CHINA
JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
16,837,873
|
|
|
$
|
18,364,424
|
|
Restricted cash
|
|
|
10,277,758
|
|
|
|
9,431,386
|
|
Financial assets available for sale
|
|
|
165,282
|
|
|
|
87,068
|
|
Notes receivable
|
|
|
312,570
|
|
|
|
253,394
|
|
Trade accounts receivable
|
|
|
10,200,542
|
|
|
|
8,561,596
|
|
Inventories
|
|
|
11,077,027
|
|
|
|
9,923,101
|
|
Other receivables, net
|
|
|
2,624,059
|
|
|
|
2,269,193
|
|
Advances to suppliers
|
|
|
3,914,099
|
|
|
|
5,504,141
|
|
Other current assets
|
|
|
1,804,654
|
|
|
|
1,566,155
|
|
Total current assets
|
|
|
57,213,864
|
|
|
|
55,960,458
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
4,533,390
|
|
|
|
4,263,157
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Long-term investment
|
|
|
46,501
|
|
|
|
46,152
|
|
Farmland assets
|
|
|
744,256
|
|
|
|
718,787
|
|
Long term deposits
|
|
|
3,202,793
|
|
|
|
2,294,848
|
|
Other noncurrent assets
|
|
|
1,327,447
|
|
|
|
1,177,005
|
|
Intangible assets, net
|
|
|
3,097,546
|
|
|
|
2,712,611
|
|
Total other assets
|
|
|
8,418,543
|
|
|
|
6,949,403
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
70,165,797
|
|
|
$
|
67,173,018
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCK HOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
23,089,541
|
|
|
|
19,441,195
|
|
Notes payable
|
|
|
12,872,045
|
|
|
|
12,691,575
|
|
Other payables
|
|
|
2,735,247
|
|
|
|
2,916,283
|
|
Other payables - related parties
|
|
|
859,191
|
|
|
|
927,052
|
|
Customer deposits
|
|
|
3,083,129
|
|
|
|
2,675,030
|
|
Taxes payable
|
|
|
570,631
|
|
|
|
681,939
|
|
Accrued liabilities
|
|
|
800,558
|
|
|
|
679,350
|
|
Total current liabilities
|
|
|
44,010,342
|
|
|
|
40,012,424
|
|
|
|
|
|
|
|
|
|
|
Purchase option and warrants liability
|
|
|
297,466
|
|
|
|
496,217
|
|
Total liabilities
|
|
|
44,307,808
|
|
|
|
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 September 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 September 30, 2017 and March 31, 2017
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
37,270,620
|
|
|
|
36,581,248
|
|
Statutory reserves
|
|
|
1,309,109
|
|
|
|
1,309,109
|
|
Accumulated deficit
|
|
|
(15,189,270
|
)
|
|
|
(12,601,257
|
)
|
Accumulated other comprehensive income
|
|
|
2,442,315
|
|
|
|
1,350,062
|
|
Total stockholders’ equity
|
|
|
25,857,989
|
|
|
|
26,664,377
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
70,165,797
|
|
|
$
|
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)
(UNAUDITED)
|
|
For the three months ended
September 30,
|
|
|
For the six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
|
$
|
23,491,043
|
|
|
$
|
20,160,835
|
|
|
$
|
45,161,411
|
|
|
$
|
41,096,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
17,933,446
|
|
|
|
15,807,828
|
|
|
|
35,426,153
|
|
|
|
32,261,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
5,557,597
|
|
|
|
4,353,007
|
|
|
|
9,735,258
|
|
|
|
8,834,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING EXPENSES
|
|
|
4,350,772
|
|
|
|
3,023,322
|
|
|
|
8,267,631
|
|
|
|
5,706,043
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
2,855,555
|
|
|
|
1,382,650
|
|
|
|
4,580,998
|
|
|
|
3,301,132
|
|
TOTAL OPERATING EXPENSES
|
|
|
7,206,327
|
|
|
|
4,405,972
|
|
|
|
12,848,629
|
|
|
|
9,007,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) FROM OPERATIONS
|
|
|
(1,648,730
|
)
|
|
|
(52,965
|
)
|
|
|
(3,113,371
|
)
|
|
|
(172,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
|
358,344
|
|
|
|
61,035
|
|
|
|
403,243
|
|
|
|
285,457
|
|
INTEREST EXPENSE
|
|
|
-
|
|
|
|
(430
|
)
|
|
|
-
|
|
|
|
(869
|
)
|
OTHER INCOME(LOSS), NET
|
|
|
(8,703
|
)
|
|
|
17,425
|
|
|
|
(38,051
|
)
|
|
|
104,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
|
|
|
148,427
|
|
|
|
90,289
|
|
|
|
198,751
|
|
|
|
58,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
|
(1,150,662
|
)
|
|
|
115,354
|
|
|
|
(2,549,428
|
)
|
|
|
274,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
18,047
|
|
|
|
17,484
|
|
|
|
38,585
|
|
|
|
49,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
|
(1,168,709
|
)
|
|
|
97,870
|
|
|
|
(2,588,013
|
)
|
|
|
229,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
633,184
|
|
|
|
(87,721
|
)
|
|
|
1,092,253
|
|
|
|
27,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME
|
|
$
|
(535,525
|
)
|
|
$
|
10,149
|
|
|
$
|
(1,495,760
|
)
|
|
$
|
256,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,214,678
|
|
|
|
19,375,773
|
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
Diluted
|
|
|
25,214,678
|
|
|
|
19,375,773
|
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
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
(UNAUDITED)
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
(2,588,013
|
)
|
|
|
229,023
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
590,618
|
|
|
|
466,570
|
|
Stock-based compensation
|
|
|
689,372
|
|
|
|
1,329,574
|
|
Bad debt provision
|
|
|
1,241,159
|
|
|
|
(177,274
|
)
|
Change in fair value of purchase option derivative liability
|
|
|
(198,751
|
)
|
|
|
(58,145
|
)
|
|
|
|
|
|
|
|
|
|
Change in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, trade
|
|
|
(2,138,968
|
)
|
|
|
(2,190,470
|
)
|
Notes receivable
|
|
|
(49,387
|
)
|
|
|
(156,527
|
)
|
Inventories
|
|
|
(789,355
|
)
|
|
|
(3,358,110
|
)
|
Other receivables
|
|
|
(39,756
|
)
|
|
|
(176,334
|
)
|
Advances to suppliers
|
|
|
958,032
|
|
|
|
275,098
|
|
Other current assets
|
|
|
(180,048
|
)
|
|
|
(269,040
|
)
|
Other noncurrent assets
|
|
|
(106,981
|
)
|
|
|
(354,594
|
)
|
Long term deposit
|
|
|
(813,282
|
)
|
|
|
-
|
|
Change in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
2,911,679
|
|
|
|
5,147,686
|
|
Other payables and accrued liabilities
|
|
|
(181,932
|
)
|
|
|
(102,920
|
)
|
Customer deposits
|
|
|
308,252
|
|
|
|
156,632
|
|
Taxes payable
|
|
|
(133,285
|
)
|
|
|
(306,109
|
)
|
Net cash (used in) provided by operating activities
|
|
|
(520,646
|
)
|
|
|
455,060
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(212,358
|
)
|
|
|
(49,298
|
)
|
Purchase of financial assets available for sale
|
|
|
(73,915
|
)
|
|
|
|
|
Increase in construction-in-progress
|
|
|
(473,716
|
)
|
|
|
|
|
Increase intangible assets
|
|
|
(298,617
|
)
|
|
|
|
|
Decrease in Financial assets available for sale
|
|
|
-
|
|
|
|
454,608
|
|
Investment in a joint venture
|
|
|
(9,387
|
)
|
|
|
(75,768
|
)
|
Additions to leasehold improvements
|
|
|
(27,986
|
)
|
|
|
(26,262
|
)
|
Net cash provided by investing activities
|
|
|
(1,095,979
|
)
|
|
|
303,280
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
|
|
|
|
-
|
|
Repayment of short-term bank loan
|
|
|
|
|
|
|
-
|
|
Change in restricted cash
|
|
|
(503,908
|
)
|
|
|
6,411,257
|
|
Repayments of notes payable
|
|
|
(12,929,115
|
)
|
|
|
(17,196,298
|
)
|
Proceeds from notes payable
|
|
|
12,664,216
|
|
|
|
11,800,003
|
|
Proceeds from other payables-related parties
|
|
|
|
|
|
|
95,088
|
|
Repayment of other payables-related parties
|
|
|
(88,698
|
)
|
|
|
|
|
Proceeds from equity financing
|
|
|
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
(857,505
|
)
|
|
|
1,110,050
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
947,579
|
|
|
|
(188,172
|
)
|
INCREASE IN CASH
|
|
|
(1,526,551
|
)
|
|
|
1,680,218
|
|
CASH, beginning of period
|
|
|
18,364,424
|
|
|
|
6,671,873
|
|
CASH, end of period
|
|
$
|
16,837,873
|
|
|
$
|
8,352,091
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
869
|
|
Cash paid for income taxes
|
|
$
|
42,689
|
|
|
$
|
42,437
|
|
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. During the six months
ending September 30, 2017, Jiuzhou Pharmacy established the following companies, each of which operates a drugstore in Hangzhou
City:
Entity Name
|
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Date Established
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Hangzhou Jiuben Pharmacy Co., Ltd (“Jiuben Pharmacy”)
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April 27, 2017
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Hangzhou Jiuli Pharmacy Co., Ltd (“Jiuli Pharmacy”)
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May 22, 2017
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Hangzhou Jiuxiang Pharmacy Co., Ltd (“Jiuxiang Pharmacy”)
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May 26, 2017
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Hangzhou Jiuheng Pharmacy Co., Ltd (“Jiuheng Pharmacy”)
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June 6, 2017
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Hangzhou Jiujiu Pharmacy Co., Ltd (“Jiujiu Pharmacy”)
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June 8, 2017
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Hangzhou Jiuyi Pharmacy Co., Ltd (“Jiuyi Pharmacy”)
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June 8, 2017
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Hangzhou Jiuyuan Pharmacy Co., Ltd (“Jiuyuan Pharmacy”)
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July 13, 2017
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Hangzhou Jiumu Pharmacy Co., Ltd (“Jiumu Pharmacy”)
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July 21, 2017
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Hangzhou Jiurui Pharmacy Co., Ltd (“Jiurui Pharmacy”)
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August 4, 2017
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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”), a wholly-owned subsidiary of Shouantang Technology, 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. (“Quannuo Technology”). 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
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Background
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Ownership
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Renovation
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●
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Incorporated
in Hong Kong SAR on September 2, 2008
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100%
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Jiuxin Management
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●
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Established
in the PRC on October 14, 2008
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100%
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●
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Deemed
a wholly foreign owned enterprise (“WFOE”) under PRC law
|
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●
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Registered
capital of $14.5 million fully paid
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Shouantang
Technology
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●
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Established
in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
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100%
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●
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Registered
capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid
|
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●
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Deemed
a WFOE under PRC law
|
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●
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Invests
and finances the working capital of Quannuo Technology
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Qianhong
Agriculture
|
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●
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Established
in the PRC on August 10, 2010 by Jiuxin Management
|
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100%
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●
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Registered
capital of RMB 10 million fully paid
|
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●
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Carries
out herb farming business
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Jiuzhou Pharmacy
(1)
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●
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Established
in the PRC on September 9, 2003
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VIE by contractual arrangements
(2)
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●
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Registered
capital of RMB 5 million fully paid
|
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●
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Operates
the “Jiuzhou Grand Pharmacy” stores in Hangzhou
|
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Jiuzhou Clinic
(1)
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●
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Established
in the PRC as a general partnership on October 10, 2003
|
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VIE by contractual
arrangements
(2)
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●
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Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
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Jiuzhou Service
(1)
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●
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Established
in the PRC on November 2, 2005
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|
VIE by contractual
arrangements
(2)
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●
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Registered
capital of RMB 500,000 fully paid
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●
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Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
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Jiuxin
Medicine
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●
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Established
in PRC on December 31, 2003
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VIE
by contractual arrangements
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●
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Acquired
by Jiuzhou Pharmacy in August 2011
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as
a wholly-owned subsidiary of
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●
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Registered
capital of RMB 10 million fully paid
|
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Jiuzhou
Pharmacy
(2)
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●
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Carries
out pharmaceutical distribution services
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Jiutong
Medical
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●
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Established
in the PRC on December 20, 2011 by Renovation
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100%
|
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●
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Registered capital
of $2.6 million fully paid
|
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●
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Currently
has no operation
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Entity
Name
|
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Background
|
|
Ownership
|
Shouantang
Bio
|
|
●
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Established
in the PRC in October, 2014 by Shouantang Technology
|
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100%
|
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●
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100%
held by Shouantang Technology
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●
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Registered
capital of RMB 1,000,000 fully paid
|
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●
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Sells
nutritional supplements under its own brand name
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Jiuyi
Technology
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●
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Established
in the PRC on September 10, 2015
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100%
|
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●
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100%
held by Renovation
|
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●
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Registered
capital of USD 5,000,000 (USD 2,500,000 paid)
|
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●
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Technical
support to online pharmacy
|
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Kahamadi
Bio
|
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●
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Established
in the PRC in May 2016
|
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49%
|
|
|
●
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49%
held by Shouantang Bio
|
|
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●
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Registered
capital of RMB 10 million
|
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●
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Develop
brand name for nutritional supplements
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Lin’An
Jiuzhou
|
|
●
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Established
in the PRC in March 31, 2017
|
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100%
|
|
|
●
|
100%
held by Jiuxin Management
|
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|
●
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Registered
capital of RMB 5 million (RMB 550,000 paid)
|
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●
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Explore
retail pharmacy market in Lin’An City
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Jiuben
Pharmacy
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|
●
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Established
in the PRC in April 27, 2017
|
|
VIE
by contractual arrangements as
|
|
|
●
|
100%
held by Jiuzhou Pharmacy
|
|
a
wholly-owned subsidiary of
|
|
|
●
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Registered
capital of RMB 100,000
|
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Jiuzhou
Pharmacy
(2)
|
|
|
●
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Operates
a retail pharmacy drugstore in Hangzhou City
|
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Jiumu
Pharmacy
|
|
●
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Established
in the PRC in July 21, 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
|
|
|
|
|
|
|
|
|
Jiuheng
Pharmacy
|
|
●
|
Established
in the PRC in June 6, 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
|
|
|
|
|
|
|
|
|
Jiujiu
Pharmacy
|
|
●
|
Established
in the PRC in June 8, 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
|
|
|
|
|
|
|
|
|
Jiuli
Pharmacy
|
|
●
|
Established
in the PRC in May 22 ,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
|
|
|
Jiurui
Pharmacy
|
|
●
|
Established
in the PRC in August 4, 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
|
|
|
|
|
|
|
|
|
JiuxiangPharmacy
|
|
●
|
Established
in the PRC in May 26, 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
|
|
|
Entity
Name
|
|
Background
|
|
Ownership
|
Jiuyi
Pharmacy
|
|
●
|
Established
in the PRC in June 8, 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
|
|
|
|
|
|
|
|
|
Jiuyuan
Pharmacy
|
|
●
|
Established
in the PRC in July 13, 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 September 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
|
|
|
16,837,873
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
16,837,873
|
|
Notes payable
|
|
|
-
|
|
|
|
12,872,045
|
|
|
|
-
|
|
|
|
12,872,045
|
|
Warrants liability
|
|
|
-
|
|
|
|
297,466
|
|
|
$
|
-
|
|
|
|
297,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,837,873
|
|
|
|
13,169,511
|
|
|
$
|
-
|
|
|
|
30,007,384
|
|
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 September
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 September 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 September 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 September 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 $180,639 and $113,638 for the three months ended September 30, 2017
and 2016, respectively, and $320,734 and $182,487 for the six months ended September 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 September 30, 2017 and at March 31, 2017 were translated at 1 RMB to 0.1503
USD and at 1 RMB to 0.1451 USD, respectively. The average translation rates applied to income and cash flow statement amounts
for the six months ended September 30, 2017 and 2016 were at at 1 RMB to 0.1478 USD and 1 RMB to 0.1515 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 77,150) per bank. As of September
30, 2017 and March 31, 2017, the Company had deposits totaling $26,709,868 and $27,357,785 that were covered by such limited
insurance, respectively. Any balance over RMB 500,000 (USD 75,150) 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 September 30, 2017, three largest vendors accounted for 61.3% of the Company’s total purchases and
one vendor accounted for 16.8% of the Company’s total advances to suppliers. For the three months ended September 30, 2016,
one largest vendor accounted for 30.7% of the Company’s total purchases and one vendor accounted for 9.9% of the Company’s
total advances to suppliers.
For
the six months ended September 30, 2017, two largest vendors accounted for 39.6% of the Company’s total purchases and one
vendor accounted for 16.8% of the Company’s total advances to suppliers. For the six months ended September 30, 2016, two
largest vendors accounted for 38.6% of the Company’s total purchases and one vendor accounted for 9.9% of the Company’s
total advances to suppliers.
For
the three months and six months ended September 30, 2017 and September 30, 2016, no customer accounted for more than 10% of the
Company’s total sales or 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
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 planning to adopt the new accounting
standard ASC 606 and all related amendment using a modified retrospective approach. Revenue from sales at drugstores continues
to be recognized at the point of sale, which is when a customer pays for and receives the merchandise. Revenue from online pharmacy
sales is recognized when merchandise is shipped to customers. Revenue from sales of merchandise to non-retail customers is recognized
upon delivery of goods. The Company does not expect the adoption of the New Revenue Standard to have material impact on its net
income on an ongoing basis. Its interpretation is subject to change as a result of future change in market conditions or product
offering.
NOTE
3 – FINANCIAL ASSETS AVAILABLE FOR SALE
As
of September 30, 2017 and March 31, 2017, financial assets available for sale amounted to $165,282 (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 $300,600 (RMB 2,000,000).
NOTE
4 – TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consisted of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Accounts receivable
|
|
$
|
12,270,651
|
|
|
$
|
9,977,101
|
|
Less: allowance for doubtful accounts
|
|
|
(2,070,109
|
)
|
|
|
(1,415,505
|
)
|
Trade accounts receivable, net
|
|
$
|
10,200,542
|
|
|
$
|
8,561,596
|
|
For
the three months ended September 30, 2017 and 2016, $98,590 and $30,790 in accounts receivable were directly written off
respectively. For the six months ended September 30, 2017 and 2016, $124,983 and $63,382 in accounts receivable were directly
written off respectively. As of September 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:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Deposit*
|
|
$
|
1,216,800
|
|
|
$
|
855,755
|
|
Advance to employees
|
|
|
584,996
|
|
|
|
652,436
|
|
Accrued supplier rebate**
|
|
|
190,554
|
|
|
|
321,993
|
|
Interest receivable***
|
|
|
240,410
|
|
|
|
|
|
Others
|
|
|
418,825
|
|
|
|
465,593
|
|
Less: allowance for doubtful accounts
|
|
|
(27,526
|
)
|
|
|
(26,584
|
)
|
Other receivable, net
|
|
$
|
2,624,059
|
|
|
$
|
2,269,193
|
|
*
|
It
refers to various advances 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.
|
|
|
***
|
It
refers to accrued interest receivable from several three-year bank deposits, which are used as a pledge for bank-guranteed notes
payable (see Note 14).
|
Note
6 – OTHER CURRENT ASSETS
Other
current assets consisted of the following:
|
|
September 30
2017
|
|
|
March 31,
2017
|
|
Prepaid rental expenses
(1)
|
|
$
|
1,395,985
|
|
|
$
|
1,171,472
|
|
Prepaid and other current assets
|
|
|
408,669
|
|
|
|
394,683
|
|
Total
|
|
$
|
1,804,654
|
|
|
$
|
1,566,155
|
|
(1)
|
Represents
store and office rental expenses that were usually prepaid and amortized over the prepayment period. The increase reflects
additional prepaid rental for new stores.
|
Note 7
– PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Building
|
|
$
|
1,611,055
|
|
|
$
|
1,555,923
|
|
Leasehold improvements
|
|
|
12,229,600
|
|
|
|
11,783,611
|
|
Farmland development cost
|
|
|
1,796,971
|
|
|
|
1,735,475
|
|
Office equipment and furniture
|
|
|
5,126,811
|
|
|
|
5,339,005
|
|
Motor vehicles
|
|
|
475,446
|
|
|
|
585,769
|
|
Total
|
|
|
21,239,883
|
|
|
|
20,999,783
|
|
Less: Accumulated depreciation
|
|
|
(14,861,284
|
)
|
|
|
(14,489,479
|
)
|
Impairment*
|
|
|
(2,365,317
|
)
|
|
|
(2,247,147
|
)
|
Construction-in-progress**
|
|
|
520,108
|
|
|
|
-
|
|
Property and equipment, net
|
|
$
|
4,533,390
|
|
|
$
|
4,263,157
|
|
*
|
The
variance of impairment from March 31, 2017 to September 30, 2017 is solely caused by exchange rate variance.
|
**
|
Includes
clinic renovation expense of $70,798 and SAP (a popular ERP software) implementation fee of $449,309. The clinic renovation
has been completed at the end of October 2017. SAP system is expected to be implemented by the end of 2017.
|
Depreciation
expenses for property and equipment totaled $171,051 and $213,969 for the three months ended September 30, 2017 and 2016, respectively.
Depreciation expenses for property and equipment totaled $576,154 and $452,979 for the six months ended September 30, 2017 and
2016, respectively. There were no fixed assets impaired in the six months ended September 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 September 30, 2017 and March 31, 2017, advance
to suppliers consist of the following:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Advance to suppliers
|
|
$
|
6,280,908
|
|
|
$
|
7,006,396
|
|
Less: allowance for doubtful accounts
|
|
|
(2,366,809
|
)
|
|
|
(1,502,255
|
)
|
Advance to suppliers, net
|
|
$
|
3,914,099
|
|
|
$
|
5,504,141
|
|
*
|
In
order to collect a larger rebate for certain merchandise, such as
Colla corii asini
(donkey-hide gelatin), from certain
suppliers, the Company made a significant cash advance to such suppliers.
|
For
the six months ended September 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 $11,077,027 and $9,923,101 as of September 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 September 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 September 30, 2017
and March 31, 2017, farmland assets are valued as follows:
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2017
|
|
Farmland assets
|
|
$
|
2,273,593
|
|
|
$
|
2,195,787
|
|
Less: Impairment*
|
|
|
(1,529,337
|
)
|
|
|
(1,477,000
|
)
|
Farmland assets, net
|
|
$
|
744,256
|
|
|
$
|
718,787
|
|
*
|
The
estimated fair value is estimated to be lower than its investment value as of September 30, 2017 and March 31, 2017.
|
Note 11
– LONG TERM DEPOSITS, LANDLORDS
As
of September 30, 2017 and March 31, 2017, long term deposits amounted to $3,202,793 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 six months ended September 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:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Forest land use rights*
|
|
$
|
1,192,217
|
|
|
$
|
1,177,005
|
|
Long-term prepaid store rent (over one year)**
|
|
|
135,230
|
|
|
|
-
|
|
Total
|
|
$
|
1,327,447
|
|
|
$
|
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 $7,042 and $15,484 for the three months
ended September 30, 2017 and 2016, respectively. The amortization of the prepayment for the lease of forest land use right was
approximately $13,888 and $31,298 for the six months ended September 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 September 30,
|
|
Amount
|
|
2018
|
|
$
|
28,233
|
|
2019
|
|
|
28,233
|
|
2020
|
|
|
28,233
|
|
2021
|
|
|
28,233
|
|
2022
|
|
|
28,233
|
|
Thereafter
|
|
|
1,057,869
|
|
**
|
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:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
License
(1)
|
|
$
|
1,747,477
|
|
|
$
|
1,394,546
|
|
Land use rights
(2)
|
|
|
1,465,229
|
|
|
|
1,415,086
|
|
Total intangible assets
|
|
|
3,212,706
|
|
|
|
2,809,632
|
|
Less: accumulated amortization
|
|
|
(115,160
|
)
|
|
|
(97,021
|
)
|
Intangible assets, net
|
|
$
|
3,097,546
|
|
|
$
|
2,712,611
|
|
Amortization
expense of intangibles amounted to $7,334 and $6,101 for the three months ended September 30, 2017 and 2016, respectively, and
$14,464 and $13,591 for the six months ended September 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 September 2017,
the Company acquired several new stores for the purpose of the Municipal Social Medical Reimbursement Qualification
Certificates. The owners of these acquried drugstores agreed to cease their stores’ business and liquidate all of
the stores’ accounts before Jiuzhou Pharmacy acquired their stores. As a result, Jiuzhou Pharmacy has not obtained any
assets or liabilities from the stores, but was able to transfer the Certificate to our new store opened at the same time.
|
|
|
(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 September 30, 2017 and March 31, 2017:
|
|
|
|
Origination
|
|
Maturity
|
|
September 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
|
|
04/05/17
|
|
10/05/17
|
|
|
1,345,036
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
05/04/17
|
|
11/04/17
|
|
|
1,806,808
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
06/05/17
|
|
12/05/17
|
|
|
1,561,478
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
06/05/17
|
|
12/05/17
|
|
|
354,534
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
06/29/17
|
|
12/29/17
|
|
|
1,074,330
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
06/29/17
|
|
12/29/17
|
|
|
826,408
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
06/29/17
|
|
12/29/17
|
|
|
1,984,650
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
08/09/17
|
|
02/09/18
|
|
|
1,357,600
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
09/05/17
|
|
12/05/17
|
|
|
267,756
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
09/05/17
|
|
03/05/18
|
|
|
2,293,445
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
$
|
12,872,045
|
|
|
$
|
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 September 30, 2017, the Company had $12,872,045 (RMB 85667428.6) of notes payable from HUB. The Company is required to hold
restricted cash in the amount of $1,432,935 (RMB 9,536,623) with HUB as collateral against these bank notes. Additionally, a total
of $8,785,866 deposit (RMB 58,472,647.3)
, which matures
in three years, 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 September 30, 2017, the Company had no notes payable from ZTCB.
|
As
of September 30, 2017, the Company had a credit line of approximately $16.74 million in the aggregate from HUB, BOH, ICBC
and ZTCB. By putting up the restricted cash of $1.43 million deposited in the banks, the total credit line was $18.17 million.
As of September 30, 2017, the Company had approximately $12.87 million of bank notes payable and approximately $5.30 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 and six months ended September 30, 2017 and 2016, the income tax provisions were as follow:
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income tax
|
|
$
|
18,047
|
|
|
$
|
17,484
|
|
|
$
|
38,585
|
|
|
$
|
45,918
|
|
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 and six months
ended September 30, 2017 and 2016:
|
|
For the
three months ended
|
|
|
For the
six months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
U.S. Statutory
rates
|
|
|
34
.0%
|
|
|
|
34
.0
%
|
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized
in the U.S.
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
China income taxes
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
|
|
25.0
|
|
Change in valuation allowance
(1)
|
|
|
(18
.4
|
)
|
|
|
(25.0
|
)
|
|
|
(2
2.9
|
)
|
|
|
(25.0
|
)
|
Non-deductible
expenses-permanent difference (2)
|
|
|
(8
.2
|
)
|
|
|
15.2
|
|
|
|
(3
.6
|
)
|
|
|
16.7
|
|
Effective
tax rate
|
|
|
(1.6
|
)%
|
|
|
15.2
|
%
|
|
|
(1.5
|
)%
|
|
|
16.7
|
%
|
(1)
|
Represents
non-taxable expense reversal due to overall decrease in allowance for accounts receivables and advance to suppliers.
|
(2)
|
The
(1.6)% and 15.2% rate adjustments for the three months ended September 30, 2017 and 2016, and the (1.5)% and 16.7% rate adjustments
for the six months ended September 30, 2017 and 2016 represent expenses primarily including stock option expenses, legal,
accounting and other expenses incurred by the Company that were not deductible for PRC income tax.
|
Jo-Jo
Drugstores is incorporated in the U.S. and incurred a net operating loss for income tax purposes for the six months ended September
30, 2017 and 2016. As of September 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 September 30, 2017. There was no net change in the valuation allowance for the six months ended
September 30, 2017 and 2016. Management reviews this valuation allowance periodically and makes adjustments as necessary.
Taxes
payable at September 30, 2017 and March 31, 2017 consisted of the following:
|
|
September 30
2017
|
|
|
March 31,
2017
|
|
VAT
|
|
$
|
515,358
|
|
|
$
|
615,067
|
|
Income tax
|
|
|
18,494
|
|
|
|
19,416
|
|
Others
|
|
|
36,779
|
|
|
|
47,456
|
|
Total taxes payable
|
|
$
|
570,631
|
|
|
$
|
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 September 30, 2017 and September 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 six months ended September 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 $276,490 and $222,732 in employment benefits and pension for the three months ended September 30, 2017 and
2016, respectively. The Company contributed $559,734 and $470,632 in employment benefits and pension for the six months
ended September 30, 2017 and 2016, respectively.
Note
17 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts
payable to related parties are summarized as follows:
|
|
September 30,
2017
|
|
|
March 31,
2017
|
|
Due to a director and CEO
(1)
:
|
|
|
755,734
|
|
|
|
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 September 30, 2017 and March 31, 2017, notes payable totaling $3,684,220 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 2018. Rent expenses totaled $4,435 and $4,499 for
the three months ended September 30, 2017 and 2016, respectively. Rent expenses totaled $8,870 and $9,092 for the
six months ended September 30, 2017 and 2016, respectively. The amounts owed under the lease for the three months ended September
30, 2017 and 2016 were not paid to Mr. Liu as of September 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
|
|
|
|
September 30,
2017
(1)
|
|
|
March 31,
2017
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
1.62
|
|
|
$
|
1.80
|
|
Exercise price
|
|
$
|
3.10
|
|
|
$
|
3.10
|
|
Annual dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Expected term (years)
|
|
|
3.30
|
|
|
|
3.80
|
|
Risk-free interest rate
|
|
|
1.62
|
%
|
|
|
0.87
|
%
|
Expected volatility
|
|
|
70.81
|
%
|
|
|
90.73
|
%
|
(1)
|
As
of September 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 and six months ended September 30, 2017, the Company recognized a gain of $148,427 and $198,751 for the
investor warrant and placement agent warrant, from the change in fair value of the warrant liability, respectively. As a result,
the warrant liability is carried on the consolidated balance sheets at the fair value of $297,466 for the investor warrant and
placement agent warrant, collectively, as of September 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
September 30, 2017 and 2016, $221,859 and $221,859 was recorded as service compensation expense, respectively. For the six
months ended September 30, 2017 and 2016, $441,306 and $286,970 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 six months ended September 30, 2017 and 2016, $248,066
and $248,066 was recorded as compensation expense. For the three months ended September 30, 2017 and 2016, $124,033 and $124,033
was recorded as compensation expense. As of September 30, 2017, there was approximately $0.07 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 0.13 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 and six
months ended September 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:
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income attributable to controlling interest
|
|
$
|
(1,168,709
|
)
|
|
$
|
97,870
|
|
|
$
|
(2,588,013
|
)
|
|
$
|
229,023
|
|
Weighted average shares used in basic computation
|
|
|
25,214,678
|
|
|
|
19,375,773
|
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
Diluted effect of purchase options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted effect of restricted shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
|
25,214,678
|
|
|
|
19,375,773
|
|
|
|
25,214,678
|
|
|
|
18,239,065
|
|
Income per share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Add: Net loss attributable to noncontrolling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net income attributable to controlling interest
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Loss per share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Add: Net income attributable to noncontrolling interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Net income attributable to controlling interest
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
For
the three and six months ended September 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 each requires 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 September 30,
2017.
|
|
Retail drugstores
|
|
|
Online Pharmacy
|
|
|
Drug wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
15,047,615
|
|
|
$
|
3,065,016
|
|
|
|
5,378,412
|
|
|
|
-
|
|
|
|
23,491,043
|
|
Cost of goods
|
|
|
10,804,453
|
|
|
|
2,665,299
|
|
|
|
4,463,694
|
|
|
|
-
|
|
|
|
17,933,446
|
|
Gross profit
|
|
$
|
4,243,162
|
|
|
$
|
399,717
|
|
|
|
914,718
|
|
|
|
-
|
|
|
|
5,557,597
|
|
Selling expenses
|
|
|
2,582,089
|
|
|
|
459,785
|
|
|
|
1,308,898
|
|
|
|
-
|
|
|
|
4,350,772
|
|
General and administrative expenses
|
|
|
2,742,437
|
|
|
|
107,616
|
|
|
|
5,361
|
|
|
|
141
|
|
|
|
2,855,555
|
|
(Loss) income from operations
|
|
$
|
(1,081,364
|
)
|
|
$
|
(167,684
|
)
|
|
|
(399,541
|
)
|
|
|
(141
|
)
|
|
|
(1,648,730
|
)
|
Depreciation and amortization
|
|
$
|
(416,231
|
)
|
|
$
|
-
|
|
|
|
121,767
|
|
|
|
(119,461
|
)
|
|
|
(413,925
|
)
|
Total capital expenditures
|
|
$
|
149,568
|
|
|
$
|
-
|
|
|
|
45,451
|
|
|
|
-
|
|
|
|
195,019
|
|
*
|
Includes
accounts receivable allowance reversal of $654,606 and additional advance to suppliers allowance of $864,554.
|
The
following table presents summarized information by segment of the continuing operations for the three months ended September 30,
2016.
|
|
Retail drugstores
|
|
|
Online Pharmacy
|
|
|
Drug wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
12,806,987
|
|
|
$
|
3,783,725
|
|
|
$
|
3,570,123
|
|
|
$
|
-
|
|
|
$
|
20,160,835
|
|
Cost of goods
|
|
|
9,037,377
|
|
|
|
3,386,588
|
|
|
|
3,383,863
|
|
|
|
-
|
|
|
|
15,807,828
|
|
Gross profit
|
|
$
|
3,769,610
|
|
|
$
|
397,137
|
|
|
$
|
186,260
|
|
|
$
|
-
|
|
|
$
|
4,353,007
|
|
Selling expenses
|
|
|
2,192,969
|
|
|
|
450,866
|
|
|
|
379,487
|
|
|
|
-
|
|
|
|
3,023,322
|
|
General and administrative expenses
|
|
|
1,652,375
|
|
|
|
-
|
|
|
|
(276,910
|
)*
|
|
|
7,185
|
|
|
|
1,382,650
|
|
(Loss) income from operations
|
|
$
|
(75,734
|
)
|
|
$
|
(53,729
|
)
|
|
$
|
83,683
|
|
|
$
|
(7,185
|
)
|
|
$
|
(52,965
|
)
|
Depreciation and amortization
|
|
$
|
466,051
|
|
|
$
|
-
|
|
|
$
|
6,644
|
|
|
$
|
-
|
|
|
$
|
472,695
|
|
Total capital expenditures
|
|
$
|
40,084
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
40,084
|
|
*
|
Includes
accounts receivable and advance to suppliers allowance reversal of $318,789.
|
The
following table presents summarized information of the continuing operation by segment for the six months ended September 30,
2017:
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
28,067,985
|
|
|
$
|
6,200,705
|
|
|
|
10,892,721
|
|
|
|
|
|
|
|
45,161,411
|
|
Cost of goods
|
|
|
20,540,661
|
|
|
|
5,509,797
|
|
|
|
9,375,695
|
|
|
|
|
|
|
|
35,426,153
|
|
Gross profit
|
|
$
|
7,527,324
|
|
|
$
|
690,908
|
|
|
|
1,517,026
|
|
|
|
|
|
|
|
9,735,258
|
|
Selling expenses
|
|
|
5,001,645
|
|
|
|
975,172
|
|
|
|
2,290,814
|
|
|
|
|
|
|
|
8,267,631
|
|
General and administrative expenses
|
|
|
4,012,213
|
|
|
|
177,905
|
|
|
|
380,833
|
|
|
|
10,047
|
|
|
|
4,580,998
|
|
(Loss) income from operations
|
|
$
|
(1,486,534
|
)
|
|
$
|
(462,169
|
)
|
|
|
(1,154,621
|
)
|
|
|
(10,047
|
)
|
|
|
(3,113,371
|
)
|
Depreciation and amortization
|
|
$
|
(329,242
|
)
|
|
$
|
-
|
|
|
|
204,374
|
|
|
|
|
|
|
|
(124,868
|
)
|
Total capital expenditures
|
|
$
|
206,142
|
|
|
$
|
-
|
|
|
|
6,216
|
|
|
|
|
|
|
|
212,358
|
|
*
|
Includes accounts receivable and advance
to suppliers allowance reversal of $280,645.
|
The
following table presents summarized information of the continuing operation by segment for the six months ended September 30,
2016:
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
25,515,229
|
|
|
$
|
8,854,804
|
|
|
$
|
6,726,717
|
|
|
$
|
-
|
|
|
$
|
41,096,750
|
|
Cost of goods
|
|
|
18,124,144
|
|
|
|
7,800,678
|
|
|
|
6,337,117
|
|
|
|
-
|
|
|
|
32,261,939
|
|
Gross profit
|
|
$
|
7,391,085
|
|
|
$
|
1,054,126
|
|
|
$
|
389,600
|
|
|
$
|
-
|
|
|
$
|
8,834,811
|
|
Selling expenses
|
|
|
4,401,929
|
|
|
|
912,912
|
|
|
|
391,202
|
|
|
|
-
|
|
|
|
5,706,043
|
|
General and administrative expenses
|
|
|
3,180,948
|
|
|
|
-
|
|
|
|
108,476
|
|
|
|
11,708
|
|
|
|
3,301,132
|
|
(Loss) income from operations
|
|
$
|
(191,792
|
)
|
|
$
|
141,214
|
|
|
$
|
(110,078
|
)
|
|
$
|
(11,708
|
)
|
|
$
|
(172,364
|
)
|
Depreciation and amortization
|
|
$
|
412,859
|
|
|
$
|
-
|
|
|
$
|
53,711
|
|
|
$
|
-
|
|
|
$
|
466,570
|
|
Total capital expenditures
|
|
$
|
49,298
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
49,298
|
|
*
|
Includes accounts receivable and advance
to suppliers allowance reversal of $280,645.
|
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 is as follows:
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
4,891,435
|
|
|
$
|
4,097,127
|
|
|
$
|
9,486,789
|
|
|
$
|
8,368,229
|
|
Over-the-counter drugs
|
|
|
6,780,715
|
|
|
|
5,188,201
|
|
|
|
12,424,677
|
|
|
|
10,063,556
|
|
Nutritional supplements
|
|
|
1,638,031
|
|
|
|
965,346
|
|
|
|
2,675,363
|
|
|
|
2,142,086
|
|
Traditional Chinese medicine
|
|
|
938,688
|
|
|
|
1,120,808
|
|
|
|
1,951,199
|
|
|
|
2,049,831
|
|
Sundry products
|
|
|
362,443
|
|
|
|
223,799
|
|
|
|
624,479
|
|
|
|
478,357
|
|
Medical devices
|
|
|
436,303
|
|
|
|
1,176,034
|
|
|
|
905,478
|
|
|
|
2,377,497
|
|
Total
|
|
$
|
15,047,615
|
|
|
$
|
12,771,315
|
|
|
$
|
28,067,985
|
|
|
$
|
25,479,556
|
|
The
Company’s net revenue from external customers through online pharmacy by main products is as follows:
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Over-the-counter drugs
|
|
|
1,385,899
|
|
|
|
1,309,143
|
|
|
|
2,503,291
|
|
|
|
2,946,434
|
|
Nutritional supplements
|
|
|
334,806
|
|
|
|
536,456
|
|
|
|
850,882
|
|
|
|
1,444,479
|
|
Traditional Chinese medicine
|
|
|
10,182
|
|
|
|
-
|
|
|
|
10,182
|
|
|
|
-
|
|
Sundry products
|
|
|
422,388
|
|
|
|
405,341
|
|
|
|
841,421
|
|
|
|
1,071,504
|
|
Medical devices
|
|
|
911,741
|
|
|
|
1,532,784
|
|
|
|
1,994,929
|
|
|
|
3,392,386
|
|
Total
|
|
$
|
3,065,016
|
|
|
$
|
3,783,724
|
|
|
$
|
6,200,705
|
|
|
$
|
8,854,803
|
|
The
Company’s net revenue from external customers through wholesale by main products is as follows:
|
|
Three months ended
September 30,
|
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Prescription drugs
|
|
$
|
3,077,232
|
|
|
$
|
1,948,879
|
|
|
$
|
6,474,633
|
|
|
$
|
3,846,484
|
|
Over-the-counter drugs
|
|
|
2,248,503
|
|
|
|
1,621,129
|
|
|
|
4,349,153
|
|
|
|
2,840,030
|
|
Nutritional supplements
|
|
|
12,279
|
|
|
|
31,170
|
|
|
|
28,537
|
|
|
|
70,493
|
|
Traditional Chinese medicine
|
|
|
604
|
|
|
|
4,453
|
|
|
|
604
|
|
|
|
4,453
|
|
Sundry products
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Medical devices
|
|
|
39,794
|
|
|
|
165
|
|
|
|
39,794
|
|
|
|
931
|
|
Total
|
|
$
|
5,378,412
|
|
|
$
|
3,605,796
|
|
|
$
|
10,892,721
|
|
|
$
|
6,762,391
|
|
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 September 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2018
|
|
$
|
3,875,101
|
|
|
$
|
36,366
|
|
|
$
|
72,732
|
|
|
$
|
-
|
|
|
$
|
3,984,199
|
|
2019
|
|
|
3,462,529
|
|
|
|
36,366
|
|
|
|
72,732
|
|
|
|
-
|
|
|
|
3,571,627
|
|
2020
|
|
|
2,704,078
|
|
|
|
36,366
|
|
|
|
72,732
|
|
|
|
-
|
|
|
|
2,813,176
|
|
2021
|
|
|
2,156,248
|
|
|
|
12,122
|
|
|
|
24,244
|
|
|
|
-
|
|
|
|
2,192,614
|
|
2022
|
|
|
1,653,163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,653,163
|
|
Thereafter
|
|
|
2,556,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,556,744
|
|
Total
rent expense amounted to $1,076,749 and $722,190 for the three months ended September 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
into on January 18, 2017, Jiuzhou Pharmacy will set up a JV with CareRetail HK. The JV is intended to be an investment vehicle
in acquiring or cooperating with another pharmaceutical chain in China. As certain important terms (such as the amount of capital)
require further discussion, as of the date hereof, the JV has not been set up.
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 September 30, 2017, we had 84 pharmacies in Hangzhou under the store
brand of “Jiuzhou Grand Pharmacy.” During the six months ended September 30, 2017, we opened twenty-eight new pharmacies.
Since May 2010, we have
also been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online. Our online pharmacy
sells through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s own platform
all over China. In fiscal year 2018, 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 made any sales in the six
months ended September 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 three months ended September 30, 2017 and
2016
The following table
summarizes our results of operations for the three months ended September 30, 2017 and 2016:
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
23,491,043
|
|
|
|
100
|
%
|
|
$
|
20,160,835
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
5,557,597
|
|
|
|
23.7
|
%
|
|
$
|
4,353,007
|
|
|
|
21.59
|
%
|
Selling expenses
|
|
$
|
4,350,772
|
|
|
|
18.5
|
%
|
|
$
|
3,023,322
|
|
|
|
15.0
|
%
|
General and administrative expenses
|
|
$
|
2,855,555
|
|
|
|
12.2
|
%
|
|
$
|
1,382,650
|
|
|
|
6.8
|
%
|
Loss from operations
|
|
$
|
(1,648,730
|
)
|
|
|
(7.0
|
)%
|
|
$
|
(52,965
|
)
|
|
|
(0.2
|
)%
|
Interest income
|
|
$
|
358,344
|
|
|
|
1.5
|
%
|
|
$
|
61,035
|
|
|
|
0.3
|
%
|
Interest expenses
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
(430
|
)
|
|
|
0.0
|
%
|
Other income, net
|
|
$
|
(8,703
|
)
|
|
|
0.0
|
%
|
|
$
|
17,425
|
|
|
|
(0.1
|
)%
|
Change in fair value of purchase option derivative liability
|
|
$
|
148,427
|
|
|
|
0.6
|
%
|
|
$
|
90,289
|
|
|
|
0.4
|
%
|
Income tax expense (benefit)
|
|
$
|
18,047
|
|
|
|
0.1
|
%
|
|
$
|
17,484
|
|
|
|
(0.1
|
)%
|
Net income(loss)
|
|
$
|
(1,168,709
|
)
|
|
|
(5.0
|
)%
|
|
$
|
97,870
|
|
|
|
0.5
|
%
|
Revenue
Primarily due to the
increase in our retail drugstores and wholesale business , revenue increased by $3,330,208 or 17.0% for the three months ended
September 30, 2017, as compared to the three months ended September 30, 2016, partially offset by the decrease in online pharmacy
business. The following table breaks down the revenue for our four business segments for the three months ended September 30, 2017
and 2016:
Quarterly Revenue by Segment
The following table
breaks down the revenue for our four business segments for the three months ended September 30, 2017 and 2016:
|
|
Three months ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
15,047,615
|
|
|
|
64.1
|
%
|
|
$
|
12,806,987
|
|
|
|
63.5
|
%
|
|
$
|
2,240,628
|
|
|
|
17.0
|
%
|
Revenue from online sales
|
|
|
3,065,016
|
|
|
|
13.0
|
%
|
|
|
3,783,725
|
|
|
|
18.8
|
%
|
|
|
(718,709
|
)
|
|
|
(19.0
|
)%
|
Revenue from wholesale business
|
|
|
5,378,412
|
|
|
|
22.9
|
%
|
|
|
3,570,123
|
|
|
|
17.7
|
%
|
|
|
1,808,289
|
|
|
|
51.0
|
%
|
Revenue from farming business
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
23,491,043
|
|
|
|
100.0
|
%
|
|
$
|
20,160,835
|
|
|
|
100.0
|
%
|
|
$
|
3,330,208
|
|
|
|
17.0
|
%
|
Retail drugstores sales,
which accounted for approximately 64.1% of total revenue for the three months ended September 30, 2017, increased by $2,240,628,
or 17.0% as compared to the three months ended September 30, 2016, to $15,047,615. Same-store sales increased by approximately
$1,313,448, or 11.5%, while new stores contributed approximately $889,010 in revenue in the three months ended September 30, 2017.
Starting in fiscal year 2017, our new general manager in retail business has been spending significant efforts on commodity selection
and purchase price negotiation. A wide choice of suitable health products to customers is a key to a drugstore success. By introducing
more quality products at lower prices, we were able to retain more customers visiting our stores. Additionally, in cooperation
with brand name suppliers, we continuously implement various marketing activities. For example, we made a strategic alliance with
a famous
Colla corii asini
manufacturer to promote its sales in Hangzhou.
Colla corii asini
is a well-known nutritional
supplement in China and has a large number of consumers. By promoting the products in our stores, we were able to raise sales of
the products while enjoying the supplier’s support in the form of a lower purchase price and technical on-site assistance.
As a side effect, customers who bought
Colla corii asini
in our stores also made purchases of other health products. We
have plans to marketing a series of quality products in cooperation with their manufacturers in the second half of calendar year
2017. Our store count increased to 95 as of September 30, 2016, compared to 62 stores as of September 30, 2016, as an effect of
opening thirty-three stores in fiscal year 2018.
Our online pharmacy
sales decreased by approximately $718,709, or 19.0% for the three months ended September 30, 2017, as compared to the three months
ended September 30, 2016. The decrease was mainly caused by decline in our sale via e-commerce platforms, as further explained
below, during this quarter. We carry our business either through certain e-commerce platforms such as Tmall and JD.com or via our
own official online pharmacy website. 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 year 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 34.4% period
over period. We are adding more non-medical health products such as nutritional supplements into our sales menu to counterpart
the decline in sale of OTC drug category. For instance, we are opening a
dendrobium candidum
flagship store at Tmall with
a local popular brand. The brand has a large customer base in Hangzhou. We expect our e-commerce platform sales will pick up in
the future.
Wholesale revenue increased
by $1,808,289 or 51.0%, 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 September 30, 2017 and 2016, we have not generated revenue from our farming business. We planted ginkgo and maidenhair trees
during the year of 2013. A ginkgo tree may have a growth period of up to twenty years 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 increased
by $1,204,590 or 27.7% period over period primarily as a result of an increase in gross margin of wholesale business and increase
in retail drugstores sale . At the same time, gross margin increased from 21.6% to 23.7% due to higher retail profit
margins. The average gross margins for each of our four business segments are as follows:
|
|
Three months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Average gross margin for retail drugstores
|
|
|
28.2
|
%
|
|
|
29.4
|
%
|
Average gross margin for online sales
|
|
|
13.0
|
%
|
|
|
10.5
|
%
|
Average gross margin for wholesale business
|
|
|
17.0
|
%
|
|
|
5.2
|
%
|
Average gross margin for farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail gross margins
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 September 30, 2017. As an effective
method to promote sales, we have implemented promotional policies, such as coupon discounts on certain merchandise. As a result,
our retail profit margins were diminished. Additionally, certain DTP medicines from hospitals have low profit margins. By selling
these medicines, we may incur lower profit margins while maintaining a higher level of sales.
Gross margin of online
pharmacy sales decreased primarily as a result of sales strategy adjustments. Starting from July 2017, the successive GM at our
online pharmacy adjusted the sales strategy by abandoning certain extremely low margin products and introducing several profitable
products. Although online sales declined, profit margins continued to increase. In contrast, in the three months ended September
30, 2016, in order to promote online sales, the predecessor GM chose to cut sales prices. In the future, we plan to increase our
sales while keeping reasonable gross profit margins.
Wholesale gross
margin increased primarily as a result of different products we carried and sold to certain pharmaceutical vendors. As we carried
sales of certain high margin produces with suppliers rebate in this quarter, our sales profit margins increased.
Selling and Marketing Expenses
Sales and marketing
expenses increased by $1,327,450, or 43.9%, period over period, primarily due to commissions payable to our wholesale sales contractors,
rent and expenditures for new retail stores, and reclassification of certain staff’s salaries to selling and marketing expense
in our wholesale business. In the three months ended September 30, 2017, certain wholesale business was referred by unaffiliated
individual medical products traders who earned commissions based on the brokered transaction amount. As a result, we incurred additional
selling expenses of approximately $0.8 million. In the quarter ended September 30, 2017, we accelerated new store opening. As a
result, we incurred additional rental costs of $0.2 million. Additionally, as certain members of our wholesale staff provide general
customer care and warehouses support that are more related to our sales, we reclassified $0.3 million expenses as sales and marketing
expenses to better reflect their nature. Such increase in expenses, as well as a decrease in overall sales, caused an increase
in expenses as a percentage of our revenue to 18.5%, from 15.0% for the same period a year ago.
General and Administrative Expenses
General and administrative
expenses increased by $1,472,905, or 106.5%, period over period. Such expenses as a percentage of revenue increased
to 12.20% from 6.9% for the same period a year ago. The increase in absolute dollars reflects additional accounts receivable and
advances to vendors allowance of $1.1 million in the three months ended September 30, 2017 as compared to reversal of $0.3 million
in the six months ended September 30, 2016. The difference was due to certain aged accounts receivable and advances to suppliers
accounts as of September 30, 2017.
Income (Loss) from Operations
As a result of the above,
we had loss from operations of $1,648,730, as compared to loss from operations of $52,965 a year ago. Our operating margin for
the three months ended September 30, 2017 and 2016 was (7.0)% and (0.3)%, respectively.
Income Taxes
Our income tax expense
increased by $563 period over period due to increase in retail sales profit.
Net Income(Loss)
As a result of the foregoing,
net income decreased by $1,266,579 period over period.
Comparison of six months ended September 30, 2017 and
2016
The following table
summarizes our results of operations for the six months ended September 30, 2017 and 2016:
|
|
Six months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
45,161,411
|
|
|
|
100.0
|
%
|
|
|
41,096,750
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
9,735,258
|
|
|
|
21.6
|
%
|
|
|
8,834,811
|
|
|
|
21.5
|
%
|
Selling expenses
|
|
$
|
8,267,631
|
|
|
|
18.3
|
%
|
|
|
5,706,043
|
|
|
|
13.9
|
%
|
General and administrative expenses
|
|
$
|
4,580,998
|
|
|
|
10.1
|
%
|
|
|
3,301,132
|
|
|
|
8
|
%
|
Income (loss) from operations
|
|
$
|
(3,113,371
|
)
|
|
|
(6.9
|
)%
|
|
|
(172,364
|
)
|
|
|
(0.4
|
)%
|
Interest Income
|
|
|
403,243
|
|
|
|
0.9
|
%
|
|
|
285,457
|
|
|
|
0.7
|
%
|
Interest Expenses
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(869
|
)
|
|
|
0.0
|
%
|
Other (expense), net
|
|
$
|
(38,051
|
)
|
|
|
(0.1
|
)%
|
|
|
104,624
|
|
|
|
0.2
|
%
|
Change in fair value of purchase option derivative liability
|
|
$
|
198,751
|
|
|
|
0.4
|
%
|
|
|
58,093
|
|
|
|
0.1
|
%
|
Income tax expense
|
|
$
|
38,585
|
|
|
|
0.1
|
%
|
|
|
45,918
|
|
|
|
0.1
|
%
|
Net income attributable to controlling interest
|
|
$
|
(2,588,013
|
)
|
|
|
(5.7
|
)%
|
|
|
229,023
|
|
|
|
0.6
|
%
|
Net income (loss) attributable to noncontrolling interest
|
|
$
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Revenue
Primarily due to the
increase in our retail pharmacy business and wholesale business, our revenue increased by $4,064,661 or 10.0% for the six months
ended September 30, 2017, as compared to the six months ended September 30, 2016, partially offset by the increase in our wholesale
business. The following table breaks down the revenue for our four business segments for the six months ended September 30, 2017
and 2016.
Quarterly Revenue by Segment
The following table
breaks down the revenue for our four business segments for the six months ended September 30, 2017 and 2016:
|
|
Six months ended September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
28,067,985
|
|
|
|
62.0
|
%
|
|
$
|
25,515,229
|
|
|
|
62.1
|
%
|
|
$
|
2,552,756
|
|
|
|
10.0
|
%
|
Revenue from online sales
|
|
|
6,200,705
|
|
|
|
14.0
|
%
|
|
|
8,854,804
|
|
|
|
21.5
|
%
|
|
|
(2,654,099
|
)
|
|
|
(30.0
|
)%
|
Revenue from wholesale business
|
|
|
10,892,721
|
|
|
|
24.0
|
%
|
|
|
6,726,717
|
|
|
|
16.4
|
%
|
|
|
4,166,004
|
|
|
|
62.0
|
%
|
Revenue from farming business
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
45,161,411
|
|
|
|
100.0
|
%
|
|
$
|
41,096,750
|
|
|
|
100.0
|
%
|
|
$
|
4,064,661
|
|
|
|
10.0
|
%
|
Retail drugstores sales,
which accounted for approximately 62.0% of total revenue for the six months ended September 30, 2017, increased by $2,552,756,
or 10.0% as compared to the six months ended September 30, 2016, to $28,067,985. Same-store sales increased by approximately $2,814,763,
or 12.4%, while new stores contributed approximately $1,178,665 in revenue in the six months ended September 30, 2017. Excluding
the RMB depreciation effect, the same store sales increased by approximately 15.2% period over period. Starting in fiscal year
2017, our new general manager in retail business has been spending significant efforts on commodity selection and purchase price
negotiation. A wide choice of suitable health products to customers is a key to a drugstore success. By introducing more quality
products at lower prices, we were able to retain more customers visiting our stores. Additionally, in cooperation with brand name
suppliers, we continuously implement various marketing activities. For example, we made a strategic alliance with a famous
Colla
corii asini
manufacturer to promote its sales in Hangzhou.
Colla corii asini
is a well-known nutritional supplement
in China and has a large number of consumers. By promoting the products in our stores, we were able to raise sales of the products
while enjoying the supplier’s support in the form of a lower purchase price and technical on-site assistance. As a side effect,
customers who bought
Colla corii asini
in our stores also made purchases of other health products. We have plans to market
a series of quality products in cooperation with their manufacturers in the second half of calendar year 2017. Our store count
increased to 95 as of September 30, 2016, compared to 62 stores as of September 30, 2016, as an effect of opening thirty-three
stores in fiscal year 2018.
Our online pharmacy
sales decreased by approximately $2,654,099, or 30.0% for the six months ended September 30, 2017, as compared to the six months
ended September 30, 2016. The decrease was mainly caused by decline in our sale via e-commerce platforms, as further explained
below, during this quarter. We carry our business either through certain e-commerce platforms such as Tmall and JD.com or via our
own official online pharmacy website. 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 year 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 28.0% period
over period. We are adding more non-medical health products such as nutritional supplements into our sales menu to counteract the
decline in sale of OTC drug category. For instance, we are openning a
dendrobium candidum
flagship store at Tmall with a
local popular brand. The brand has a large customer base in Hangzhou. We expect our e-commerce platform sales will pick up in the
future. Due to the decline in business referred to us from “Yikatong”, a popular pharmacy and health insurance benefit
card, the sales on our own official website for the six months ended September 30, 2017 decreased by $0.53 million or 41.4% as
compared to the six months ended September 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.
Wholesale revenue increased
by $4,166,004 or 62.0%, 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.
In the six months ended
September 30, 2017 and 2016, we have not harvested and generated revenue from our farming business. We planted ginkgo and maidenhair
trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough
for harvest. Usually, the longer it grows the more valuable it becomes. We plan to continue cultivating the trees in order to
maximize their market value in the future. During the six months ended September 30, 2017, we have been evaluating feasibility
of planting other herbs with short period of growth. We anticipate that we will continue to grow ginkgo trees and start cultivating
other herbs in the future.
Gross Profit
Gross profit increased
by $900,447 or 10.2% period over period primarily as a result of an increase in gross margin of wholesale business and increase
in retail drugstores sale. At the same time, gross margin increased from 21.5% to 21.6% due to higher retail profit
margins. The average gross margins for each of our four business segments are as follows:
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Average gross margin for retail drugstores
|
|
|
26.8
|
%
|
|
|
29.0
|
%
|
Average gross margin for online sales
|
|
|
11.1
|
%
|
|
|
11.9
|
%
|
Average gross margin for wholesale business
|
|
|
13.9
|
%
|
|
|
5.8
|
%
|
Average gross margin for farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail gross margins
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 September 30, 2017. As an effective
method to promote sales, we have implemented promotional policies such as coupon discounts on certain merchandise. As a result,
our retail profit margins were diminished. Additionally, certain DTP medicines from hospitals have low profit margins. By selling
these medicines, we may incur lower profit margins while keeping our sales up. However, as we continuously renegotiate with
our suppliers for lower purchase prices from, we expect to increase profit while keeping sales growth quickly.
Gross margin of online
pharmacy sales decreased primarily because of the decline in our sales via our own official website. 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. However, Starting from July 2017, the successive general
manager at our online pharmacy adjusted the sales strategy by abandoning certain extremely low margin products and introducing
several profitable products. Although online sales declined, profit margins continue to increase. In the future, we plan to increase
our sales while keeping reasonable gross profit margins.
Wholesale gross
margin increased primarily as a result of different products we carried and sold to certain pharmaceutical vendors. As we were
able to carry sales of certain high margin produces with suppliers rebate in this period, our sales profit margin increased.
Selling and Marketing Expenses
Sales and marketing
expenses increased by $2,561,588 or 44.9% period over period, primarily due to commissions payable to our wholesale sales contractors,
rent and expenditures for new retail stores, and reclassification of certain staff’s salaries to selling and marketing expense
in our wholesale business. In the three months ended September 30, 2017, much of our wholesale business was referred by unaffiliated
individuals medical products traders who earned commissions based on the brokered transaction amount. As a result, we incurred
additional selling expenses of approximately $1.3 million. In the quarter ended September 30, 2017, we accelerated new store openings.
As a result, we incurred $0.7 million for additional rental and new store expenditures such as stationery and utility. Additionally,
as certain members of our wholesale staff provide general customer care and warehouses support that are more related to our sales,
we reclassified $0.4 million expenses as sales and marketing expenses to better reflect their nature. These increases in expenses,
as well as the decrease in overall sales, caused expenses as a percentage of our revenue to increase to 18.3%, from 13.9% for the
same period a year ago.
General and Administrative Expenses
General and administrative
expenses increased by $1,279,866 or 38.8% period over period. Such expenses as a percentage of revenue increased to
10.1% from 8.0% for the same period a year ago. The increase in absolute dollars reflects additional accounts receivable
and advances to vendors allowance of $1.5 million in the six months ended September 30, 2017 as compared to a reversal of $0.3
million in the six months ended September 30, 2016. The difference was due to certain aged accounts receivable and advances to
suppliers accounts in the three months ended September 30, 2016.
Income (Loss) from Operations
As a result of the above,
we had loss from operations of $3,113,371, as compared to loss from operations of $172,364 a year ago. Our operating
margin for the six months ended September 30, 2017 and 2016 was (6.9)% and (0.4)%, respectively.
Income Taxes
Our income tax expense
decreased by $7,333 period over period due to overall increase in operation loss in retail profit.
Net Income (Loss)
As a result of the foregoing,
net income decreased by $2,817,036 period over period.
Accounts receivable
Accounts receivable,
which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments
from our customers 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 d ate of invoice to customer
|
|
Retail
drugstores
|
|
|
Online
Pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
amount
|
|
1- 3 months
|
|
$
|
7,048,169
|
|
|
$
|
1,087,106
|
|
|
$
|
1,676,473
|
|
|
$
|
-
|
|
|
$
|
9,812,462
|
|
4- 6 months
|
|
|
1,347
|
|
|
|
298,029
|
|
|
|
39,664
|
|
|
|
-
|
|
|
|
339,040
|
|
7- 12 months
|
|
|
24,117
|
|
|
|
34,652
|
|
|
|
168,793
|
|
|
|
-
|
|
|
|
226383
|
|
Over one year
|
|
|
11,742
|
|
|
|
124,458
|
|
|
|
1,756,101
|
|
|
|
-
|
|
|
|
1,892,766
|
|
Allowance for doubtful accounts
|
|
|
(63,651
|
)
|
|
|
(164,091
|
)
|
|
|
(1,842,367
|
)
|
|
|
-
|
|
|
|
(2,070,109
|
)
|
Total accounts receivable
|
|
$
|
7,021,724
|
|
|
$
|
1,380,154
|
|
|
$
|
1,798,664
|
|
|
$
|
-
|
|
|
$
|
10,200,542
|
|
Accounts receivable
from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health insurance
programs. In the three and six months ended September 30, 2017 and 2016, we wrote off an approximately $124,983 and
$30,790 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 year 2013, and
it tightened its customer credit policy and strengthened monitoring of uncollected receivables. However, in the six months ended
September 30, 2016, certain accounts become aged and reserved. As a result, we made an additional $654,604 in allowance.
Subsequent to September
30, 2017 and through October 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 and favorable pricing. The aging of our advances to suppliers
is as follows for the periods described below:
From date of cash prepayment to suppliers
|
|
Retail
drugstores
|
|
|
Online
Pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
amount
|
|
1- 3 months
|
|
$
|
477,084
|
|
|
$
|
-
|
|
|
$
|
2,855,179
|
|
|
$
|
-
|
|
|
$
|
3,332,263
|
|
4- 6 months
|
|
|
79,909
|
|
|
|
-
|
|
|
|
254,474
|
|
|
|
-
|
|
|
|
334,383
|
|
7- 12 months
|
|
|
54,722
|
|
|
|
-
|
|
|
|
469,246
|
|
|
|
-
|
|
|
|
523,968
|
|
Over one year
|
|
|
320,080
|
|
|
|
-
|
|
|
|
1,770,214
|
|
|
|
-
|
|
|
|
2,090,294
|
|
Allowance for doubtful accounts
|
|
|
(367,622
|
)
|
|
|
-
|
|
|
|
(1,999,187
|
)
|
|
|
-
|
|
|
|
(2,366,809
|
)
|
Total advances to suppliers
|
|
$
|
564,173
|
|
|
$
|
-
|
|
|
$
|
3,349,926
|
|
|
$
|
-
|
|
|
$
|
3,914,099
|
|
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 such as sundry. As a result, our retail chain had little advances
to suppliers as of September 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 supplier-specific 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 or not the prepayments should be reserved or written off. To facilitate its initial expansion, Jiuxin Medicine made
significant prepayments to certain vendors. Lack of timely supplier account reconciliation caused by several sales staff rotations
delayed the monitoring of such accounts. To accommodate potential loss in advances to suppliers, we made reserve for amounts
considered to be uncollectible. As previously discussed, Jiuxin Medicine transitioned away from focusing on sales volume beginning
in the second half of fiscal year 2013, and since then 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:
|
|
Six months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
(520,646
|
)
|
|
$
|
455,060
|
|
Net cash provided by investing activities
|
|
$
|
(1,095,979
|
)
|
|
$
|
303,280
|
|
Net cash provided by financing activities
|
|
$
|
(857,505
|
)
|
|
$
|
1,110,050
|
|
For the six months ended
September 30, 2017, cash used in operating activities amounted to $520,646, as compared to $455,060 cash used in operating activities
a year ago. The change is primarily attributable to a decrease of $2,817,036 in net income, and a decrease of $2,236,007
in cash provided by accounts payable, offset by a decrease of $2,568,755 in cash used in inventory and biological assets, and an
increase of $1,418,433 in the change of bad debt direct write-off.
For the six months ended
September 30, 2017, net cash used in investing activities amounted to $1,095,979, as compared to $303,280, provided by investing
activities a year ago. The change is attributable to purchase of intangible assets such as social medical reimbursement certificate
and increase in construction-in-progress such as SAP (see Note 7) system implementation in the six months ended September 30, 2017.
For the six months ended
September 30, 2017, net cash used in financing activities amounted to $857,505, as compared to $1,110,050, provided by financing
activities a year ago.
As of September 30,
2017, we had cash of approximately $16,837,873. Our total current assets as of September 30, 2016, were $57,213,864 and total current
liabilities were $44,010,342, which resulted in a working capital of $13,203,522.
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 September 30, 2017,
we had approximately $5.30 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 September 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2018
|
|
$
|
3,875,101
|
|
|
$
|
36,366
|
|
|
$
|
72,732
|
|
|
$
|
-
|
|
|
$
|
3,984,199
|
|
2019
|
|
|
3,462,529
|
|
|
|
36,366
|
|
|
|
72,732
|
|
|
|
-
|
|
|
|
3,571,627
|
|
2020
|
|
|
2,704,078
|
|
|
|
36,366
|
|
|
|
72,732
|
|
|
|
-
|
|
|
|
,2,813,176
|
|
2021
|
|
|
2,156,248
|
|
|
|
12,122
|
|
|
|
24,244
|
|
|
|
-
|
|
|
|
2,192,614
|
|
2022
|
|
|
1,653,163
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,653,163
|
|
Thereafter
|
|
|
2,556,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,556,744
|
|
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:
|
|
September 30,
2017
|
|
March 31,
2017
|
Balance sheet items, except for the registered and paid-up capital, as of end of period
|
|
USD1: RMB 0.1503
|
|
USD1: RMB 0.1451
|
|
|
|
|
|
Amounts included in the statement of Operations and statement of cash flows for the period ended
|
|
USD1: RMB 0.1478
|
|
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 September 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 would be detected or prevented.
We have been continually
making progress in improving its internal control. In 2017, we have just installed a leading ERP system, SAP from Germany. SAP
is a well-known management system used by many fortune 500 companies. Per the contract with the local SAP system provider, the
total fee for SAP customized installation and training adds up to more than 1 million USD in this year. By automatically connecting
commodity flow data with accounting recording, the system minimizes the manual errors made by accounting staff. Additionally, the
system provides a view of overall and instant cash information by electronically linking local banking systems with SAP. Additional
benefits include automaticly-generated customized monthly company performance report, instant inventory monitoring and reporting,
and punctual customer and suppliers accounts maintaining. On the other side, we plan to introduce talented managers who are able
to better utilize the system. We expect to continually improve our internal control system.
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