CHINA JO-JO DRUGSTORES, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
14,359,565
|
|
|
$
|
18,364,424
|
|
Restricted cash
|
|
|
10,127,165
|
|
|
|
9,431,386
|
|
Financial assets available for sale
|
|
|
162,303
|
|
|
|
87,068
|
|
Notes receivable
|
|
|
171,156
|
|
|
|
253,394
|
|
Trade accounts receivable
|
|
|
8,794,199
|
|
|
|
8,561,596
|
|
Inventories
|
|
|
10,481,496
|
|
|
|
9,923,101
|
|
Other receivables, net
|
|
|
2,166,616
|
|
|
|
2,269,193
|
|
Advances to suppliers
|
|
|
4,968,236
|
|
|
|
5,504,141
|
|
Other current assets
|
|
|
1,659,801
|
|
|
|
1,566,155
|
|
Total current assets
|
|
|
52,890,537
|
|
|
|
55,960,458
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
4,407,849
|
|
|
|
4,263,157
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Long-term investment
|
|
|
36,293
|
|
|
|
46,152
|
|
Farmland assets
|
|
|
730,843
|
|
|
|
718,787
|
|
Long term deposits
|
|
|
3,115,537
|
|
|
|
2,294,848
|
|
Other noncurrent assets
|
|
|
1,360,796
|
|
|
|
1,177,005
|
|
Intangible assets, net
|
|
|
2,832,043
|
|
|
|
2,712,611
|
|
Total other assets
|
|
|
8,075,512
|
|
|
|
6,949,403
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
65,373,898
|
|
|
$
|
67,173,018
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCK HOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
18,230,169
|
|
|
|
19,441,195
|
|
Notes payable
|
|
|
13,181,779
|
|
|
|
12,691,575
|
|
Other payables
|
|
|
2,640,499
|
|
|
|
2,916,283
|
|
Other payables - related parties
|
|
|
849,075
|
|
|
|
927,052
|
|
Customer deposits
|
|
|
2,804,020
|
|
|
|
2,675,030
|
|
Taxes payable
|
|
|
511,680
|
|
|
|
681,939
|
|
Accrued liabilities
|
|
|
663,160
|
|
|
|
679,350
|
|
Total current liabilities
|
|
|
38,880,382
|
|
|
|
40,012,424
|
|
|
|
|
|
|
|
|
|
|
Purchase option and warrants liability
|
|
|
445,893
|
|
|
|
496,217
|
|
Total liabilities
|
|
|
39,326,275
|
|
|
|
40,508,641
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 250,000,000 shares authorized; 25,214,678 and 25,214,678 shares issued and outstanding as of June 30, 2017 and March 31, 2017
|
|
|
25,215
|
|
|
|
25,215
|
|
Preferred stock; $0.001 par
value; 10,000,000 shares authorized; nil issued and outstanding as of June 30, 2017 and March 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
36,924,729
|
|
|
|
36,581,248
|
|
Statutory reserves
|
|
|
1,309,109
|
|
|
|
1,309,109
|
|
Accumulated deficit
|
|
|
(14,020,561
|
)
|
|
|
(12,601,257
|
)
|
Accumulated other comprehensive income
|
|
|
1,809,131
|
|
|
|
1,350,062
|
|
Total stockholders’ equity
|
|
|
26,047,623
|
|
|
|
26,664,377
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
65,373,898
|
|
|
$
|
67,173,018
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
CHINA JO-JO DRUGSTORES, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
|
For the three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
REVENUES, NET
|
|
$
|
21,670,368
|
|
|
$
|
20,935,915
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
17,492,707
|
|
|
|
16,454,111
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
4,177,661
|
|
|
|
4,481,804
|
|
|
|
|
|
|
|
|
|
|
SELLING EXPENSES
|
|
|
3,916,859
|
|
|
|
2,682,721
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,725,443
|
|
|
|
1,918,482
|
|
TOTAL OPERATING EXPENSES
|
|
|
5,642,302
|
|
|
|
4,601,203
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,464,641
|
)
|
|
|
(119,399
|
)
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
|
44,899
|
|
|
|
224,422
|
|
INTEREST EXPENSE
|
|
|
-
|
|
|
|
(439
|
)
|
OTHER (EXPENSE) INCOME, NET
|
|
|
(29,348
|
)
|
|
|
87,199
|
|
CHANGE IN FAIR VALUE OF PURCHASE OPTION AND WARRANTS LIABILITY
|
|
|
50,324
|
|
|
|
(32,196
|
)
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(1,398,766
|
)
|
|
|
159,587
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
20,538
|
|
|
|
28,434
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(1,419,304
|
)
|
|
|
131,153
|
|
|
|
|
|
|
|
|
|
|
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
|
|
|
459,069
|
|
|
|
114,869
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME
|
|
|
(960,235
|
)
|
|
|
246,022
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
Diluted
|
|
|
25,214,678
|
|
|
|
18,276,565
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS PER SHARES:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
CHINA JO-JO DRUGSTORES, INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
(1,419,304
|
)
|
|
$
|
131,153
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Bad debt direct write-off and provision
|
|
|
212,199
|
|
|
|
70,736
|
|
Depreciation and amortization
|
|
|
289,058
|
|
|
|
246,499
|
|
Stock based compensation
|
|
|
343,480
|
|
|
|
590,651
|
|
Change in fair value of purchase option derivative liability
|
|
|
(50,324
|
)
|
|
|
32,196
|
|
Accounts receivable, trade
|
|
|
(537,768
|
)
|
|
|
(1,360,690
|
)
|
Notes receivable
|
|
|
85,434
|
|
|
|
(40,252
|
)
|
Inventories and biological assets
|
|
|
(387,176
|
)
|
|
|
(251,067
|
)
|
Other receivables
|
|
|
365,954
|
|
|
|
(202,805
|
)
|
Advances to suppliers
|
|
|
450,107
|
|
|
|
(605,769
|
)
|
Other current assets
|
|
|
(66,556
|
)
|
|
|
(414,770
|
)
|
Long term deposit
|
|
|
(772,661
|
)
|
|
|
-
|
|
Other noncurrent assets
|
|
|
(162,049
|
)
|
|
|
(358,242
|
)
|
Accounts payable, trade
|
|
|
(1,518,372
|
)
|
|
|
(679,734
|
)
|
Other payables and accrued liabilities
|
|
|
(346,903
|
)
|
|
|
(47,600
|
)
|
Customer deposits
|
|
|
83,096
|
|
|
|
164,352
|
|
Taxes payable
|
|
|
(179,483
|
)
|
|
|
(40,087
|
)
|
Net cash provided by operating activities
|
|
|
(3,611,268
|
)
|
|
|
(2,765,429
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of financial assets available for sale
|
|
|
(72,875
|
)
|
|
|
-
|
|
Acquisition of equipment
|
|
|
(17,340
|
)
|
|
|
(9,372
|
)
|
Increase in construction-in-progress
|
|
|
(336,882
|
)
|
|
|
-
|
|
Increase intangible assets
|
|
|
(80,162
|
)
|
|
|
-
|
|
Additions to leasehold improvements
|
|
|
-
|
|
|
|
(26,532
|
)
|
Net cash used in investing activities
|
|
|
(507,259
|
)
|
|
|
(35,904
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
(531,031
|
)
|
|
|
6,951,672
|
|
Proceeds from notes payable
|
|
|
8,684,688
|
|
|
|
7,768,165
|
|
Repayment of notes payable
|
|
|
(8,410,741
|
)
|
|
|
(13,368,248
|
)
|
Changes in other payables-related parties
|
|
|
(87,449
|
)
|
|
|
36,662
|
|
Net cash provided by (used in) financing activities
|
|
|
(344,533
|
)
|
|
|
1,388,251
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
458,201
|
|
|
|
(200,700
|
)
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH
|
|
|
(4,004,859
|
)
|
|
|
(1,613,782
|
)
|
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
|
18,364,424
|
|
|
|
6,671,873
|
|
|
|
|
|
|
|
|
|
|
CASH, end of year
|
|
$
|
14,359,565
|
|
|
$
|
5,058,091
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
412
|
|
Cash paid for income taxes
|
|
$
|
26,853
|
|
|
$
|
17,973
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
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”), Hangzhou Jiutong Medical Technology Co., Ltd (“Jiutong
Medical”), and Hangzhou Jiuyi Medical Technology Co. Ltd. (“Jiuyi Technology”), its wholly-owned subsidiaries.
The Company is an online and offline
retailer 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, which are operated
by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company that the Company controls through
contractual arrangements. On March 31, 2017, Jiuxin Management established a subsidiary, Lin’An Jiuzhou Pharmacy Co., Ltd
(“Lin’An Jiuzhou”) to operates drugstores in Lin’an City. On April 27, 2017, Jiuzhou Pharmacy established
Hangzhou Jiuben Pharmacy Co., Ltd, which runs a drugstore in Hangzhou City.
The Company’s
offline retail business also includes three 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. In May 2016, Hangzhou Shouantang Bio-technology Co., Ltd.
(“Shouantang Bio”) set up and held 49% of Hangzhou Kahamadi Bio-technology Co., Ltd.(“Kahamadi Bio”),
a joint venture specialized in brand name development for nutritional supplements.
The Company currently conducts its
online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online pharmacy license. Prior to November
2015, the Company primarily conducted its online retail pharmacy business through Zhejiang Quannuo Internet Technology Co., Ltd.
.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 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
|
|
●
|
Incorporated
in Hong Kong SAR on September 2, 2008
|
|
100%
|
|
|
|
|
|
|
Jiuxin Management
|
|
●
|
Established
in the PRC on October 14, 2008
|
|
100%
|
|
|
●
|
Deemed
a wholly foreign owned enterprise (“WFOE”) under PRC law
|
|
|
|
|
●
|
Registered
capital of $14.5 million fully paid
|
|
|
|
|
|
|
|
|
Shouantang
Technology
|
|
●
|
Established
in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
|
|
100%
|
|
|
●
|
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
|
|
|
|
|
|
|
|
|
Qianhong
Agriculture
|
|
●
|
Established
in the PRC on August 10, 2010 by Jiuxin Management
|
|
100%
|
|
|
●
|
Registered
capital of RMB 10 million fully paid
|
|
|
|
|
●
|
Carries
out herb farming business
|
|
|
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
●
|
Established
in the PRC on September 9, 2003
|
|
VIE by contractual arrangements
(2)
|
|
|
●
|
Registered
capital of RMB 5 million fully paid
|
|
|
|
|
●
|
Operates
the “Jiuzhou Grand Pharmacy” stores in Hangzhou
|
|
|
|
|
|
|
|
|
Jiuzhou Clinic
(1)
|
|
●
|
Established
in the PRC as a general partnership on October 10, 2003
|
|
VIE by contractual
arrangements
(2)
|
|
|
●
|
Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
|
|
|
|
|
|
|
Jiuzhou Service
(1)
|
|
●
|
Established
in the PRC on November 2, 2005
|
|
VIE by contractual
arrangements
(2)
|
|
|
●
|
Registered
capital of RMB 500,000 fully paid
|
|
|
|
|
●
|
Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
|
|
|
|
|
|
|
Jiuxin
Medicine
|
|
●
|
Established
in PRC on December 31, 2003
|
|
VIE
by contractual arrangements
|
|
|
●
|
Acquired
by Jiuzhou Pharmacy in August 2011
|
|
as
a wholly-owned subsidiary of
|
|
|
●
|
Registered
capital of RMB 10 million fully paid
|
|
Jiuzhou Pharmacy
(2)
|
|
|
●
|
Carries
out pharmaceutical distribution services
|
|
|
|
|
|
|
|
|
Jiutong
Medical
|
|
●
|
Established
in the PRC on December 20, 2011 by Renovation
|
|
100%
|
|
|
●
|
Registered capital
of $2.6 million fully paid
|
|
|
|
|
●
|
Currently
has no operation
|
|
|
Entity
Name
|
|
Background
|
|
Ownership
|
Shouantang
Bio
|
|
●
|
Established
in the PRC in October, 2014 by Shouantang Technology
|
|
100%
|
|
|
●
|
100%
held by Shouantang Technology
|
|
|
|
|
●
|
Registered
capital of RMB 1,000,000 fully paid
|
|
|
|
|
●
|
Sells
nutritional supplements under its own brand name
|
|
|
|
|
|
|
|
|
Jiuyi
Technology
|
|
●
|
Established
in the PRC on September 10, 2015
|
|
100%
|
|
|
●
|
100%
held by Renovation
|
|
|
|
|
●
|
Registered capital of
USD 5,000,000
(USD 2,500,000 paid)
|
|
|
|
|
●
|
Technical support to online pharmacy
|
|
|
|
|
|
|
|
|
Kahamadi
Bio
|
|
●
|
Established
in the PRC in May 2016
|
|
49%
|
|
|
●
|
49%
held by Shouantang Bio
|
|
|
|
|
●
|
Registered
capital of RMB 10 million
|
|
|
|
|
●
|
Develop
brand name for nutritional supplements
|
|
|
|
|
|
|
|
|
Lin’An
Jiuzhou
|
|
●
|
Established
in the PRC in March 31, 2017
|
|
100%
|
|
|
●
|
100%
held by Jiuxin Management
|
|
|
|
|
●
|
Registered
capital of RMB 5 million (RMB 550,000 paid)
|
|
|
|
|
●
|
Explore
retail pharmacy market in Lin’An City
|
|
|
|
|
|
|
|
|
Jiuben
Pharmacy
|
|
●
|
Established
in the PRC in April 27, 2017
|
|
VIE
by contractual arrangements as
|
|
|
●
|
100%
held by Jiuzhou Pharmacy
|
|
a wholly-owned subsidiary
of
|
|
|
●
|
Registered
capital of RMB 100,000
|
|
Jiuzhou Pharmacy
(2)
|
|
|
●
|
Operates
a retail pharmacy drugstore in Hangzhou City
|
|
|
(1)
|
Jiuzhou
Pharmacy, Jiuzhou Clinic and Jiuzhou Service have been under the common control of Mr. Lei Liu, Mr. Chong’an Jin and
Ms. Li Qi, 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 rights agreement. Based on such
voting rights agreement, the Company has determined that common control exists among these three companies. 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: a consulting services agreement, operating agreement, equity pledge agreement, voting rights
agreement and option agreement. Because such agreements 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 each of the 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 consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”). The consolidated financial statements include the financial statements of the Company, its wholly-owned
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 in the voting rights 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 suppliers.
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, inventory
reserve 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 FASB 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 FASB 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, 2017, 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
|
|
|
14,359,565
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,359,565
|
|
Notes payable
|
|
|
-
|
|
|
|
13,181,779
|
|
|
|
-
|
|
|
|
13,181,779
|
|
Warrants liability
|
|
|
-
|
|
|
|
445,893
|
|
|
$
|
-
|
|
|
|
445,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,359,565
|
|
|
|
13,627,672
|
|
|
$
|
-
|
|
|
|
27,987,237
|
|
Revenue recognition
Revenue from sales of prescription
medicine at 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 drugstores is recognized at the point of sale, which is when a customer pays for and receives the merchandise. Usually the majority
of our merchandise, such as prescription and OTC drugs, are not allowed to be returned after the customers leave the counter. Return
of other products, such as sundry products, are minimal. 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 shipped 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.
Our sales policy allows for the return of certain merchandises without reason within seven days after customer’s receipt
of the applicable merchandise. A proper sales reserve is made to account for the potential loss from returns from customers. Historically,
sales returns seven days after merchandise receipts 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 and long-term deposits 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
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 and 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 it determines 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
trends.
In the Company’s online pharmacy
business, accounts receivable primarily consist of amounts due from non-bank third party payment instruments such as Alipay and
certain e-commerce platforms. To purchase pharmaceutical products from an e-commerce platforms such as Tmall, customers are required
to submit payment to certain non-bank third party payment instruments, such as Alipay, which, in turn, 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 directly purchases
certain non-medical products, such as certain nutritional supplements. As a result, almost all advances to suppliers are made by
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 have difficulty
receiving products from a vendor, we take the following steps: cease purchasing products from such vendor, ask for return of our
prepayment promptly, and if necessary, take legal action. If all of these steps are unsuccessful, management then determines
whether 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,
labor costs that are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development
cost. All costs are accumulated until the time of harvest and then allocated to harvested herbs costs when the herbs 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.
Farmland assets
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 costs. Since April 2014,
amortization of farmland development costs has been expensed instead of allocated into inventory due to unpredictable future market
value of planted gingko trees.
All related costs described in the
above are accumulated until the time of harvest and then allocated to harvested herbs when they are sold.
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 rights
|
|
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, 2017.
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 a self-assessment and
the Company’s liability for income taxes includes 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, 2017 and March 31, 2017, 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, 2017
and 2016, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant
tax authorities, the most significant of which 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, 2017 and 2016.
Stock
based compensation
The
Company follows the provisions of FASB ASC 718, “Compensation — Stock Compensation,” which establishes accounting
standards for non-employee and employee stock-based awards. Under the provisions of FASB 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 $456,904 and $445,000 for the three months ended June 30, 2017 and
2016, 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-cancellable 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 10 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. In
addition, 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, 2017 and at March 31 2017 were translated at 1 RMB to 0.1475
USD and at 1 RMB to 0.1451 USD, respectively. The average translation rates applied to income and cash flow statement amounts
for the three months ended June 30, 2017 and June 30, 2017 were at 1 RMB to 0.1457 USD and at 1 RMB to 0.1487 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 77,550) per bank. As of June
30, 2017 and March 31, 2017, the Company had deposits totaling $23,967,288 and $27,357,785 that were covered by such limited
insurance, respectively. Any balance over RMB 500,000 (USD 73,750) per bank in PRC will not be covered. To date, the Company has
not experienced any losses in such accounts.
For
the three months ended June 30, 2017, two vendors collectively accounted for 35.7% of the Company’s total purchases and
two suppliers accounted for more than 10% of total advances to suppliers. For the three months ended June 30, 2016, two vendors
accounted for 36.2% of the Company’s total purchases and two vendors accounted for more than 10% of total advances to suppliers.
For
the three months ended June 30, 2017, no customer accounted for more than 10% of the Company’s total sales or more than
10% of total accounts receivable. For the three months ended June 30,, 2016, no customer accounted for more than 10% of the Company’s
total sales and more than 10% of total accounts receivable.
Recent
Accounting Pronouncements
In
January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, “Intangibles—Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from
the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as
the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated
to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business
entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this ASU for its annual or any interim
goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption
of ASU 2017-04 on our 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 the fiscal year of 2019, 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, 2017 and March 31, 2017, financial assets available for sale amounted to $162,303 (RMB 1,100,000)
and $87,068 (RMB 600,000), respectively. In the year ended March 31, 2017, the Company invested as a limited partner (LP) in a
private equity fund, which is intended to invest in retail pharmaceutical business. The company has signed an investment agreement
with the private equity fund and agreed to invest a total of $290,228 (RMB 2,000,000).
NOTE
4 – TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consisted of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Accounts receivable
|
|
$
|
10,459,019
|
|
|
$
|
9,977,101
|
|
Less: allowance for doubtful accounts
|
|
|
(1,664,820
|
)
|
|
|
(1,415,505
|
)
|
Trade accounts receivable, net
|
|
$
|
8,794,199
|
|
|
$
|
8,561,596
|
|
For
the three months ended June 30, 2017 and 2016, $26,393 and $32,592 in accounts receivable were directly written off, respectively.
As of June 30, 2017 and March 31, 2017, no trade accounts receivables were pledged as collateral for borrowings from financial
institutions.
Note
5 – OTHER RECEIVABLE
Other
receivable consisted of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Deposit*
|
|
$
|
1,049,574
|
|
|
$
|
855,755
|
|
Advance to employees
|
|
|
578,471
|
|
|
|
652,436
|
|
Accrued supplier rebate**
|
|
|
125,653
|
|
|
|
321,993
|
|
Others
|
|
|
439,948
|
|
|
|
465,593
|
|
Less: allowance for doubtful accounts
|
|
|
(27,030
|
)
|
|
|
(26,584
|
)
|
Other receivable, net
|
|
$
|
2,166,616
|
|
|
$
|
2,269,193
|
|
*
|
It refers to various deposits made to service providers
and commercial platforms such as Alibaba’s Tmall, in order to carry business via these service providers and platforms.
|
**
|
It
refers
to supplier rebate receivables, which are computed based on our sales volume of the suppliers’ products.
|
Note
6 – OTHER CURRENT ASSETS
Other
current assets consisted of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Prepaid rental expenses
(1)
|
|
$
|
1,258,498
|
|
|
$
|
1,171,472
|
|
Prepaid and other current assets
|
|
|
401,303
|
|
|
|
394,683
|
|
Total
|
|
$
|
1,659,801
|
|
|
$
|
1,566,155
|
|
(1)
|
Represents
store and office rental expenses that were usually prepaid and amortized over the prepayment period.
|
Note 7
– PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Building
|
|
$
|
1,582,020
|
|
|
$
|
1,555,923
|
|
Leasehold improvements
|
|
|
11,981,258
|
|
|
|
11,783,611
|
|
Farmland development cost
|
|
|
1,764,584
|
|
|
|
1,735,475
|
|
Office equipment and furniture
|
|
|
5,450,537
|
|
|
|
5,339,005
|
|
Motor vehicles
|
|
|
591,168
|
|
|
|
585,769
|
|
Total
|
|
|
21,369,567
|
|
|
|
20,999,783
|
|
Less: Accumulated depreciation
|
|
|
(15,017,919
|
)
|
|
|
(14,489,479
|
)
|
Impairment*
|
|
|
(2,322,760
|
)
|
|
|
(2,247,147
|
)
|
Construction-in-progress**
|
|
|
378,961
|
|
|
|
-
|
|
Property and equipment, net
|
|
$
|
4,407,849
|
|
|
$
|
4,263,157
|
|
*
|
The
variance
of impairment from March 31, 2017 to June 30, 2017 is solely caused by exchange rate variance.
|
**
|
Includes
clinic
renovation expense of $69,522 and SAP (an popular ERP software) implementation fee of $309,439. Both projects are expected to
be completed by December 31, 2017.
|
Depreciation
expenses for property and equipment totaled $281,928 and $239,010 for the three months ended June 30, 2017 and 2016, respectively.
There were no fixed assets impaired in the three months ended June 30, 2017. For the year ended March 31, 2017, $106,257 of land
and road improvement in Qianhong Agriculture were impaired due to the estimated fair value being lower than the carrying value.
Note 8
– ADVANCES TO SUPPLIERS
Advances
to suppliers consist of deposits, with or advances to, outside vendors for future inventory purchases. Most of the Company’s
suppliers 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, 2017 and March 31, 2017, advance
to suppliers consist of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Advance to suppliers
|
|
$
|
6,668,252
|
|
|
$
|
7,006,396
|
|
Less: allowance for doubtful accounts
|
|
|
(1,700,016
|
)
|
|
|
(1,502,255
|
)
|
Advance to suppliers, net
|
|
$
|
4,968,236
|
|
|
$
|
5,504,141
|
|
*
|
In
order to collect a larger rebate for certain merchandise, such as colla coril asini (donkey-hide gelatin), from certain suppliers,
the Company made a significant cash advance to such suppliers.
|
For
the three months ended June 30, 2017 and 2016, none of the advances to suppliers were written off against previous allowances
for doubtful accounts, respectively.
Note
9 – INVENTORY
Inventory
consisted of finished goods, valued at $10,481,496 and $9,923,101 as of June 30, 2017 and March 31, 2017, respectively. The Company
constantly monitors its potential obsolete products and is allowed to return products close to their expiration date to its suppliers.
Any loss on damaged items is immaterial and will be recognized immediately. As a result, no reserves were made for inventory as
of June 30, 2017 and March 31, 2017.
Note
10 – FARMLAND ASSETS
Farmland
assets consist of ginkgo trees planted in 2012 and expected to be harvested and sold in several years. As of June 30, 2017 and
March 31, 2017, farmland assets are valued as follows:
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
Farmland assets
|
|
$
|
2,232,617
|
|
|
$
|
2,195,787
|
|
Less: Impairment*
|
|
|
(1,501,774
|
)
|
|
|
(1,477,000
|
)
|
Farmland assets, net
|
|
$
|
730,843
|
|
|
$
|
718,787
|
|
*
|
The estimated fair value is estimated to be lower than its investment value as of
June
30, 2017 and March 31, 2017.
|
Note 11
– LONG TERM DEPOSITS, LANDLORDS
As
of June 30, 2017 and March 31, 2017, long term deposits amounted to $3,115,537 and $2,294,848, respectively. Long term deposits
are money deposited with, or advanced to, landlords for the purpose of securing retail store leases that the Company does not
anticipate being returned within the next twelve months. Most of the Company’s landlords require a minimum payment of nine
months’ rent, paid upfront, plus additional deposits. In the three months ended June 30, 2017, in order to quickly expand
its network, the Company signed quite a few new store lease agreements and made additional leasehold deposits.
Note 12
– OTHER NONCURRENT ASSETS
Other noncurrent assets consisted of the
following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Forest land use rights*
|
|
$
|
1,183,738
|
|
|
$
|
1,177,005
|
|
Long-term prepaid store rent (over one year)**
|
|
|
177,058
|
|
|
|
-
|
|
Total
|
|
$
|
1,360,796
|
|
|
$
|
1,177,005
|
|
*
The
prepayment for lease of forest land use rights is a payment made to a local government in connection with entering into an operating
land lease agreement. The land is currently used to cultivate Ginkgo trees. The forest rights certificate from the local village
extends the life of the lease to January 31, 2060.
The
amortization of the prepayment for the lease of forest land use right was approximately $6,846 and $15,805 for the three months
ended June 30, 2017 and 2016, respectively.
The
Company’s amortizations of the prepayment for lease of land use right for the next five years and thereafter are as follows:
For the year ending June 30,
|
|
Amount
|
|
2018
|
|
$
|
27,384
|
|
2019
|
|
|
27,384
|
|
2020
|
|
|
27,384
|
|
2021
|
|
|
27,384
|
|
2022
|
|
|
27,384
|
|
Thereafter
|
|
|
1,046,818
|
|
**In order to secure better terms in a
lease agreement, the Company agreed to pay two-year rent at the beginning of the lease.
Note 13
– INTANGIBLE ASSETS
Net
intangible assets consisted of the following at:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
License
(1)
|
|
$
|
1,499,088
|
|
|
$
|
1,394,546
|
|
Land use rights
(2)
|
|
|
1,438,821
|
|
|
|
1,415,086
|
|
Total intangible assets
|
|
|
2,937,909
|
|
|
|
2,809,632
|
|
Less: accumulated amortization
|
|
|
(105,866
|
)
|
|
|
(97,021
|
)
|
Intangible assets, net
|
|
$
|
2,832,043
|
|
|
$
|
2,712,611
|
|
Amortization
expense of intangibles amounted to $7,130 and $29,089 for the three months ended June 30, 2017 and 2016, respectively.
(1)
|
This
represents the fair value of the licenses of insurance applicable drugstores acquired from Sanhao Pharmacy, a drugstore chain
Jiuzhou Pharmacy acquired in 2014. The licenses allow patients to pay by using insurance cards at stores. The stores are reimbursed
from the Human Resource and Social Security Department of Hangzhou City. In June 2017, the Company acquired an additional new
store for the purpose of its social medical reimbursement certificate.
|
|
|
(2)
|
In
July 2013, the Company purchased the land use rights 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 the near future.
|
Note 14
– 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, 2017 and March 31, 2017:
|
|
|
|
|
|
Origination
|
|
|
Maturity
|
|
|
June 30,
|
|
|
March 31,
|
|
Beneficiary
|
|
|
Endorser
|
|
|
date
|
|
|
date
|
|
|
2017
|
|
|
2017
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
10/09/16
|
|
|
|
04/09/17
|
|
|
|
-
|
|
|
|
1,755,879
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
10/09/16
|
|
|
|
04/09/17
|
|
|
|
-
|
|
|
|
341,676
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
11/08/16
|
|
|
|
05/08/17
|
|
|
|
-
|
|
|
|
1,637,419
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
11/11/16
|
|
|
|
05/11/17
|
|
|
|
-
|
|
|
|
314,897
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
12/05/16
|
|
|
|
06/05/17
|
|
|
|
-
|
|
|
|
1,508,042
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
12/29/16
|
|
|
|
06/29/17
|
|
|
|
-
|
|
|
|
1,205,419
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
12/29/16
|
|
|
|
06/29/17
|
|
|
|
-
|
|
|
|
1,030,309
|
|
Jiuzhou Pharmacy
(2)
|
|
|
|
ZTCB
|
|
|
|
12/27/16
|
|
|
|
06/27/17
|
|
|
|
-
|
|
|
|
580,456
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
02/06/17
|
|
|
|
08/06/17
|
|
|
|
-
|
|
|
|
2,253,804
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
-
|
|
|
|
117,542
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
-
|
|
|
|
267,651
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
-
|
|
|
|
1,678,481
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
02/06/17
|
|
|
|
08/06/17
|
|
|
|
2,291,607
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
119,514
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
272,140
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
03/07/17
|
|
|
|
09/07/17
|
|
|
|
1,706,634
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
04/05/17
|
|
|
|
10/05/17
|
|
|
|
1,320,795
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
05/04/17
|
|
|
|
11/04/17
|
|
|
|
1,774,244
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
06/05/17
|
|
|
|
12/05/17
|
|
|
|
1,533,336
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
06/05/17
|
|
|
|
12/05/17
|
|
|
|
348,145
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
06/29/17
|
|
|
|
12/29/17
|
|
|
|
1,054,968
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
06/29/17
|
|
|
|
12/29/17
|
|
|
|
811,514
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
|
|
HUB
|
|
|
|
06/29/17
|
|
|
|
12/29/17
|
|
|
|
1,948,882
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,181,779
|
|
|
$
|
12,691,575
|
|
(1)
|
As
of March 31, 2017, the Company had $12,111,119 (RMB 81,459,343.5) of notes payable from HUB. The Company is required to hold
restricted cash in the amount of $1,328,098 (RMB 9,152,104.2) with HUB as collateral against these bank notes. As of June
30, 2017, the Company had $13,181,779 (RMB 89,338,992.1) of notes payable from HUB. The Company is required to hold restricted
cash in the amount of $1,442,963 (RMB 9,779,623) with HUB as collateral against these bank notes. Additionally, a total of
$8,627,522 three-year deposit (RMB 58,472,647.3) was deposited into HUB as a collateral for current and future notes payable
from HUB.
|
|
|
(2)
|
As
of March 31, 2017, the Company had $580,456 (RMB 4,000,000) of notes payable from ZTCB, with restricted cash in the amount
of $290,228 (RMB 2,000,000) held at the bank. As of June 30, 2017, the Company had no notes payable from ZTCB.
|
As
of June 30, 2017, the Company had a credit line of approximately $16.62 million in the aggregate from HUB, BOH, ICBC and
ZTCB. By putting up the restricted cash of $1.44 million deposited in the banks, the total credit line was $18.06 million. As
of June 30, 2017, the Company had approximately $13.18 million of bank notes payable and approximately $4.88 million bank credit
line was still available for further borrowing. The bank notes are secured by buildings owned by the Company’s major shareholders
and by a shop of Jiuzhou Pharmacy, and are guaranteed by Jiuxin Medical.
Note 15
– TAXES
Income
tax
For
the three months ended June 30, 2017 and 2016, the income tax provisions were as follow:
|
|
For the three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax
|
|
$
|
20,538
|
|
|
$
|
28,434
|
|
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, 2017 and 2016:
|
|
For the
three months ended
|
|
|
|
|
June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
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
(1)
|
|
|
(32.0
|
)
|
|
|
|
(3.7
|
)
|
|
Non-deductible
expenses-permanent difference
(2)
|
|
|
5.5
|
|
|
|
|
3.5
|
|
|
Effective
tax rate
|
|
|
(1.5
|
)%
|
|
|
|
17.8
|
%
|
|
(1)
|
Represents
a non-taxable expense reversal due to overall decrease in allowance for accounts receivable and advances to suppliers.
|
(2)
|
The
(1.5)% and17.8% rate adjustments for the three months ended June 30, 2017 and 2016 represent expenses that primarily include
stock option expenses and legal, accounting and other expenses incurred by the Company that are 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, 2017 and 2016. As of June 30, 2017, 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 continuing losses for U.S. income tax purposes. Accordingly, the Company has provided
a 100% valuation allowance at June 30, 2017. There was no net change in the valuation allowance for the three months ended
June 30, 2017 and 2016. Management reviews this valuation allowance periodically and makes adjustments as necessary.
Taxes
payable at June 30, 2017 and March 31, 2017 consisted of the following:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
VAT
|
|
$
|
465,977
|
|
|
$
|
615,067
|
|
Income tax
|
|
|
15,863
|
|
|
|
19,416
|
|
Others
|
|
|
29,840
|
|
|
|
47,456
|
|
Total taxes payable
|
|
$
|
511,680
|
|
|
$
|
681,939
|
|
The
Company has adopted FASB ASC Topic 740-10-05, “Income Taxes.” To date, the adoption of this interpretation has not
impacted the Company’s financial position, results of operations, or cash flows. The Company performed a self-assessment
and the Company’s liability for income taxes includes 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, 2017 and June 30, 2016, management considered that the Company had no 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 future. There are no estimated interest costs and penalties provided in the Company’s consolidated
financial statements for the three months ended June 30, 2017 and 2016, respectively. The Company’s tax positions related
to open tax years are subject to examination by the relevant tax authorities, the most significant of which is the China Tax Authority.
Note
16 – 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 $283,244 and $247,900 in employment benefits and pension for the three months ended June 30, 2017 and 2016,
respectively.
Note
17 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts
payable to related parties are summarized as follows:
|
|
June 30,
2017
|
|
|
March 31,
2017
|
|
Due to a director and CEO
(1)
:
|
|
|
849,075
|
|
|
|
927,052
|
|
Total
|
|
$
|
849,075
|
|
|
$
|
927,052
|
|
(1)
|
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, 2017 and March 31, 2017, notes payable totaling $3,737,336 and $3,974,193 were secured by the personal properties
of certain of the Company’s shareholders, respectively.
The
Company leases from Mr. Lei Liu a retail space; the lease expires in September 2017. Rent expenses totaled $4,460 and $17,839
for the three months ended June 30, 2017 and 2016, respectively. The amounts owed under the lease for the three months
ended June 30, 2017 and 2016 were not paid to Mr. Liu as of June 30, 2017.
Note
18 – WARRANTS
In
connection with the registered direct offering closed on July 19, 2015, the Company issued to an investor a warrant to purchase
up to 600,000 shares of common stock at an exercise price of $3.10 per share. The warrant became exercisable on January 19, 2016
and will expire on January 18, 2021. In connection with the offering, the Company also issued a warrant to its placement agent
of this offering, pursuant to which the agent may purchase up to 6% of the aggregate number of shares of common stock sold in
the offering, i.e. 72,000 shares. Such warrant has the same terms as the warrant issued to investor in the offering.
The
fair value of the warrants issued to purchase 672,000 shares as described above was estimated by using the binominal pricing model
with the following assumptions:
|
|
Common Stock
Warrants
|
|
|
Common Stock
Warrants
|
|
|
|
June 30,
2017
(1)
|
|
|
March 31,
2017
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
1.74
|
|
|
$
|
1.80
|
|
Exercise price
|
|
$
|
3.10
|
|
|
$
|
3.10
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years)
|
|
|
3.55
|
|
|
|
3.80
|
|
Risk-free interest rate
|
|
|
1.55
|
%
|
|
|
0.87
|
%
|
Expected volatility
|
|
|
87.33
|
%
|
|
|
90.73
|
%
|
(1)
|
As
of June 30, 2017, the warrants had not been exercised.
|
Upon
evaluation, the warrants meet the definition of a derivative under FASB ASC 815, as the Company cannot avoid a net cash settlement
under certain circumstances. Accordingly, the fair value of the warrants was classified as a liability of $496,217 as of March
31, 2017. For the three months ended June 30, 2017, the Company recognized a gain of $50,324 for the investor warrant and placement
agent warrant, from the change in fair value of the warrant liability. As a result, the warrant liability is carried on the consolidated
balance sheets at the fair value of $ 445,893 for the investor warrant and placement agent warrant, collectively, as of June 30,
2017.
Note
19 – STOCKHOLDER’S EQUITY
Common
stock
On
January 23, 2017, the Company closed a private offering with one institutional investor (the “Investor”) pursuant
to which the Company sold to the Investor, and the Investor purchased from the Company, an aggregate of 4,840,000 shares of the
common stock, par value $0.001 per share, of the Company, at a purchase price of $2.20 per share, for aggregate gross proceeds
to the Company of $10,648,000 (the “Private Placement”).
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 an expense over the requisite service periods in the
Company’s consolidated statements of operations. Share-based awards are attributed to expenses 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 FASB 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
June 3, 2016, the Company granted a total of 1,630,000 shares of restricted common stock to its key employees in its retail drugstores
and online pharmacy under the Company’s 2010 Equity Incentive Plan, as amended. The stock awards vests in three years from
the date of the grant. The trading value of the Company’s common stock on June 3, 2016 was $1.62. For the three months ended
June 30, 2017 and 2016, $219,447 and $65,111 was recorded as service compensation expense, respectively.
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 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, 2017 and 2016, $124,033
and $124,033 was recorded as compensation expense. As of June 30, 2017, there was approximately $0.19 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 0.38 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 dividends 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, 2017 and 2016, the Company did not make appropriations to 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
20 – (LOSS) INCOME 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 (loss) earnings per share computation:
|
|
The three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net (loss) income attributable to controlling interest
|
|
$
|
(1,419,304
|
)
|
|
$
|
131,153
|
|
Weighted average shares used in basic computation
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
Diluted effect of stock options and warrants
|
|
|
-
|
|
|
|
37,500
|
|
Weighted average shares used in diluted computation
|
|
|
25,214,678
|
|
|
|
18,276,565
|
|
Income per share – Basic:
|
|
|
-
|
|
|
|
-
|
|
Net income before noncontrolling interest
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
Add: Net loss attributable to noncontrolling interest
|
|
$
|
-
|
|
|
$
|
|
|
Net income attributable to controlling interest
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
Loss per share – Diluted:
|
|
|
|
|
|
|
-
|
|
Net (loss) income before noncontrolling interest
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
Add: Net income attributable to noncontrolling interest
|
|
$
|
-
|
|
|
$
|
|
|
Net (loss) income attributable to controlling interest
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
For
the three months ended June 30, 2017, 967,000 shares underlying employee stock 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.
Note
21 – 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 operations for the three months ended June 30, 2017.
|
|
Retail drugstores
|
|
|
Online Pharmacy
|
|
|
Drug wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
13,020,370
|
|
|
$
|
3,135,689
|
|
|
|
5,514,309
|
|
|
|
-
|
|
|
|
21,670,368
|
|
Cost of goods
|
|
|
9,736,208
|
|
|
|
2,844,498
|
|
|
|
4,912,001
|
|
|
|
-
|
|
|
|
17,492,707
|
|
Gross profit
|
|
$
|
3,284,162
|
|
|
$
|
291,191
|
|
|
|
602,308
|
|
|
|
-
|
|
|
|
4,177,661
|
|
Selling expenses
|
|
|
2,419,556
|
|
|
|
515,387
|
|
|
|
981,916
|
|
|
|
-
|
|
|
|
3,916,859
|
|
General and administrative expenses
|
|
|
1,269,776
|
|
|
|
70,289
|
|
|
|
375,472
|
|
|
|
9,906
|
|
|
|
1,725,443
|
*
|
(Loss) income from operations
|
|
$
|
(405,170
|
)
|
|
$
|
(294,485
|
)
|
|
|
(755,080
|
)
|
|
|
(9,906
|
)
|
|
|
(1,464,641
|
)
|
Depreciation and amortization
|
|
$
|
86,989
|
|
|
$
|
-
|
|
|
|
82,607
|
|
|
|
119,461
|
|
|
|
289,057
|
|
Total capital expenditures
|
|
$
|
56,574
|
|
|
$
|
-
|
|
|
|
(39,235
|
)
|
|
|
-
|
|
|
|
17,339
|
|
*
|
Includes accounts receivable allowance reversal of $249,315
and additional advance to suppliers allowance of $197,761.
|
The
following table presents summarized information by segment of the continuing operations 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
|
|
|
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
|
*
|
(Loss) income from operations
|
|
$
|
(116,058
|
)
|
|
$
|
194,943
|
|
|
|
(193,761
|
)
|
|
|
(4,523
|
)
|
|
|
(119,399
|
)
|
Depreciation and amortization
|
|
$
|
(53,192
|
)
|
|
$
|
-
|
|
|
|
47,067
|
|
|
|
-
|
|
|
|
(6,125
|
)
|
Total capital expenditures
|
|
$
|
9,214
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,214
|
|
*
|
Includes
accounts
receivable and advance to suppliers allowance reversal of $38,144.
|
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 drugstores by
main product category for the three months ended June 30, 2017 and 2016 were as follows:
|
|
For the three months ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
4,595,354
|
|
|
|
4,271,102
|
|
OTC drugs
|
|
|
5,643,962
|
|
|
|
4,875,355
|
|
Nutritional supplements
|
|
|
1,037,332
|
|
|
|
1,176,741
|
|
TCM
|
|
|
1,012,511
|
|
|
|
929,023
|
|
Sundry products
|
|
|
262,036
|
|
|
|
254,558
|
|
Medical devices
|
|
|
469,175
|
|
|
|
1,201,463
|
|
Total
|
|
$
|
13,020,370
|
|
|
|
12,078,242
|
|
The
Company’s net revenue from external customers through online pharmacy by main product category is as follows:
|
|
For the three months ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
-
|
|
|
|
-
|
|
OTC drugs
|
|
|
1,117,392
|
|
|
|
1,637,291
|
|
Nutritional supplements
|
|
|
516,076
|
|
|
|
908,023
|
|
TCM
|
|
|
-
|
|
|
|
-
|
|
Sundry products
|
|
|
419,033
|
|
|
|
666,163
|
|
Medical devices
|
|
|
1,083,188
|
|
|
|
1,859,602
|
|
Total
|
|
$
|
3,135,689
|
|
|
|
5,071,079
|
|
The
Company’s net revenue from external customers through wholesale by main product category is as follows:
|
|
For the three months ended
|
|
|
|
June 30
|
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
3,397,401
|
|
|
|
1,897,605
|
|
OTC drugs
|
|
|
2,100,650
|
|
|
|
1,218,901
|
|
Nutritional supplements
|
|
|
16,258
|
|
|
|
39,323
|
|
TCM
|
|
|
-
|
|
|
|
-
|
|
Sundry products
|
|
|
-
|
|
|
|
-
|
|
Medical devices
|
|
|
-
|
|
|
|
766
|
|
Total
|
|
$
|
5,514,309
|
|
|
|
3,156,594
|
|
Note
22 – COMMITMENTS AND CONTINGENCIES
Operating
lease commitments
The
Company recognizes lease expenses 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
|
|
2018
|
|
|
$
|
3,244,645
|
|
|
$
|
35,854
|
|
|
$
|
71,709
|
|
|
$
|
-
|
|
|
$
|
3,352,208
|
|
2019
|
|
|
|
2,849,103
|
|
|
|
35,854
|
|
|
|
71,709
|
|
|
|
-
|
|
|
|
2,956,666
|
|
2020
|
|
|
|
2,112,542
|
|
|
|
35,854
|
|
|
|
71,709
|
|
|
|
-
|
|
|
|
2,220,105
|
|
2021
|
|
|
|
1,329,446
|
|
|
|
20,915
|
|
|
|
41,830
|
|
|
|
-
|
|
|
|
1,392,191
|
|
2022
|
|
|
|
846,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846,904
|
|
Thereafter
|
|
|
|
1,708,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,708,850
|
|
Total
rent expense amounted to $848,341 and $755,252 for the three months ended June 30, 2017 and 2016, respectively.
Note
23 – Subsequent Events
Based
on a joint venture agreement (the “JV”) with CareRetail (HK) Holdings Limited (“CareRetail HK”) entered
on January 18, 2017, Jiuzhou Pharmacy will set up a JV with CareRetail HK. The JV is intended to be used as an investment vehicle
in acquiring or cooperating with other pharmaceutical chain in China. As certain important terms such as the amount of capital
needs further arrangements, as of the date herein, the JV has not been set up.
In July 2017, The Company has entered into
agreements to acquire three drugstores with qualification for reimbursement from Human Resource and Social Security Department
of Hangzhou City. It usually takes one or two months to close the acquisitions.
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, 2017 and filed with the SEC on June 29, 2017. 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, medical devices, and 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. As of June 30, 2017, we had 71 pharmacies in Hangzhou under the
store brand of “Jiuzhou Grand Pharmacy.” During the three months ended June 30, 2017, we had opened six new pharmacies
while closing two stores due to termination of their lease contracts.
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 2017, in order to keep top rankings in certain third-party platforms
such as Tmall, we have spent reasonable resources on marketing our products through these third-party platforms. Our sales through
our own platform are primarily generated by customers who use their private commercial medical insurances package.
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 year ended June 30, 2017.
Critical
Accounting Policies and Estimates
In
preparing our audited 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
2 to our audited consolidated financial statements accompanying in this report.
Results
of Operations
Comparison
of the three months ended June 30, 2017 and 2016
The
following table summarizes our results of operations for the three months ended June 30, 2017 and 2016:
|
|
Three months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
21,670,368
|
|
|
|
100.0
|
%
|
|
$
|
20,935,915
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
4,177,661
|
|
|
|
19.3
|
%
|
|
$
|
4,481,804
|
|
|
|
21.4
|
%
|
Selling expenses
|
|
$
|
3,916,859
|
|
|
|
18.1
|
%
|
|
$
|
2,682,721
|
|
|
|
12.8
|
%
|
General and administrative expenses
|
|
$
|
1,725,443
|
|
|
|
8.0
|
%
|
|
$
|
1,918,482
|
|
|
|
9.2
|
%
|
Loss from operations
|
|
$
|
(1,464,641
|
)
|
|
|
(6.8
|
)%
|
|
$
|
(119,399
|
)
|
|
|
(0.6
|
)%
|
Interest income
|
|
$
|
44,899
|
|
|
|
0.2
|
%
|
|
$
|
224,422
|
|
|
|
1.1
|
%
|
Interest expenses
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
(439
|
)
|
|
|
(0.0
|
)%
|
Other income, net
|
|
$
|
(29,348
|
)
|
|
|
(0.1
|
)%
|
|
$
|
87,199
|
|
|
|
0.4
|
%
|
Change in fair value of derivative liability
|
|
$
|
50,324
|
|
|
|
0.2
|
%
|
|
$
|
(32,196
|
)
|
|
|
(0.2
|
)%
|
Income tax expense
|
|
$
|
20,538
|
|
|
|
0.1
|
%
|
|
$
|
28,434
|
|
|
|
0.1
|
%
|
Net income(loss)
|
|
$
|
(1,419,304
|
)
|
|
|
(6.5
|
)%
|
|
$
|
131,153
|
|
|
|
0.6
|
%
|
Revenue
Due
to the growth in our retail drugstores business and increase in wholesale business, revenue increased by $734,453 or 3.5% for
the three months ended June 30, 2017, as compared to the three months ended June 30, 2016, offset by the decrease in our online
sales. The following table breaks down the revenue for our four business segments for the three months ended June 30, 2017 and
2016:
Revenue
by Segment
The
following table breaks down the revenue for our four business segments for the three months ended June 30, 2017 and 2016:
|
|
For the three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
13,020,370
|
|
|
|
60.1
|
%
|
|
$
|
12,708,242
|
|
|
|
60.5
|
%
|
|
$
|
312,128
|
|
|
|
2.5
|
%
|
Revenue from online sales
|
|
|
3,135,689
|
|
|
|
14.5
|
%
|
|
|
5,071,079
|
|
|
|
24.2
|
%
|
|
|
(1,935,390
|
)
|
|
|
(38.2
|
)%
|
Revenue from wholesale business
|
|
|
5,514,309
|
|
|
|
25.4
|
%
|
|
|
3,156,594
|
|
|
|
15.3
|
%
|
|
|
2,357,715
|
|
|
|
74.7
|
%
|
Revenue from farming business
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
21,670,368
|
|
|
|
100.0
|
%
|
|
$
|
20,935,915
|
|
|
|
100.0
|
%
|
|
$
|
734,453
|
|
|
|
3.5
|
%
|
Retail
drugstores sales, which accounted for approximately 60.1% of total revenue for the three months ended June 30, 2017, increased
by $312,128, or 2.5% compared to the three months ended June 30, 2016, to $13,020,370. Same-store sales increased by approximately
$1,320,656, or 11.7%, while new stores contributed approximately $285,578 in revenue in the three months ended June 30, 2017.
Excluding the RMB depreciation effect, the same store sales increased by approximately 17.3% period over period. The increase
in our retail drugstore sales is primarily due to promotional campaign, benefits such as incremental DTP (Direct-to-Patient) business
caused by continuous hospital medical reform, and growing healthcare products demand from local people. As a way to promote sales
of brand-name medical products, we have implemented several marketing campaigns in our stores. In reward, the medical products
provided a series of supports such as technical supports and vendor rebates. Although brand-name medical products leave lower
gross profit margin to our drugstores as compared to non-brand-name medical products, they usually have better curative effects.
By promoting brand-name products, we were able to retain quality customers and increase our sales. Additionally, DTP drugs are
usually low profit margin new medicines not sold at hospitals. As part of medical reform package, local governments require the
revenue percentage from drug sales at public hospitals to decline year by year. In order to achieve lower drug sales percentage
out of their total revenue, the public hospitals chose to abandon sales of low profit margin DTP products first. We have actively
contacted local vendors of certain DTP products and were able to sell these DTP products in our stores. As a result, sales in
our drugstores increased. As local people care about their health more and more, healthcare products industry has experienced
overall higher growth rates than China GDP growth. Furthermore, starting from fiscal 2018, we have accelerated our new stores
expansion, which is expected to generate more retail drugstore revenue. Our store count increased to 71 as of June 30, 2017, compared
to 67 stores as of March 31, 2017.
Our
online pharmacy sales decreased by approximately $1,935,390, or 38.2% for the three months ended June 30, 2017, as compared to
the three months ended June 30, 2016. The decrease was primarily caused by the decline in business referred from Yikatong and
decline in our sales via various e-commerce platforms, as further explained below, during this three months. We carry our business
either through certain e-commerce platforms such as Tmall and JD.com or via our own official online pharmacy website. Such arrangements
with third-party platforms have exposed our online presence to a wider consumer base. In order to increase the popularity of our
products, we have made considerable efforts to identify popular products that can drive sales, while keeping a close watch on
cost. However, due to the suspension of OTC drug sales on e-commerce platforms such as Alibaba in the second quarter of fiscal
2017 by the China Food and Drug Administration (“CFDA”), our sales via these e-commerce platforms have been curtailed.
As a result, our sales via these e-commerce platforms decreased by 24.6% period over period. To minimize the effect of OTC drug
sales suspension, we are using these platforms as a showcase for our OTC products. Customers interested in listed OTC products
can place order requests on these platforms which will forwards these requests to us. We will process these orders and the customers
can pay us upon delivery. We are also adding more non-medical health products such as nutritional supplements into our sales menu
to counteract the decline in sales of OTC drugs. Due to the decline in business referred to us from “Yikatong”, the
popular pharmacy and health insurance benefit card, the sales on our own official website for the three months ended June 30,
2017 decreased by $0.6 million or 67.6% as compared to the three months ended June 30, 2016. Yikatong is run by a Pharmacy Benefit
Management (“PBM”) provider in China. In fiscal year 2016, we created a 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 large customer pool in the near future. If we
are able to retain the new vendor, we anticipate future growth for our own website sales.
Wholesale
revenue increased by $2,357,715 or 74.7%, primarily as a result of our ability to resell certain products, which our retail stores
made large orders on, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name products,
we were able to bargain lower purchase prices than the market level on these merchandises. As a result, vendors who were unable
to obtain a better price than ours, turned to us for these products, causing the wholesale volume to grow. However, hospitals
still act as a major source of drug retailers 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 secure a status to serve as a provincial or national exclusive sale agent for certain popular drugs, we
do not expect our wholesale business to increase significantly in the immediate future.
In
the three months ended June 30, 2017 and 2016, we have not generated revenue from our farming business. We planted ginkgo and
maidenhair trees during the year ended June 30, 2013. A ginkgo tree may have a growth period of up to twenty-three months before
it is mature enough for harvest. We have not yet harvested our ginkgo or maidenhair trees. 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. We anticipate
that we will continue to grow ginkgo trees and start cultivating other herbs in the future.
Gross Profit
Gross
profit decreased by $304,143 or 6.8% period over period primarily as a result of a decrease in gross profit provided by online
sales, which decreased significantly in the three months ended June 30, 2017. At the same time, gross margin decreased from 21.4%
to 19.3% due to lower retail and online profit margins. The average gross margins for each of our four business segments are as
follows:
|
|
For the three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Average gross margin for retail drugstores
|
|
|
25.2
|
%
|
|
|
28.5
|
%
|
Average gross margin for online sales
|
|
|
9.3
|
%
|
|
|
13.0
|
%
|
Average gross margin for wholesale business
|
|
|
10.9
|
%
|
|
|
8.4
|
%
|
Average gross margin for farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail
gross margin decreased primarily due to lower prices in promotional campaigns, and lower profit margins of DTP medicine. In order
to boost our sales, we have implemented several marketing campaigns in our stores in the three months ended June 30, 2017. As
an effective method to promote sales, we have given promotion policy such as coupon discount on certain merchandises. As a result,
our retail profit margin were curtailed. Additionally, certain DTP medicine flowed out of hospitals have low profit margin. By
selling these medicine, we may incur lower profit margin while keeping our sales up.
Gross
margin of online pharmacy sales decreased primarily because of the decline in our sales via our own official website, as well
as due to our promotion of certain products sold at low profit margin. We conduct 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 have higher profit margins because customers referred by Yikatong and commercial insurance companies are premium
customers who can afford premium products with higher profit margins. As described in the above, Yikatong has continued to cut
its customer referrals to our online pharmacy. In addition, to promote sales via third-party platforms, we also organized several
market campaigns focusing on competitive pricing. As a result, our overall online sales profit margin declined in the three months
ended June 30, 2017.
Wholesale
gross margin varies period by period primarily as a result of different products we carry and sell to certain pharmaceutical vendors.
Although we have attempted to market 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 a provincial or national exclusive sale agent for certain popular
drugs or have sales access to large local hospitals, we may have to maintain low profit margins in order to drive sales on our
wholesale business.
Selling
and Marketing Expenses
Sales
and marketing expenses increased by $1,234,138, or 46.0%, period over period, primarily due to reward to our wholesale sales persons
and reclassification of certain staff salary to selling and marketing expense in our wholesale business. In the three months
ended June 30, 2017, much of our wholesale business was referred by outside medical products individual traders who require reward
based on the transaction amount. As a result, we incurred additional selling expense of approximately $0.5 million. Additionally,
as certain members of our wholesale staff provides general customer care and warehouses support that are more related to our sales,
we reclassified these expenses as sales and marketing expenses to better reflect their nature. Primarily due to the decrease in
overall sales, such expenses as a percentage of our revenue increased to 15.9%, from 13.9% for the same period three months ago. Except
for online business, which declined significantly, we expect other sectors’ future sales and marketing expenses not to deviate
significantly from current levels.
General
and Administrative Expenses
General
and administrative expenses decreased by $193,039, or 10.1%, period over period. Such expenses as a percentage of revenue
decreased to 8.0% from 9.2% for the same period three months ago. Our stock compensation has decreased by approximately
$247,000 as certain stocks compensation have been fully amortized into expense in fiscal year 2017 and no more expenses were incurred
in the three months ended June 30, 2017. Excluding such an effect, general and administrative expenses slightly decreased by approximately
$54,000.
Loss
from Operations
As a result of the
above, we had loss from operations of $1,464,641 in the quarter ended June 30, 2017, as compared to loss from operations of $119,399
a year ago. Our operating margin for the three months ended June 30, 2017 and 2016 was (6.8)% and (0.6)%, respectively.
Income
Taxes
Our
income tax expense decreased by $7,896 period over period due to a decrease in overall profit.
Net
(Loss) Income
As
a result of the foregoing, net loss is $1,419,304 in the three months ended June 30, 2017 as compared to a net income of
$131,153 in the three months ended June 30, 2016.
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
|
|
$
|
5,799,616
|
|
|
$
|
585,104
|
|
|
$
|
1,106,032
|
|
|
$
|
-
|
|
|
$
|
7,490,752
|
|
4- 6 months
|
|
|
19,428
|
|
|
|
400,542
|
|
|
|
421,241
|
|
|
|
-
|
|
|
|
841,211
|
|
7- 12 months
|
|
|
13,533
|
|
|
|
222,253
|
|
|
|
695,731
|
|
|
|
-
|
|
|
|
931,517
|
|
Over one year
|
|
|
18,577
|
|
|
|
7,843
|
|
|
|
1,167,939
|
|
|
|
1,180
|
|
|
|
1,195,539
|
|
Allowance for doubtful accounts
|
|
|
(62,663
|
)
|
|
|
(122,623
|
)
|
|
|
(1,478,354
|
)
|
|
|
(1,180
|
)
|
|
|
(1,664,820
|
)
|
Total accounts receivable
|
|
$
|
5,788,491
|
|
|
$
|
1,093,119
|
|
|
$
|
1,912,589
|
|
|
$
|
-
|
|
|
$
|
8,794,199
|
|
Accounts
receivable from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health
insurance programs. In the three months ended June 30, 2017, we wrote off an approximately $26,393 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, 2017, we were able to continually collect certain aged accounts. As a result, we reversed approximately
$683,739 in allowance.
Subsequent
to June 30, 2017 and through May 31, 2017, we collected approximately $2.6 million in receivables relating to our drugstore business,
approximately $1.4 million in receivables relating to our online pharmacy business, approximately $0.2 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 at 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
|
|
$
|
125,814
|
|
|
$
|
-
|
|
|
$
|
3,600,765
|
|
|
$
|
-
|
|
|
$
|
3,726,579
|
|
4- 6 months
|
|
|
155,431
|
|
|
|
-
|
|
|
|
52,377
|
|
|
|
-
|
|
|
|
207,808
|
|
7- 12 months
|
|
|
142,882
|
|
|
|
-
|
|
|
|
1,675,841
|
|
|
|
-
|
|
|
|
1,818,723
|
|
Over one year
|
|
|
150,052
|
|
|
|
-
|
|
|
|
765,090
|
|
|
|
-
|
|
|
|
915,142
|
|
Allowance for doubtful accounts
|
|
|
(225,963
|
)
|
|
|
-
|
|
|
|
(1,474,053
|
)
|
|
|
-
|
|
|
|
(1,700,016
|
)
|
Total advances to suppliers
|
|
$
|
348,216
|
|
|
$
|
-
|
|
|
$
|
4,620,020
|
|
|
$
|
-
|
|
|
$
|
4,968,236
|
|
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 purchases on certain non-medical products. As a result, our retail chain had little advances
to suppliers as of June 30, 2017.
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 action. If all of these steps are unsuccessful, management
then determines whether 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. To control credit risk, we have tightened our customer credit policy and strengthened
monitoring of uncollected receivables.
Liquidity
and Capital Resources
Our
cash flows for the periods indicated are as follows:
|
|
For the three months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by/used in operating activities
|
|
$
|
(3,611,268
|
)
|
|
$
|
(2,765,429
|
)
|
Net cash provided by/used in investing activities
|
|
$
|
(507,259
|
)
|
|
$
|
(35,904
|
)
|
Net cash provided by/used in financing activities
|
|
$
|
(344,533
|
)
|
|
$
|
1,388,251
|
|
For
the three months ended June 30, 2017, cash used in operating activities amounted to $3,611,26
8,
as compared to $2,765,429 a year ago. The change is primarily attributable to a decrease in cash provided by net income
of $1,550,457, a decrease in cash provided by change of accounts payable of $838,638 offset by an increase of $1,055,876 in advances
to suppliers and provision, an increase in cash provided by Accounts receivable of $822,922, and an increase in cash provided
by the change of other current assets of $348,214.
For
the three months ended June 30, 2017, net cash used in investing activities amounted to $(507,258), as compared to $(35,904) provided
by investing activities a year ago. The change is attributable to the disposal of financial assets available for sale and
Increase in construction-in-progress such as SAP system implementation in the three months ended June 30, 2017.
For
the three months ended June 30, 2017, net cash provided by financing activities amounted to $(344,533), as compared to $1,388,251
net cash used in financing activities a year ago. The financing proceeds were from the private placement described below.
As
of June 30, 2017, we had cash of approximately $14,359,565. Our total current assets as of June 30, 2017, were $
52,890,537
and total current liabilities were $38,880,382, which resulted in a working capital of $14,010,155.
On
January 23, 2017, we completed a private placement with a single healthcare-focused institutional investor for the purchase of
an aggregate of 4,840,000 of our common stock at a price of $2.20 per share and gross proceeds of approximately $10,648,000.
As of June 30, 2017, we had approximately $5.20 million in our credit line 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
|
|
2018
|
|
$
|
3,244,645
|
|
|
$
|
35,854
|
|
|
$
|
71,709
|
|
|
$
|
-
|
|
|
$
|
3,352,208
|
|
2019
|
|
|
2,849,103
|
|
|
|
35,854
|
|
|
|
71,709
|
|
|
|
-
|
|
|
|
2,956,666
|
|
2020
|
|
|
2,112,542
|
|
|
|
35,854
|
|
|
|
71,709
|
|
|
|
-
|
|
|
|
2,220,105
|
|
2021
|
|
|
1,329,446
|
|
|
|
20,915
|
|
|
|
41,830
|
|
|
|
-
|
|
|
|
1,392,191
|
|
2022
|
|
|
846,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
846,904
|
|
Thereafter
|
|
|
1,708,850
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,708,850
|
|
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 audited consolidated financial statements
or otherwise disclosed in this report were as follows:
|
|
June
30,
2017
|
|
|
March
31,
2017
|
Balance sheet items, except for the registered and paid-up capital, as of end of period
|
|
USD1: RMB 0.1475
|
|
|
USD1: RMB 0.1451
|
|
|
|
|
|
|
Amounts included in the statement of Operations and statement of cash flows for the period ended
|
|
USD1: RMB 0.1457
|
|
|
USD1: RMB 0.1487
|
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, 2017, 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, 2017:
Accounting
and Finance Personnel Weaknesses
- As noted in Item 9A of our annual reports on Form 10-K for the preceding 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