrants
have the same terms as the warrants issued to purchaser in the offering.
The fair value of the warrants issued
was estimated by using the binominal pricing model with the following assumptions:
|
|
Common Stock
Warrants
|
|
|
Common Stock
Warrants
|
|
|
|
June 30,
2016 (1)
|
|
|
March 31,
2016
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
1.82
|
|
|
$
|
1.60
|
|
Exercise price
|
|
$
|
3.10
|
|
|
$
|
3.10
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years)
|
|
|
4.55
|
|
|
|
4.80
|
|
Risk-free interest rate
|
|
|
1.01
|
%
|
|
|
1.21
|
%
|
Expected volatility
|
|
|
99.10
|
%
|
|
|
102.16
|
%
|
(1)
|
As
of June 30, 2016, the warrants had not been exercised.
|
Upon evaluation, the derivative meets
the definition of a derivative under ASC 815 as the Company cannot avoid net cash settlement under certain circumstances. Accordingly,
the fair value of the warrants was classified as a liability of $546,304 as of March 31, 2016. For the three months ended June
30, 2016, the Company recognized a loss of $15,223 for the investor warrants and placement agent warrants, from the change in fair
value of the warrants liability. As a result, the warrants liability is carried on the consolidated balance sheets at the fair
value of $561,527 for the investor warrants and placement agent warrants, as of June 30, 2016.
Note 18 – STOCKHOLDER’S
EQUITY
Stock-based compensation
The Company accounts for share-based
payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company
estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of
operations. Share-based awards are attributed to expense using the straight-line method over the vesting period. The Company determines
the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other
option awards are valued using the Black-Scholes valuation model as permitted under ASC 718
Compensation - Stock Compensation
. The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates.
The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation
recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional
stock option modifications, estimates of forfeitures, and the related income tax impact.
On November 25, 2015, the Company agreed
to grant a total of 150,000 shares of restricted common stock to a financial consulting firm for its financial advisory services.
The term of the service agreement is one year. The trading value of the Company’s common stock on November 25, 2015 was $1.77.
For the three months ended June 30, 2016, $66,193 was recorded as a consulting expense.
On November 27, 2015, the Company granted
a total of 735,000 shares of restricted common stock to its directors, officers and certain employees under the Company’s
2010 Equity Incentive Plan, as amended (the “Plan”). The stock awards vests in one year. The trading value of the Company’s
common stock on November 27, 2015 was $1.76. For the three months ended June 30, 2016, $322,514 was recorded as service compensation
expense.
On June 7, 2016, the Company granted
a total of 8,000 shares of restricted common stock to Taylor Raffery, an investor relation firm for its marketing services. The
trading value of the Company’s common stock on June 2016 was $1.60. Taylor Raffery’s service ended in June 2016. As
a result, for the three months ended June 30, 2016, $12,800 was recorded as a consulting expense.
On June 3, 2016, the Company granted
a total of 1,630,000 shares of restricted common stock to its key employees in retail drugstores and online pharmacy under the
Company’s 2010 Equity Incentive Plan, as amended. The stock awards vests in three year. The trading value of the Company’s
common stock on June 3, 2016 was $1.62. For the three months ended June 30, 2016, $65,111 was recorded as service compensation
expense.
Stock option
On November 18, 2014, the Company granted
a total of 967,000 shares of stock options under the Plan to a group of a total of 46 grantees including directors, officers and
employees. The exercise price of the stock option is $2.50. The option vests in three years on November 18, 2017, provided that
the grantees are still employed by the Company on such a date. The options will be exercisable for five years from the vesting
date, or November 18, 2017 until November 17, 2022. For the three months ended June 30, 2016 and 2015, $124,033 and $124,033 was
recorded as compensation expense. As of June 30, 2016, there was approximately $0.69 million of total unrecognized compensation
costs related to stock option compensation arrangements granted which is expected to be recognized over the remaining weighted-average
period of 1.38 years.
Statutory reserves
Statutory reserves represent restricted
retained earnings. Based on their legal formation, the Company is required to set aside 10% of its net income as reported in their
statutory accounts on an annual basis to the Statutory Surplus Reserve Fund (the “Reserve Fund”). Once the total amount
set aside in the Reserve Fund reaches 50% of the entity’s registered capital, further appropriations become discretionary.
The Reserve Fund can be used to increase the entity’s registered capital upon approval by relevant government authorities
or eliminate its future losses under PRC GAAP upon a resolution by its board of directors. The Reserve Fund is not distributable
to shareholders, as cash dividend or otherwise, except in the event of liquidation.
Appropriations to the Reserve Fund are
accounted for as a transfer from unrestricted earnings to statutory reserves. During the three months ended June 30, 2016 and 2015,
the Company did not make appropriations to the statutory reserves.
There are no legal requirements in the
PRC to fund the Reserve Fund by transfer of cash to any restricted accounts, and the Company does not do so.
Note 19 – EARNINGS PER
SHARE
The Company reports earnings per share
in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share.
Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available
to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised
and converted into common stock.
The following is a reconciliation of
the basic and diluted earnings per share computation:
|
|
Three months ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net earnings attributable to controlling interest
|
|
$
|
131,153
|
|
|
$
|
110,611
|
|
Weighted average shares used in basic computation
|
|
|
18,239,065
|
|
|
|
15,650,504
|
|
Diluted effect of restricted shares
|
|
|
-
|
|
|
|
-
|
|
Diluted effect of purchase options
|
|
|
-
|
|
|
|
229,957
|
|
Diluted effect of warrants
|
|
|
37,500
|
|
|
|
95,122
|
|
Weighted average shares used in diluted computation
|
|
|
18,276,565
|
|
|
|
15,975,583
|
|
Earnings per share – Basic:
|
|
|
|
|
|
|
|
|
Net earnings before non-controlling interest
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Add: Net earnings attributable to non-controlling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Net earnings attributable to controlling interest
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Earnings per share – Diluted:
|
|
|
|
|
|
|
|
|
Net earnings before non-controlling interest
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Add: Net earnings attributable to non-controlling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Net earnings attributable to controlling interest
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
For the three months ended June 30,
2016, the 967,000 shares underlying employee stocks options and 600,000 shares underlying outstanding purchase options to an investor,
and 72,000 shares underlying outstanding purchase option to an investment placement agent were excluded from the calculation of
diluted loss per share as the options were anti-dilutive. For the three months ended June 30, 2015, no warrants were excluded from
the calculation of diluted earnings per share as the options were anti-dilutive.
Note 20 – SEGMENTS
The Company operates within four main
reportable segments: retail drugstores, online pharmacy, drug wholesale and herb farming. The retail drugstores segment
sells prescription and over-the-counter (“OTC”) medicines, TCM, dietary supplements, medical devices, and sundry items
to retail customers. The online pharmacy sells OTC drugs, dietary supplements, medical devices and sundry items to customers
through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s own platform
all over China. The drug wholesale segment includes supplying the Company’s own retail drugstores with prescription
and OTC medicines, TCM, dietary supplement, medical devices and sundry items (which sales have been eliminated as intercompany
transactions), and also selling them to other drug vendors and hospitals. The Company’s herb farming segment cultivates selected
herbs for sales to other drug vendors. The Company is also involved in online sales and clinic services that do not meet the quantitative
thresholds for reportable segments and are included in the retail drugstores segment. The segments' accounting policies are the
same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or
loss from operations before interest and income taxes not including nonrecurring gains and losses.
The Company's reportable business segments
are strategic business units that offer different products and services. Each segment is managed separately because they require
different operations and markets to distinct classes of customers.
The following table presents summarized
information by segment of the continuing operation for the three months ended June 30, 2016:
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
12,708,242
|
|
|
$
|
5,071,079
|
|
|
$
|
3,156,594
|
|
|
$
|
-
|
|
|
$
|
20,935,915
|
|
Cost of goods sold
|
|
|
9,086,767
|
|
|
|
4,414,090
|
|
|
|
2,953,254
|
|
|
|
-
|
|
|
|
16,454,111
|
|
Gross profit
|
|
$
|
3,621,475
|
|
|
$
|
656,989
|
|
|
$
|
203,340
|
|
|
$
|
-
|
|
|
$
|
4,481,804
|
|
Selling expenses
|
|
|
2,208,960
|
|
|
|
462,046
|
|
|
|
11,715
|
|
|
|
-
|
|
|
|
2,682,721
|
|
General and administrative expenses*
|
|
|
1,528,573
|
|
|
|
-
|
|
|
|
385,386
|
|
|
|
4,523
|
|
|
|
1,918,482
|
|
Income (loss) from operations
|
|
$
|
(116,058
|
)
|
|
$
|
194,943
|
|
|
$
|
(193,761
|
)
|
|
$
|
(4,523
|
)
|
|
$
|
(119,399
|
)
|
Depreciation and amortization
|
|
$
|
(5,3192
|
)
|
|
$
|
-
|
|
|
$
|
47,067
|
|
|
$
|
-
|
|
|
$
|
(6,125
|
)
|
Total capital expenditures
|
|
$
|
9,214
|
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
9,214
|
|
* include the accounts receivable and
advance to supplier allowance expense of $38,144.
The following table presents summarized
information by segment of the continuing operation for the three months ended June 30, 2015:
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
12,170,888
|
|
|
$
|
5,965,768
|
|
|
$
|
3,174,636
|
|
|
$
|
-
|
|
|
$
|
21,311,292
|
|
Cost of goods sold
|
|
|
9,037,894
|
|
|
|
4,944,283
|
|
|
|
2,953,432
|
|
|
|
-
|
|
|
|
16,935,609
|
|
Gross profit
|
|
$
|
3,132,994
|
|
|
$
|
1,021,485
|
|
|
$
|
221,204
|
|
|
$
|
-
|
|
|
$
|
4,375,683
|
|
Selling expenses
|
|
|
2,574,468
|
|
|
|
407,250
|
|
|
|
114,651
|
|
|
|
-
|
|
|
|
3,096,369
|
|
General and administrative expenses*
|
|
|
1,099,722
|
|
|
|
231,615
|
|
|
|
(419,398
|
)
|
|
|
8,291
|
|
|
|
920,230
|
|
Income (Loss) from operations
|
|
$
|
(541,196
|
)
|
|
$
|
382,620
|
|
|
$
|
525,951
|
|
|
$
|
(8,291
|
)
|
|
$
|
359,084
|
|
Depreciation and amortization
|
|
$
|
195,006
|
|
|
$
|
-
|
|
|
$
|
143,506
|
|
|
$
|
81,294
|
|
|
$
|
419,806
|
|
Total capital expenditures
|
|
$
|
86,932
|
|
|
$
|
5,979
|
|
|
$
|
6,482
|
|
|
$
|
-
|
|
|
$
|
99,393
|
|
* include the accounts receivable and advance
to supplier allowance reversal of $729,164.
The Company does not have long-lived
assets located outside the PRC. In accordance with the enterprise-wide disclosure requirements of FASB’s accounting
standard, the Company's net revenue from external customers through its retail stores by main products is as follows:
|
|
Three months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Prescription drugs
|
|
$
|
4,271,102
|
|
|
$
|
4,646,376
|
|
OTC drugs
|
|
|
4,875,355
|
|
|
|
4,896,692
|
|
Nutritional supplements
|
|
|
1,176,741
|
|
|
|
910,611
|
|
TCM
|
|
|
929,023
|
|
|
|
1,136,509
|
|
Sundry products
|
|
|
254,558
|
|
|
|
262,047
|
|
Medical devices
|
|
|
1,201,463
|
|
|
|
318,653
|
|
Total
|
|
$
|
12,708,242
|
|
|
$
|
12,170,888
|
|
The Company’s net revenue from external
customers through its online pharmacy by main products is as follows:
|
|
Three months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Prescription drugs
|
|
$
|
-
|
|
|
$
|
-
|
|
OTC Drugs
|
|
|
1,637,291
|
|
|
|
1,880,284
|
|
Nutritional supplements
|
|
|
908,023
|
|
|
|
513,744
|
|
TCM
|
|
|
-
|
|
|
|
-
|
|
Sundry products
|
|
|
666,163
|
|
|
|
1,226,954
|
|
Medical devices
|
|
|
1,859,602
|
|
|
|
2,344,786
|
|
Total
|
|
$
|
5,071,079
|
|
|
$
|
5,965,768
|
|
The Company’s net revenue from external
customers through wholesale by main products is as follows:
|
|
Three months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Prescription drugs
|
|
$
|
1,897,604
|
|
|
$
|
1,903,320
|
|
OTC Drugs
|
|
|
1,218,901
|
|
|
|
1,196,778
|
|
Nutritional supplements
|
|
|
39,323
|
|
|
|
20,585
|
|
TCM
|
|
|
-
|
|
|
|
-
|
|
Sundry products
|
|
|
-
|
|
|
|
2,933
|
|
Medical devices
|
|
|
766
|
|
|
|
51,020
|
|
Total
|
|
$
|
3,156,594
|
|
|
$
|
3,174,636
|
|
Note 21 – COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company recognizes lease expense
on a straight line basis over the term of its leases in accordance with the relevant accounting standards. The Company has entered
into various tenancy agreements for its store premises and for the land leased from a local government to farm herbs.
The Company’s commitments for
minimum rental payments under its leases for the next five years and thereafter are as follows:
Periods ending June 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2017
|
|
$
|
2,784,901
|
|
|
$
|
94,555
|
|
|
$
|
67,404
|
|
|
$
|
-
|
|
|
$
|
2,946,860
|
|
2018
|
|
|
2,431,624
|
|
|
|
78,342
|
|
|
|
67,404
|
|
|
|
-
|
|
|
|
2,577,370
|
|
2019
|
|
|
1,972,597
|
|
|
|
55,645
|
|
|
|
67,404
|
|
|
|
-
|
|
|
|
2,095,646
|
|
2020
|
|
|
1,279,458
|
|
|
|
55,043
|
|
|
|
67,404
|
|
|
|
-
|
|
|
|
1,401,905
|
|
2021
|
|
|
470,032
|
|
|
|
41,282
|
|
|
|
|
-
|
|
|
-
|
|
|
|
511,314
|
|
Thereafter
|
|
|
611,206
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
611,206
|
|
Total rent expense amounted to $755,252
and $1,249,385 for the three months ended June 30, 2016 and 2015, respectively.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial
statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition
to historical information, the following discussion contains certain forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives,
expectations and intentions. These statements may be identified by the use of words such as "may," "will,"
"could," "expect," "anticipate," "intend," "believe," "estimate,"
"plan," "predict," and similar terms or terminology, or the negative of such terms or other comparable terminology. Although
we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors
that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section
of our annual report on Form 10-K for the year ended March 31, 2016 and filed with the SEC on June 28, 2015. We undertake
no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other
events occur in the future.
Our
financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United
States. See "Exchange Rates" below for information concerning the exchanges rates at which Renminbi ("RMB")
were translated into U.S. Dollars (“USD” or “$”) at various pertinent dates and for pertinent periods.
Overview
We
currently operate in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale of products similar
to those that we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).
Our
drugstores offer customers a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”)
drugs, nutritional supplements, TCM, personal and family care products, and medical devices, as well as convenience products,
including consumable, seasonal, and promotional items. Additionally, we have licensed doctors of both western medicine and TCM
on site for consultation, examination and treatment of common ailments at scheduled hours. We currently have 61 pharmacies in
Hangzhou under the store brand of “Jiuzhou Grand Pharmacy.” During the three months ended June 30, 2016, we have opened
two new pharmacies.
Since
May 2010, we have also been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online.
Our online pharmacy sells through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the
Company’s own platform all over China. In fiscal year 2016, we plan to grow sales through our own platform by closely cooperating
with commercial insurance companies and selling products to customers who have bought medical insurance from these commercial
insurance companies. Additionally, in order to keep top rankings in certain third-party platforms such as Tmall, we plan to spend
reasonable resources in marketing our products through these third-party platforms.
We operate a wholesale
business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those carried by our pharmacies)
primarily to trading companies throughout China. We also farm certain herbs used in TCM but have not incurred sales in the three
months ended June 30, 2016.
Critical
Accounting Policies and Estimates
In
preparing our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted
in the United States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts
of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period;
and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based
on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding
the future based on available information and reasonable assumptions, which together form our basis for making judgments about
matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial
reporting process, our actual results could differ materially from those estimates.
We
believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition
or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement
of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial
statements.
When
reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties
affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. The
critical accounting policies and related judgments and estimates used to prepare our financial statements are identified in Note
3 to our unaudited condensed consolidated financial statements accompanying in this report. We have not made any material
changes in the methodology used in our accounting policies that are inconsistent with those discussed in our annual report on
Form 10-K for the year ended March 31, 2016.
Results
of Operations
The
following table summarizes our results of operations for the three months ended June 30, 2016 and 2015:
|
|
Three months ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
20,935,915
|
|
|
|
100.0
|
%
|
|
$
|
21,311,292
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
4,481,804
|
|
|
|
21.4
|
%
|
|
$
|
4,375,683
|
|
|
|
20.5
|
%
|
Selling expenses
|
|
$
|
2,682,721
|
|
|
|
12.8
|
%
|
|
$
|
3,096,369
|
|
|
|
14.5
|
%
|
General and administrative expenses
|
|
$
|
1,918,482
|
|
|
|
9.2
|
%
|
|
$
|
920,230
|
|
|
|
4.3
|
%
|
(Loss) income from operations
|
|
$
|
(119,399
|
)
|
|
|
(0.6
|
)%
|
|
$
|
359,084
|
|
|
|
1.7
|
%
|
Interest income
|
|
$
|
224,422
|
|
|
|
1.1
|
%
|
|
$
|
74,997
|
|
|
|
0.4
|
%
|
Interest expenses
|
|
$
|
(439
|
)
|
|
|
(0.0
|
)%
|
|
$
|
(159,931
|
)
|
|
|
(0.8
|
)%
|
Other income (expense), net
|
|
$
|
87,199
|
|
|
|
0.4
|
%
|
|
$
|
(38,515
|
)
|
|
|
(0.2
|
)%
|
Change in fair value of purchase option derivative liability
|
|
$
|
(32,196
|
)
|
|
|
(0.2
|
)%
|
|
$
|
(42,837
|
)
|
|
|
(0.2
|
)%
|
Income tax expense
|
|
$
|
28,434
|
|
|
|
0.1
|
%
|
|
$
|
82,187
|
|
|
|
0.4
|
%
|
Net income
|
|
$
|
131,153
|
|
|
|
0.6
|
%
|
|
$
|
110,611
|
|
|
|
0.5
|
%
|
Revenue
Primarily
due to the decline in online pharmacy sales, revenue decreased by $375,377 or 1.8% for the three months ended June 30, 2016, as
compared to the three months ended June 30, 2015, partially offset by increase in our retail drugstores business. The following
table breaks down the revenue for our four business segments for the three months ended June 30, 2016 and 2015:
Quarterly
Revenue by Segment
The
following table breaks down the revenue for our four business segments for the three months ended June 30, 2016 and 2015:
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
12,708,242
|
|
|
|
60.5
|
%
|
|
$
|
12,170,888
|
|
|
|
57.0
|
%
|
|
$
|
537,354
|
|
|
|
4.4
|
%
|
Revenue from online pharmacy
|
|
|
5,071,079
|
|
|
|
24.2
|
%
|
|
|
5,965,768
|
|
|
|
28.0
|
%
|
|
|
(894,689
|
)
|
|
|
(15.0
|
)%
|
Revenue from drug wholesale
|
|
|
3,156,594
|
|
|
|
15.3
|
%
|
|
|
3,174,636
|
|
|
|
15.0
|
%
|
|
|
(18,042
|
)
|
|
|
(0.6
|
)%
|
Revenue from herb farming
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
Total revenue
|
|
|
20,935,915
|
|
|
|
100.0
|
%
|
|
|
21,311,292
|
|
|
|
100.0
|
%
|
|
|
(375,377
|
)
|
|
|
(1.8
|
)%
|
Retail drugstores
sales, which accounted for approximately 60.5% of total revenue for the three months ended June 30, 2016, increased by $537,354,
or 4.4% compared to the three months ended June 30, 2015, to $12,708,242. Same-store sales decreased by approximately $265,316,
or 2.3%. Excluding the RMB depreciation effect, the same store sales increased by approximately 4.5% period over period. In order
to promote our same-store sales growth, we implemented certain operational strategies such as increasing product adaptability to
community demand, providing access to mobile payments, close monitoring on customers with chronic disease, launching in-pharmacy
virtual doctor clinics and close cooperating with certain large reputable vendors to promote sales of their brand name products.
However, in order to prepare for the G20 summit held in Hangzhou in September 2016, the local government has tightened its security
requirements in the quarter ended June 30, 2016. For instance, local policemen make multiple detail security checks on people in
the street and the community. So more and more migrants from other areas in China, such as businessman and labors, choose to leave
temporarily. As these migrants represent a large population in the City, our sales to this group of people were curtailed. We expect
the G20 effect will last till September 2016. In the long run, the same store sales are expected to grow due to the increasing
demand on healthcare products in China. Our store count increased to 61 as of June 30, 2016, compared to 59 stores as of June 30,
2015, as an effect of opening three stores in this quarter and closing a store in fiscal 2016.
Our online pharmacy sales
decreased by approximately $894,689, or 15.0% for the three months ended June 30, 2016, as compared to the three months ended June
30, 2015. The decrease was mainly caused by the decline in business referred from Yikatong, as further explained below, during
this quarter. We carry our business either through certain e-commerce platforms such as Tmall and JD.com or via our own official
online pharmacy website. we put our products on e-commerce platforms, including Tmall at Alibaba, JD.com and www.yhd.com. Such
arrangements have exposed our online presence to a wider consumer base. In order to increase the popularity of our products, we
have made considerable efforts identifying popular products that can drive sales, while we keep close watch on the cost. We are
actively searching for talents specialized in this area and have created an operating team consisting of experienced e-commerce
experts. As a result, excluding the RMB depreciation effect, our sales via these e-commerce platforms increased by 6.0% period
over period.
Due to the decline
in business referred from “Yikatong”, the popular pharmacy and health insurance benefit card, the sales on our own
official website for the three months ended June 30, 2016 decreased by $0.9 million or 48.4% as compared to the three months ended
June 30, 2015. Yikatong is run by a Pharmacy Benefit Management (“PBM”) provider in China. In fiscal 2016, we created
strategic alliance with the PBM provider. However, in order to maximize its profit, the PBM provider chose to create its own online
pharmacy to sell products referred from Yikatong. In order to grow its own online pharmacy, the PMB provider actively directed
Yikatong customers to purchase products on its online pharmacy. As a result, the sales on our own official website declined dramatically.
In order to offset the negative effect, we had been actively working with a similar vendor, who may refer to us a big customers
pool in the near future. If we are able to retain the new vendor, our own website sale will continue to grow in the future.
Wholesale
revenue decreased by $18,042 or 0.6%. At present, the majority of drug sales still occur at hospitals in China. Local hospitals
usually have stronger ties with their existing suppliers and we have not been able to make significant progress in becoming a
major supplier to local hospitals. Until we can establish a new customer base and are granted a status to serve as provincial
or national exclusive sale agent for certain popular drugs, we do not expect our wholesale business to expand in the immediate
future.
In
the three months ended June 30, 2016 and 2015, we have not harvested and generated revenue from our farming business. We planted
ginkgo and maidenhair trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years
before it is mature enough to harvest. Usually, the longer it grows the more valuable it becomes. We plan to continue cultivating
the trees in order to maximize their market value in the future. During the three months ended June 30, 2016, we have been evaluating
feasibility of planting other herbs with short period of growth. We anticipate that we will continue growing trees and start cultivating
other herbs in the future.
Gross
Profit
Gross
profit increased by $106,121 or 2.4% period over period primarily as a result of an increase in gross margin of retail drugstores. At
the same time, gross margin increased from 20.5% to 21.4% due to higher retail profit margins. The average gross margins
for each of our four business segments are as follows:
|
|
Three months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Average gross margin
|
|
|
|
|
|
|
retail drugstores
|
|
|
28.5
|
%
|
|
|
25.7
|
%
|
online sales
|
|
|
13.0
|
%
|
|
|
17.1
|
%
|
wholesale business
|
|
|
8.4
|
%
|
|
|
7.0
|
%
|
farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail
gross margin increased primarily because more vendor rebates attributable to our focused marketing efforts in promoting brand-name
products with large pharmaceutical suppliers, continuous efforts to renegotiate prices with our suppliers periodically, and abandon
of certain low profit margin products. Instead of labeling our own products, we focused on promoting brand name products. We believe
selling brand name products will increase our store popularity and customer loyalty. As a result, we achieved significant sales
volume with certain brand pharmaceutical suppliers and received their considerable rebates. Additionally, we have been searching
for ways to improve our profit margin. From time to time, we compared existing products among our suppliers to squeeze lower cost.
Because local hospitals are required to sell certain drugs listed in CFDA list at a set cost, these drugs are sold at extremely
low profit margin from our stores. We actively search for and sell alternative drugs with better treatment effect and higher profit
margin.
Gross margin of
online pharmacy sales decreased primarily because of the decline in our sales via our own official website, as well as promotion
of certain products sales at low profit margin. We carry our business either through certain e-commerce platforms such as Tmall
and JD.com or via our own official online pharmacy website, www.dada360.com. The sales on our own official website usually has
higher profit margin because customers referred by Yikatong and commercial insurance companies are premium customers who can afford
premium products with higher profit margin. As described in the above, Yikatong has cut its customers sources to our online pharmacy.
As a result, our average profit margin was affected. On the other hand, we promoted certain products such as health herb tea on
our own website at low margin in the three months ended June 30, 2016. As a result, our overall online sales profit margin declined
in this quarter.
Wholesale
gross margin increased primarily as a result of different products we carried and sold to certain pharmaceutical vendors. Although
we tried marketing our products to major local hospitals and other pharmacies, we had not been able to make significant progress.
Until we are able to obtain status as provincial or national exclusive sale agent for certain popular drugs or have sales access
to large local hospitals, we may have to keep low profit margin in order to drive sales.
Selling
and Marketing Expenses
Sales
and marketing expenses decreased by $413,648 or 13.4% period over period. The decrease in absolute dollars is primarily
attributable to rental savings. Because online shopping becomes very popular in China, the value of physical commercial shop site
has declined. We were able to renegotiate with certain landlords to cut our rental expense when leases come to renewal. As a result,
such expenses as a percentage of our revenue decreased to 12.8%, from 14.5% for the same period a year ago. We expect future
sales and marketing expenses to not deviate significantly from the current level.
General
and Administrative Expenses
General and administrative
expenses increased by $998,252 or 108.5% period over period. Such expenses as a percentage of revenue increased to 9.2%
from 4.3% for the same period a year ago. The increase in absolute dollars reflects accounts receivable and advances
to vendors allowance reversal of $27,214 in the three months ended June 30, 2016 as compared to reversal of $729,164 in the three
months ended June 30, 2015. The difference was caused by the fact that we were able to collect certain remaining aged accounts
receivable and advances to suppliers accounts in the three months ended June 30, 2015. Excluding such an effect, general and administrative
expense increased by $296,302, which reflects higher stock-based compensation recorded in the three months ended June 30, 2016.
Income
(loss) from Operations
Due
to the increase in general and administrative expense, we had loss from operations of $119,399, as compared to income from
operations of $359,084 a year ago. Our operating margin for the three months ended June 30, 2016 and 2015 was
(0.6) % and 1.7%, respectively.
Income
Taxes
Our
income tax expense decreased by $53,753 period over period. The effective tax rate decreased from 42.6% to 17.8% period over period
primarily caused by the profit incurred in certain subsidiaries that are not taxable due to accumulated loss in the prior years
during the three months ended June 30, 2016 and loss incurred in unprofitable subsidiaries that are not deductible for profitable
subsidiaries as these subsidiaries filed tax returns separately in China during the three months ended June 30, 2015.
Net
income
As
a result of the foregoing, net income increased by $20,542 or 18.6% period over period.
Accounts
receivable
Accounts
receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections
and payments from our customers (our distributors) and maintain a provision for estimated credit losses. To prepare for potential
loss in such accounts, we made corresponding reserves.
Our
accounts receivable aging was as follows for the periods described below:
From date of invoice to customer
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
1- 3 months
|
|
$
|
6,979,201
|
|
|
$
|
316,042
|
|
|
$
|
811,004
|
|
|
$
|
-
|
|
|
$
|
8,106,247
|
|
4- 6 months
|
|
|
26,008
|
|
|
|
12,418
|
|
|
|
368,142
|
|
|
|
-
|
|
|
|
406,568
|
|
7- 12 months
|
|
|
1,378
|
|
|
|
10,282
|
|
|
|
716,055
|
|
|
|
-
|
|
|
|
727,715
|
|
Over one year
|
|
|
29,283
|
|
|
|
2,471
|
|
|
|
1,653,511
|
|
|
|
1,204
|
|
|
|
1,686,469
|
|
Allowance for doubtful accounts
|
|
|
(87,095
|
)
|
|
|
(10,365
|
)
|
|
|
(1,966,451
|
)
|
|
|
(1,204
|
)
|
|
|
(2,065,115
|
)
|
Total accounts receivable
|
|
$
|
6,948,775
|
|
|
$
|
330,848
|
|
|
$
|
1,582,261
|
|
|
$
|
-
|
|
|
$
|
8,861,884
|
|
Accounts
receivable from our retail drugstore business mainly consist of reimbursements from government health insurance bureaus and commercial
health insurance programs. In the three months ended June 30, 2016 and 2015, we wrote off an approximately $32,592 and $60,332
collectible from provincial and Hangzhou City government insurance, as such amount has been determined by the health insurance
bureaus to be unqualified for reimbursement
Accounts
receivable from our online pharmacy business mainly consist of collectibles from third-party platforms such as Tmall and JD.com
where we sell products. Usually the third-party platforms will collect from customers ordering on their platforms and then reimburse
us in times ranging from several days to a month after orders are placed.
Accounts receivable
from our drug wholesale business and herb farming business consist of receivables from our customers such as pharmaceutical distributors.
Our drug wholesale business transitioned away from focusing on sales volume beginning in the second half of fiscal 2013, and it
tightened its customer credit policy and strengthened monitoring of uncollected receivables. Furthermore, the new management team
expended significant efforts in clearing outstanding balances with certain customers and suppliers. In the three months ended June
30, 2016 and 2015, we were able to continually collect certain aged accounts. As a result, we reversed approximately $34,128 and
$655,358 in allowance for the three months ended June 30, 2016 and 2015.
Subsequent to June 30, 2016
and through July 31, 2016, we collected approximately $3.5 million in receivables relating to our drugstore business, approximately
$0.3 million in receivables relating to our online pharmacy business, approximately $0.5 million relating to our wholesale business,
and $0 relating to our herb farming business.
Advances
to suppliers
Advances
to suppliers are mainly prepayments to secure certain products or services and favorable pricing. The aging of our advances
to suppliers is as follows for the periods described below:
From date of cash prepayment to suppliers
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
1- 3 months
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
4,092,649
|
|
|
$
|
-
|
|
|
$
|
4,092,649
|
|
4- 6 months
|
|
|
|
|
|
|
-
|
|
|
|
692,507
|
|
|
|
-
|
|
|
|
692,507
|
|
7- 12 months
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Over one year
|
|
|
|
|
|
|
-
|
|
|
|
19,295
|
|
|
|
-
|
|
|
|
19,295
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
-
|
|
|
|
(112,456
|
)
|
|
|
-
|
|
|
|
(112,456
|
)
|
Total advances to suppliers
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
4,691,995
|
|
|
$
|
-
|
|
|
$
|
4,691,995
|
|
Since
the acquisition of Jiuxin Medicine, we have gradually transferred almost all logistics services of our retail drugstores to Jiuxin
Medicine. Jiuzhou Pharmacy only makes purchase on certain non-medical products such as sundry. As a result, our retail chain had
little advances to suppliers as of June 30, 2016.
Advances to suppliers
for our drug wholesale business consist of prepayments to our vendors such as pharmaceutical manufacturers and other distributors. We
typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery
from and payments to our vendors while maintaining a provision for estimated credit losses based upon historical experience and
any specific supplier issues such as discontinuing of inventory supply that have been identified. If we are having difficulty
receiving products from a vendor, we take the following steps: cease purchasing products from the vendor, ask for return of our
prepayment promptly, and if necessary, take legal actions. If all of these steps are unsuccessful, management then determines
whether or not the prepayments should be reserved or written off. To facilitate its initial expansion, Jiuxin Medicine made
significant prepayments to certain vendors. Lack of timely supplier account reconciliation caused by several sales staff rotations
delayed the monitoring of such accounts. To accommodate potential loss in advances to suppliers, we made reserve for amounts
considered to be uncollectible. As previously discussed, Jiuxin Medicine transitioned away from focusing on sales volume beginning
in the second half of fiscal 2013, and since then we have tightened our customer credit policy and strengthened monitoring of uncollected
receivables. We do not expect a significant increase in bad debts going forward.
Liquidity
and Capital Resources
Our
cash flows for the periods indicated are as follows:
|
|
Three months ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash used in operating activities
|
|
$
|
(2,765,429
|
)
|
|
$
|
(1,172,621
|
)
|
Net cash used in investing activities
|
|
$
|
(35,904
|
)
|
|
$
|
(214,053
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
1,388,251
|
|
|
$
|
(1,003,406
|
)
|
For the three months ended
June 30, 2016, cash used in operating activities amounted to $2,765,429, as compared to $1,172,621 a year ago. The change
is primarily attributable to a decrease in cash provided by accounts receivable of $3,227,736, a decrease in cash provided by other
current assets of $836,452 and a decrease in cash provided by customer deposit of $334,789, offset by an increase in cash provided
by inventories and biological assets of $1,043,942.
For the three months ended
June 30, 2016, net cash used in investing activities amounted to $35,904, as compared to $214,053 a year ago. No significant
investment occurred in the three months ended June 30, 2016, while an investment was made to subsidiary in the three months ended
June 30, 2015.
For the three months ended
June 30, 2016, net cash provided by financing activities amounted to $1,388,251, as compared to $1,003,406 net cash used in financing
activities a year ago. The change is primarily the result of increase in proceeds from restricted cash of $11,805,472, offset by
a decrease in cash provided by notes payable of $9,318,605.
As of June 30, 2016, we
had cash of approximately $5,058,091. Our total current assets as of June 30, 2016, were $40,012,120 and total current
liabilities were $34,976,069, which resulted in a net working capital of $5,036,051.
On
July 23, 2015, we completed a registered direct placement with a single health-care focused institutional investor for the purchase
of an aggregate of $3 million of its common stock at a price of $2.50 per share and net proceeds of approximately $2.7 million
after deducting commissions and all other expenses. As of June 30, 2016, we had approximately $6.75 million bank credit line was
still available for further borrowing. We believe that the foregoing sources will collectively provide sufficient liquidity for
us to meet our liquidity and capital obligations for the next twelve months. However, if we are to acquire additional businesses
or further expand our operations, we may need additional capital.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
When
we open store locations, we typically enter into lease agreements that are generally between three to ten years. Our
commitments for minimum rental payments under our leases for the next five years and thereafter are as follows:
Periods ending June 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2017
|
|
$
|
2,784,901
|
|
|
$
|
94,555
|
|
|
$
|
67,404
|
|
$
|
-
|
|
|
$
|
2,946,860
|
|
2018
|
|
|
2,431,624
|
|
|
|
78,342
|
|
|
|
67,404
|
|
|
-
|
|
|
|
2,577,370
|
|
2019
|
|
|
1,972,597
|
|
|
|
55,645
|
|
|
|
67,404
|
|
|
-
|
|
|
|
2,095,646
|
|
2020
|
|
|
1,279,458
|
|
|
|
55,043
|
|
|
|
67,404
|
|
|
-
|
|
|
|
1,401,905
|
|
2021
|
|
|
470,032
|
|
|
|
41,282
|
|
|
|
-
|
|
|
-
|
|
|
|
511,314
|
|
Thereafter
|
|
|
611,206
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
611,206
|
|
Off-balance
Sheet Arrangements
We
do not have any outstanding financial guarantees or commitments to guarantee the payment obligations of any third parties. We
have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or
that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support
to us or engages in leasing, hedging or research and development services with us.
Exchange
Rates
Our
subsidiaries and affiliated companies in the PRC maintain their books and records in RMB, the lawful currency of the PRC. In
general, for consolidation purposes, we translate their assets and liabilities into USD using the applicable exchange rates
prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting
period. Adjustments resulting from the translation of their financial statements are recorded as accumulated other
comprehensive income.
The
exchange rates used to translate amounts in RMB into USD for the purposes of preparing the unaudited condensed consolidated financial
statements or otherwise disclosed in this report were as follows:
|
|
June 30,
2016
|
|
March 31,
2016
|
|
June 30,
2015
|
Balance sheet items, except for the registered and paid-up capital, as of end of period/year
|
|
USD1: RMB 0.1505
|
|
USD1: RMB 0.1551
|
|
USD1: RMB 0.1637
|
|
|
|
|
|
|
|
Amounts included in the statement of Operations and statement of cash flows for the period/ year ended
|
|
USD1: RMB 0.1531
|
|
USD1: RMB 0.1582
|
|
USD1: RMB 0.1638
|
Inflation
We
believe that inflation has not had a material effect on our operations to date.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Not
applicable.
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As
of June 30, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon
such evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures were ineffective at the reasonable assurance level. Such conclusion is based
on the presence of the following material weakness in internal control over financial reporting as described in our annual report
on Form 10-K for the year ended March 31, 2016:
Accounting
and Finance Personnel Weaknesses
- As noted in Item 9A of our annual reports on Form 10-K for the preceding three fiscal
years, management concluded that in light of the inexperience of our accounting staff with respect to the requirements of U.S.
GAAP-based reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and
proper supervisory review to ensure that significant internal control deficiencies can be detected or prevented.
Management
anticipates that our disclosure controls and procedures will remain ineffective until such material weakness is remediated.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act
of 1934) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART II
– OTHER INFORMATION