UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to ___________________

 

Commission File Number: 001-34711

 

CHINA JO-JO DRUGSTORES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   98-0557852
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     

Hai Wai Hai Tongxin Mansion Floor 6

Gong Shu District, Hangzhou City

Zhejiang Province

P. R. China

  310008
(Address of principal executive offices)   (Zip Code)

 

+86 (571) 88077078

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, $0.001 par value   CJJD   NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer Accelerated Filer
Non-accelerated filer þ Smaller reporting company þ
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ

 

As of August 13, 2019, the registrant had 32,936,786 shares of common stock outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

TO QUARTERLY REPORT ON FORM 10-Q

 

FOR THE QUARTER ENDED JUNE 30, 2019

 

    Page
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements 1
  Unaudited condensed consolidated balance sheets as of June 30, 2019 and March 31, 2019 1
  Unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2019 and 2018 2
  Unaudited condensed consolidated statements of changes in stockholders’ equity for the three months ended June 30, 2019 and 2018 3
  Unaudited condensed consolidated statements of cash flows for the three months ended June 30, 2019 and 2018 4
  Notes to unaudited condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 41
     
PART II OTHER INFORMATION  
Item 6. Exhibits 42
Signatures 43

 

i

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

All statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for the registrant, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect” and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially.

 

Such risks include, among others, the following: national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.

 

Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.

 

ii

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    June 30,     March 31,  
    2019     2019  
ASSETS                
CURRENT ASSETS                
Cash   $ 8,341,167     $ 9,322,463  
Restricted cash     14,808,986       15,422,739  
Financial assets available for sale     162,273       180,928  
Notes receivable     92,480       177,278  
Trade accounts receivable     8,590,075       8,692,514  
Inventories     10,806,698       13,955,202  
Other receivables, net     4,253,802       4,438,230  
Advances to suppliers     1,544,132       1,950,252  
Other current assets     1,557,156       2,063,375  
Total current assets     50,156,769       56,202,981  
                 
PROPERTY AND EQUIPMENT, net     8,620,758       8,727,358  
                 
OTHER ASSETS                
Long-term investment     16,318       24,243  
Farmland assets     742,974       825,259  
Long term deposits     2,050,219       2,157,275  
Other noncurrent assets     1,177,703       1,196,197  
Operating lease right-of-use assets     13,564,115       -  
Intangible assets, net     3,888,848       3,597,323  
Total other assets     21,440,177       7,800,297  
                 
Total assets   $ 80,217,704     $ 72,730,636  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Accounts payable, trade     13,674,741       23,106,230  
Notes payable     24,574,955       25,951,673  
Other payables     3,267,074       3,197,221  
Other payables - related parties     326,778       795,179  
Customer deposits     870,100       771,942  
Taxes payable     217,704       125,859  
Accrued liabilities     990,032       1,264,182  
Current portion of operating lease liabilities     4,738,632       -  
Total current liabilities     48,660,016       55,212,286  
                 
Long term operating lease  liabilities     7,918,900       -  
Purchase option and warrants liability     61,693       465,248  
Financial liability     80,081       81,935  
Total liabilities     56,720,690       55,759,469  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ EQUITY                
Common stock; $0.001 par value; 250,000,000 shares authorized; 32,936,786 and 28,936,778 shares issued and outstanding as of June 30, 2019 and March 31, 2019     32,937       28,937  
Preferred stock; $0.001 par value; 10,000,000 shares authorized; nil issued and outstanding as of June 30, 2019 and March 31, 2019     -       -  
Additional paid-in capital     54,209,301       44,905,664  
Statutory reserves     1,309,109       1,309,109  
Accumulated deficit     (32,722,416 )     (30,587,468 )
Accumulated other comprehensive income     2,103,726       2,508,964  
Total stockholders’ equity     24,932,657       18,165,206  
Noncontrolling interests     (1,435,643 )     (1,194,039 )
Total equity     23,497,014       16,971,167  
Total liabilities and stockholders’ equity   $ 80,217,704     $ 72,730,636  

 

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

 

1

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

   

For the three months ended

June 30,

 
    2019     2018  
REVENUES, NET   $ 25,280,784     $ 22,772,566  
                 
COST OF GOODS SOLD     19,219,346       17,155,763  
                 
GROSS PROFIT     6,061,438       5,616,803  
                 
SELLING EXPENSES     5,968,551       4,626,978  
GENERAL AND ADMINISTRATIVE EXPENSES     2,851,612       1,554,528  
TOTAL OPERATING EXPENSES     8,820,163       6,181,506  
                 
LOSS FROM OPERATIONS     (2,758,725 )     (564,703 )
                 
INTEREST INCOME     47,873       47,172  
OTHER (EXPENSE), NET     (62,485 )     (114,941 )
CHANGE IN FAIR VALUE OF WARRANTS LIABILITY     403,555       (6,974 )
                 
LOSS BEFORE INCOME TAXES     (2,369,782 )     (639,446 )
                 
PROVISION FOR INCOME TAXES     8,388       57,169  
                 
NET LOSS     (2,378,170 )     (696,615 )
                 
ADD: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST     243,219       50,763  
                 
NET LOSS ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.     (2,134,951 )     (645,852 )
                 
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS     (405,238 )     621,634  
                 
COMPREHENSIVE LOSS     (2,783,408 )     (74,981 )
                 
WEIGHTED AVERAGE NUMBER OF SHARES:                
Basic     32,453,269       28,936,778  
Diluted     32,453,269       28,936,778  
                 
LOSS PER SHARES:                
Basic   $ (0.07 )   $ (0.02 )
Diluted   $ (0.07 )   $ (0.02 )

 

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

 

2

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                  Accumulated              
    Common Stock           Retained Earnings     other     Non-        
    Number of           Paid-in     Statutory           comprehensive     controlling        
    shares     Amount     capital     reserves     Unrestricted     income/(loss)     interest     Total  
BALANCE, March 31, 2018.     28,936,778       28,937       43,599,089       1,309,109       (29,661,190 )     3,586,460       -       18,862,405  
                                                                 
Stock based compensation     -       -       49,140       -       -       -       -       49,140  
Sale of 10% of Jiuxin Medicine     -       -       -       -       -       -       (617,743 )     (617,643 )
Net loss     -       -       -       -       (645,852 )     -       (50,763 )     (696,615 )
Foreign currency translation loss     -       -       -       -       -       621,634       -       621,634  
BALANCE, June 30, 2018.     28,936,778       28,937       43,648,229       1,309,109       (30,307,042 )     4,208,094       (668,506 )     18,218,821  
                                                                 
BALANCE, March 31, 2019.     28,936,778       28,937       44,905,664       1,309,109       (30,587,468 )     2,508,964       (1,194,039 )     16,971,167  
                                                                 
Stock based compensation     4,000,008       4,000       34,560       -       -       -       -       38,560  
Financing of subsidiary     -       -       9,269,077       -       -       -       -       9,269,077  
Net loss     -       -       -       -       (2,134,949 )     -       (241,604 )     (2,376,553 )
Foreign currency translation loss     -       -       -       -       -       (405,238 )             (405,238 )
BALANCE, June 30, 2019.     32,936,786       32,937       54,209,301       1,309,109       (32,722,416 )     2,103,726       (1,435,643 )     23,497,014  

 

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

 

3

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the three months ended
June 30,
 
    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (2,378,170 )   $ (696,615 )
Adjustments to reconcile net income to net cash provided by operating activities:                
Bad debt direct write-off and provision     758,231       259,279  
Depreciation and amortization     499,175       293,095  
Stock based compensation     34,560       49,140  
Change in fair value of purchase option derivative liability     (403,555 )     6,974  
Accounts receivable, trade     (959,680 )     1,077,419  
Notes receivable     81,326       (114,944 )
Inventories and biological assets     2,851,652       (458,803 )
Other receivables     371,054       (401,204 )
Advances to suppliers     242,652       (775,014 )
Other current assets     (450,042 )     554,048  
Long term deposit     58,630       (5,415 )
Other noncurrent assets     (8,631 )     (97,341 )
Accounts payable, trade     (8,968,168 )     (2,369,206 )
Other payables and accrued liabilities     (105,522 )     357,335  
Customer deposits     116,398       20,290  
Taxes payable     95,326       (281,235 )
                 
Net cash (used in) operating activities     (8,164,764 )     (2,582,197 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Disposal of financial assets available for sale     14,658       -  
Acquisition of equipment     (210,356 )     (32,753 )
Increase in intangible assets     (433,111 )     -  
Investment in a joint venture     -       (109,142 )
Additions to leasehold improvements     (542,734 )     (116,002 )
Net cash used in investing activities     (1,171,543 )     (257,897 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from notes payable     15,372,260       10,376,504  
Repayment of notes payable     (16,167,012 )     (15,512,104 )
Proceeds from equity financing     9,273,077       7,629  
Repayment of other payables-related parties     (460,000 )     (84,014 )
Net cash provided by (used in) financing activities     8,018,325       (5,211,985 )
                 
EFFECT OF EXCHANGE RATE ON CASH     (277,067 )     (457,638 )
                 
DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH     (1,595,049 )     (8,509,717 )
                 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period     24,745,202       31,452,191  
                 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of period   $ 23,150,153     $ 22,942,474  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid for income taxes   $ 29,176     $ 27,832  

 

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

 

4

 

 

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. As of June 30, 2019, Jiuzhou Pharmacy has established the following companies, each of which operates a drugstore in Hangzhou City:

 

Entity Name   Date Established
Hangzhou Jiuli Pharmacy Co., Ltd (“Jiuli Pharmacy”)   May 22, 2017
     
Hangzhou Jiuxiang Pharmacy Co., Ltd (“Jiuxiang Pharmacy”)   May 26, 2017
     
Hangzhou Jiuyi Pharmacy Co., Ltd (“Jiuyi Pharmacy”)   June 8, 2017
     
Hangzhou Jiumu Pharmacy Co., Ltd (“Jiumu Pharmacy”)   July 21, 2017

  

During the three months ended June 30, 2019, the Company dissolved four independent pharmacies. Among the four dissolved pharmacies, two stores have merged into Jiuzhou Pharmacy and became Jiuzhou Pharmacy stores in Hangzhou. The other two stores’ licenses of government medical insurance, which qualify the stores for reimbursement from government, were transferred to two Jiuzhou Pharmacy stores in Hangzhou City.

 

The Company’s offline retail business also includes three medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”), both of which are also controlled by the Company through contractual arrangements. In May 2014, Shouantang Technology established Hangzhou Shouantang Bio-technology Co., Ltd. (“Shouantang Bio”). In May 2016, Shouantang Bio set up and held 49% of Hangzhou Kahamadi Bio-technology Co., Ltd.(“Kahamadi Bio”), a joint venture specialized in brand name development for nutritional supplements. In 2018, Jiuzhou Pharmacy invested a total of $741,540 (RMB5,100,000) in and held 51% of Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd (“Linjia Medical”), which is operating two new clinics in Hangzhou as of March 31, 2019. On March 29, 2019, Jiuzhou Pharmacy set up and currently holds 51% of the equity of Zhejiang AyiGe Medical Health Management Co., Ltd.(“Ayi Health”), which is intended to provide technical support such as IT and customer support to our health management business in the future.

 

The Company currently conducts its online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online pharmacy license. Prior to November 2015, the Company primarily conducted its online retail pharmacy business through Zhejiang Quannuo Internet Technology Co., Ltd. In May 2015, the Company established Zhejiang Jianshun Network Technology Co. Ltd, a joint venture with Shanghai Jianbao Technology Co., Ltd. (“Jianshun Network”), in order to develop its online pharmaceutical sales from large commercial medical insurance companies. However, Jianshun Network was dissolved as a result that the Company terminated the strategic cooperation with the Chinese pharmacy benefit management provider which used to help the Company earn customers through “Yikatong”, a pharmacy and health insurance benefit card in China. 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. On April 20, 2018, 10% of Jiuxin Medcine shares were sold to Hangzhou Kangzhou Biotech Co. Ltd. for a total proceeds of $79,625 (RMB 507,760),

 

The Company’s herb farming business is conducted by Hangzhou Qianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned subsidiary of Jiuxin Management. Due to the complexity of the cultivation business, Qianhong Agriculture has not grown herbs in the three months ended June 30, 2019. 

 

5

 

 

The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:

 

Entity Name   Background   Ownership
Renovation    ●     Incorporated in Hong Kong SAR on September 2, 2008   100%
         
Jiuxin Management  

●     Established in the PRC on October 14, 2008

 

●     Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law  

 

●     Registered capital of $14.5 million fully paid

  100%
         
Shouantang Technology  

●     Established in the PRC on July 16, 2010 by Renovation with registered capital of $20 million

 

●     Registered capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid  

 

●     Deemed a WFOE under PRC law

 

●     Invests and finances the working capital of Quannuo Technology

  100%
         
Qianhong Agriculture   

●     Established in the PRC on August 10, 2010 by Jiuxin Management

 

●     Registered capital of RMB 10 million fully paid  

 

●     Carries out herb farming business

  100% 
         
Jiuzhou Pharmacy (1)   

●     Established in the PRC on September 9, 2003

 

●     Registered capital of RMB 5 million fully paid  

 

●     Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou

  VIE by contractual arrangements (2)
         
Jiuzhou Clinic (1)  

●     Established in the PRC as a general partnership on October 10, 2003

 

●     Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s  stores

  VIE by contractual arrangements (2)
         
Jiuzhou Service (1)  

●     Established in the PRC on November 2, 2005  

 

●     Registered capital of RMB 500,000 fully paid

 

●     Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores

 

VIE by contractual arrangements (2)

 

         
Jiuxin Medicine    

●     Established in PRC on December 31, 2003

 

●     Acquired by Jiuzhou Pharmacy in August 2011

 

●     10% of shares sold  

 

●     Registered capital of RMB 10 million fully paid

 

●     Carries out pharmaceutical distribution services

  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)

 

6

 

 

Entity Name   Background   Ownership
Jiutong Medical    

●     Established in the PRC on December 20, 2011 by Renovation

 

●     Registered capital of $2.6 million fully paid  

 

●     Currently has no operation

  100% 
         
Jiuli Pharmacy   

●      Established in the PRC on May 22, 2017 by Jiuzhou Pharmacy

 

●     Registered capital of $15,920 fully paid  

 

●     Operates a pharmacy in Hangzhou

  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2) 
         
Jiuxiang Pharmacy  

●      Established in the PRC on May 26, 2017 by Jiuzhou Pharmacy

 

●     Registered capital of $15,920 fully paid  

 

●     Operates a pharmacy in Hangzhou

  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2) 
         
Jiuyi Pharmacy  

●     Established in the PRC on June 8, 2017 by Jiuzhou Pharmacy

 

●     Registered capital of $15,920 fully paid  

 

●     Operates a pharmacy in Hangzhou

  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2) 
         
Jiumu Pharmacy  

●     Established in the PRC on July 21, 2017 by Jiuzhou Pharmacy

 

●     Registered capital of $15,920 fully paid  

 

●     Operates a pharmacy in Hangzhou

  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)

 

7

 

 

Entity Name   Background   Ownership
Shouantang Bio   

●     Established in the PRC in October, 2014 by Shouantang Technology 

 

●     100% held by Shouantang Technology 

 

●     Registered capital of RMB 1,000,000 fully paid

 

●     Sells nutritional supplements under its own brand name

  100%
         
Jiuyi Technology   

●     Established in the PRC on September 10, 2015

 

●     100% held by Renovation 

 

●     Technical support to online pharmacy

  100%
         
Kahamadi Bio   

●     Established in the PRC in May 2016

 

●     49% held by Shouantang Bio

 

●     Registered capital of RMB 10 million

 

●     Develop brand name for nutritional supplements

  49%
         
Lin’An Jiuzhou   

●     Established in the PRC in March 31, 2017

 

●     100% held by Jiuxin Management

 

●     Registered capital of RMB 5 million

 

●     Explore retail pharmacy market in Lin’An City

  100%
         
Linjia Medical  

●     Established in the PRC in September27, 2017

 

●     51% held by Jiuzhou Pharmacy

 

●     Registered capital of RMB 20 million

 

●     Operates local clinics

  VIE by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)
         
Ayi Health  

●     Established in the PRC in March 29, 2019

 

●     51% held by Jiuzhou Pharmacy

 

●     Registered capital of RMB 10 million

 

●     Provide technical Support for medial service

  VIE by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)

  

(1) Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service had been under the common control of Mr. Lei Liu, Mr. Chong’an Jin and Ms. Li Qi, the three shareholders (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 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.

 

8

 

 

Note 2 – LIQUIDITY

 

Our accounts have been prepared in accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. Our ability to continue as a going concern depends upon aligning our sources of funding (debt and equity) with our expenditure requirements and repayment of the short-term debts as and when they become due.

 

The drug retail business is a highly competitive industry in PRC. Several large drugstore chains and a variety of single stores operate in Hangzhou City and Zhejiang Province. In order to increase our competition advantages and gain more local retail pharmacy market share, during fiscal year 2018, we opened as many as fifty-seven new stores in Hangzhou. As a result, we incurred significant incremental expense related to rental, labor hiring and training, and marketing activities. As the retail pharmaceutical market becomes more competitive in recent years, a new store usually cannot make profit in its operation until a year later. In fact, we incurred significant expense with limited incremental revenue in the period we opened new stores. At their openings, except for four stores, almost all of the new stores were without government insurance reimbursement certificates. In fact, it usually takes more than one year for a new store to apply for and obtain the local government insurance reimbursement certificate. As of June 2019, we have obtained thirty reimbursement certificates for stores opened in fiscal 2018 and later. Historically, sales reimbursed from the government insurance agency contributes more than half of total revenue in a mature store. We are active in the process of applying certificates for all of our new stores. In the future, as more and more stores obtain certificates, we expect our new store revenue to increase and eventually contribute positive operating cash flow.

 

The Company’s principal sources of liquidity consist of existing cash, equity financing, bank facilities from local banks as well as personal loans from its principal shareholders if necessary. On April 15, 2019, the Company closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds of $10,000,020 from its effective shelf registration statement on Form S-3 pursuant to a Securities Purchase Agreement dated April 11, 2019 (the “2019 Securities Purchase Agreement”), by and among the Company and the investors named therein. The Company has a credit line agreement from a local bank as displayed in detail in Note 14. Approximately $3.01 million bank credit line was still available for further borrowing as of June 30, 2019. Additionally, Jiuzhou Pharmacy obtained a credit line of approximately $7,280,100 (RMB50,000,000) from Haihui Commercial Factoring (Tianjin) Co. Ltd for three years starting from July 26, 2019. Any borrowing therefrom is guaranteed by a third-party guarantor company, and secured by the Company’s assets pursuant to a collateral agreement, as well as the personal guarantees of some of its principal shareholders.

 

However, in the event the banks withdraw their credit lines with us, or our existing store performance suddenly deteriorates due to unexpected government policy change, or our operating license is canceled as a result of violation of industry regulation, the Company may or may not obtain alternative financing resources to support its continuing operation. At that time, the Company may not be able to continue to present itself on a going concern basis.

 

9

 

 

Note 3 – 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.

 

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.

 

10

 

 

Fair value measurements

 

The Company 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 14). 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). The carrying amount of the Financial assets available for sale is recorded at fair value and is determined based on unobservable inputs (Level 3). As of June 30 2019, the fair values of our derivative instruments were carried at fair value (See Note 18). As of June 30 2019, the fair values of our Financial liability were carried at fair value (See Note 19)

 

    Active Market
for Identical
Assets
(Level 1)
    Observable
Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
    Total
Carrying
Value
 
Cash and cash equivalents and restricted cash     23,150,153       -     $ -       23,150,153  
Financial assets available for sale                     162,273       162,273  
Notes payable     -       24,574,955       -       24,574,955  
Financial liability                     80,081       80,081  
Warrants liability     -       61,693     $ -       61,693  
                                 
Total     23,150,153       24,636,648     $ 242,354       48,029,155  

 

Revenue recognition

 

Effective March 31, 2018, the Company began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to the Company’s consolidated financial statements. The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer
     
Step 2: Identify the performance obligations in the contract
     
Step 3: Determine the transaction price
     
Step 4: Allocate the transaction price to the performance obligations in the contract
     
Step 5: Recognize revenue when the company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct).
     
  The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

11

 

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. 

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the

uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

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.

 

Certain contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for example, membership points. The consideration received remains a contract liability until goods or services have been provided to the retail customer. The estimated amount based on accrued membership points was deducted from sales revenue.

 

The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:

 

Pharmacy retail sales

 

The physical pharmacies sell prescription drugs, OTC drugs, traditional Chinese medicine, nutritional supplements, medical devices and sundry products. 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. As revenue from medical services are minimal compared to pharmacy retail sales, it is included as part of the pharmacy retail sales.

 

Online pharmacy sales

 

The online pharmacy sells various health products except for prescription drugs. 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. Historically, sales returns seven days after merchandise receipts have been minimal.

 

Wholesale

 

Jiuxin Medicine purchases medicine in quantity and distributes products primarily to local pharmacies and medical products dealers. Revenue from sales of merchandise to non-retail customers is recognized when the merchandise is transferred to customers. 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.

 

12

 

 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenue by major source in each segment for the three months ended June 30, 2019:

 

For the three  months ended June 30   2019     2018  
Retail drugstores                
Prescription drugs   $ 5,695,286     $ 5,809,215  
OTC drugs     7,240,228       6,964,828  
Nutritional supplements     1,231,133       945,206  
TCM     1,104,050       1,582,568  
Sundry products     298,198       204,861  
Medical devices     1,166,093       461,663  
Total retail revenue   $ 16,734,988     $ 15,968,341  
Online pharmacy                
Prescription drugs   $ -     $ -  
OTC drugs     1,024,602       775,993  
Nutritional supplements     107,194       143,096  
TCM     13,681       4,929  
Sundry products     438,736       1,037,166  
Medical devices     859,392       60,685  
Total online revenue   $ 2,443,605     $ 2,021,869  
Drug wholesale                
Prescription drugs   $ 4,880,491     $ 3,419,536  
OTC drugs     1,074,261       1,274,919  
Nutritional supplements     21,691       25,381  
TCM     98,828       21,851  
Sundry products     5,682       4,755  
Medical devices     21,238       35,914  
Total wholesale revenue   $ 6,102,191     $ 4,782,356  
Total revenue   $ 25,280,784     $ 22,772,566  

 

Contract Balances

 

Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for example membership points. The consideration received remains a contract liability until goods or services have been provided to the retail customer.

 

The following table provides information about receivables and contract liabilities from contracts with customers:

 

   

June 30,

2019

    March 31,
2019
 
Trade receivable(included in accounts receivable, net)   $ 8,590,075     $ 8,692,514  
Contract liabilities (included in accrued expenses)     1,494,018       1,689,099  

 

13

 

 

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.

 

The following represents a reconciliation of cash and cash equivalents in the Consolidated Condensed Balance Sheets to total cash, cash equivalents and restricted cash in the Consolidated Condensed Statements of Cash Flows as of June 30, 2019 and March 31, 2019:

 

    June 30,
2019
    March 31, 2019  
Cash and cash equivalents   $ 8,341,167     $ 9,322,463  
Restricted cash     14,808,986       15,422,739  
Cash, cash equivalents and restricted cash   $ 23,150,153     $ 24,745,202  

 

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.

 

14

 

 

Inventories

 

Inventories are stated at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Market value is the lower of replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. Herbs that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, labor costs that are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development cost. All costs are accumulated until the time of harvest and then allocated to harvested herbs costs when the herbs are sold. The Company periodically reviews its inventory and records write-downs to inventories for shrinkage losses and damaged merchandise that are identified. The Company provides a reserve for estimated inventory obsolescence or excess quantities on hand equal to the difference, if any, between the cost of the inventory and its estimated realizable value.

 

Farmland assets

 

Herbs that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, and labor costs that are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development costs. Since April 2014, amortization of farmland development costs has been expensed instead of allocated into inventory due to unpredictable future market value of planted gingko trees.

 

All related costs described in the above are accumulated until the time of harvest and then allocated to harvested herbs when they are sold.

 

Property and equipment

 

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements are amortized over the shorter of lease term or remaining lease period of the underlying assets. Following are the estimated useful lives of the Company’s property and equipment:

 

    Estimated Useful Life
Leasehold improvements   3-10 years
Motor vehicles   3-5 years
Office equipment & furniture   3-5 years
Buildings   35 years

 

Maintenance, repairs and minor renewals are charged to expenses as incurred. Major additions and betterment to property and equipment are capitalized.

 

Intangible assets

 

Intangible assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost of a group of assets acquired in a transaction is allocated to the individual assets based on their relative fair values.

 

The estimated useful lives of the Company’s intangible assets are as follows:

 

    Estimated
Useful Life
Land use rights   50 years
Software   3 years

 

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired.

 

Impairment of long lived assets

 

The Company evaluates long lived tangible and intangible assets for impairment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability is measured by comparing the assets’ net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. There were no fixed assets and farmland assets impaired for the three months ended June 30, 2019.

 

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.

 

15

 

 

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 accounting standards clarify the accounting and disclosure requirements for uncertain tax positions and prescribe a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. No significant penalties, uncertain tax provisions or interest relating to income taxes were incurred during the periods ended June 30, 2019 and 2018.

 

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.

 

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 $80,049 and $191,054 for the three months ended June 30, 2019 and 2018, respectively. Such costs consist primarily of print and promotional materials such as flyers to local communities.

 

16

 

 

Foreign currency translation

 

The Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their books and records in their functional currency the Renminbi (“RMB”), the currency of the PRC.

 

In general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the subsidiaries and VIEs are recorded as accumulated other comprehensive income.

 

The balance sheet amounts, with the exception of equity, at June 30, 2019 and at March 31, 2019 were translated at 1 RMB to 0.1456 USD and at 1 RMB to 0.1490 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the three months ended June 30, 2019 and 2018 were at 1 RMB to 0.1466 USD and at 1 RMB to 0.1511 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 72,800) per bank. As of June 30, 2019 and March 31, 2019, the Company had deposits totaling $23,061,379 and $24,730,736 that were covered by such limited insurance, respectively. Any balance over RMB 500,000 (USD 72,800) per bank in PRC will not be covered. To date, the Company has not experienced any losses in such accounts.

 

For the three months ended June 30, 2019, two vendors accounted for 49.2% of the Company’s total purchases and two vendors accounted for more than 10% of total advances to suppliers. For the three months ended June 30, 2018, two vendors collectively accounted for 46.2% of the Company’s total purchases and two suppliers accounted for more than 10% of total advances to suppliers.

 

For the three months ended June 30, 2019, no customer accounted for more than 10% of the Company’s total sales and more than 10% of total accounts receivable. For the three months ended June 30, 2018, no customer accounted for more than 10% of the Company’s total sales or more than 10% of total accounts receivable.

 

Leases

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02,  Leases  (Topic 842). Lessees are required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). Lessor accounting is similar to the prior model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue standard, ASU 2014-9.

 

17

 

 

The Company adopted this new accounting standard on April 1, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification. On April 1, 2019, the Company recorded an after-tax transition adjustment to increase retained earnings by approximately $422,354. The new standard had a material impact on the unaudited condensed consolidated balance sheet, but did not materially impact the Company’s consolidated operating results and had no impact on the Company’s cash flows. The following is a discussion of the Company’s lease policy under the new lease accounting standard:

 

The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its borrowing rates set by The Central Bank of the People's Republic of China , determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and exclude lease incentives.

 

The Company leases premises for retail drugstores, and offices 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, and no lease terms include options to extend. The Company leases don’t include options to extend nor any restrictions or covenants. The Company does not have any leases entered into but which have not yet commenced. 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. See Note 13 ‘‘Leases’’ for additional information.

 

 

Impact of New Lease Standard on Balance Sheet Line Items

 

As a result of applying the new lease standard using a modified retrospective method, the following adjustments were made to accounts on the condensed consolidated balance sheet as of April 1, 2019:

 

    Impact of Change in Accounting Policy  
    As Reported           Adjusted  
    March 31, 2019     Adjustments    

April 1,

2019

 
Other current assets     2,063,375       (717,414 )     1,345,961  
Total current assets     56,202,981       (717,414 )     55,485,567  
Operating lease right-of-use assets     -       15,276,388       15,276,388  
Total assets     72,730,636       14,558,974       87,289,610  
                      -  
Current portion of operating lease liabilities     -       4,718,610       4,718,610  
Total current liabilities     55,212,286       4,718,610       59,930,896  
Long-term operating lease liabilities     -       9,418,011       9,418,011  
Total liabilities     55,759,469       14,136,621       69,896,090  
                      -  
Retained earnings     (30,587,468 )     422,354       (30,165,114 )
Total shareholders’ equity     18,165,206       422,354       18,587,560  
Total  equity     16,971,167       422,354       17,393,521  

 

18

 

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” providing financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments,” addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The impact of adoption on its Condensed Consolidated Financial Statements for any period presented is not material.

  

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this Update addresses the complexity of accounting for certain financial instruments with down round features. Part II of this Update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification®. We are currently evaluating the impact of the adoption of ASU 2017-11 on our consolidated financial statements.

 

In January 2017, the FASB issued 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. ASU 2017-4 has no impact on our consolidated financial statements.

 

19

 

 

NOTE 4 – TRADE ACCOUNTS RECEIVABLE

 

Trade accounts receivable consisted of the following:

 

    June 30,
2019
    March 31,
2019
 
Accounts receivable   $ 12,395,705     $ 11,939,364  
Less: allowance for doubtful accounts     (3,805,630 )     (3,246,850 )
Trade accounts receivable, net   $ 8,590,075     $ 8,692,514  

 

For the three months ended June 30, 2019 and 2018, $36,068 and $30,583 in accounts receivable were directly written off, respectively. As of June 30, 2019 and March 31, 2018 no trade accounts receivables were pledged as collateral for borrowings from financial institutions.

 

Note 5 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

    June 30,
2019
    March 31,
2019
 
Rental deposits (1)   $ 1,466,714     $ 1,979,852  
Prepaid and other current assets     90,442       83,523  
Total   $ 1,557,156     $ 2,063,375  

 

(1) The balance as of June 30, 2019 includes short-term refundable rental security deposits only, while the balance as of March 31, 2019  includes security deposits of $1,444,026 and prepaid rental of $ 535,826.

 

20

 

 

Note 6 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    June 30,
2019
    March 31,
2019
 
Building   $ 6,072,001     $ 6,436,297  
Leasehold improvements     9,280,768       8,944,025  
Farmland development cost     1,741,311       1,781,627  
Office equipment and furniture     5,507,064       5,470,084  
Motor vehicles     539,238       551,927  
Total     23,140,382       23,183,960  
Less: Accumulated depreciation     (12,227,499 )     (12,111,409 )
Impairment*     (2,292,125 )     (2,345,193 )
Property and equipment, net   $ 8,620,758     $ 8,727,358  

 

* The variance of impairment from March 31, 2019 to June 30, 2019 is solely caused by exchange rate variance.

 

Depreciation expenses for property and equipment totaled $441,559 and $219,759 for the three months ended June 30, 2019 and 2018, respectively. There were no fixed assets impaired in the three months ended June 30, 2019 and June 30, 2018.

 

Note 7 – ADVANCES TO SUPPLIERS

 

Advances to suppliers consist of deposits, with or advances to, outside vendors for future inventory purchases. Most of the Company’s suppliers require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchase on a timely basis. This amount is refundable and bears no interest. As of June 30, 2019 and March 31, 2019, advance to suppliers consist of the following:

 

    June 30,
2019
    March 31,
2019
 
Advance to suppliers*   $ 2,180,129     $ 2,477,226  
Less: allowance for unrefundable advances     (635,997 )     (526,974 )
Advance to suppliers, net   $ 1,544,132     $ 1,950,252  

 

For the three months ended June 30, 2019 and 2018, none of the advances to suppliers were written off against previous allowance for unrefundable advances, respectively.

 

Note 8 – INVENTORY

 

Inventory consisted of finished goods, valued at $10,806,698 and $13,955,202 as of June 30, 2019 and March 31, 2019, respectively. The Company constantly monitors its potential obsolete products and is allowed to return products close to their expiration dates to its suppliers. Any loss on damaged items is immaterial and will be recognized immediately. As a result, no reserves were made for inventory as of June 30, 2019 and March 31, 2019.

 

Note 9 – FARMLAND ASSETS

 

Farmland assets consist of ginkgo trees planted in 2012 and expected to be harvested and sold in several years. As of June 30, 2019 and March 31, 2019, farmland assets are valued as follows:

 

    June 30,     March 31,  
    2019     2019  
Farmland assets   $ 2,224,942     $ 2,341,537  
Less: Impairment*     (1,481,968 )     (1,516,278 )
Farmland assets, net   $ 742,974     $ 825,259  

 

* The variance of impairment is caused by exchange rate variance.

 

21

 

 

Note 10 – LONG TERM REFUNDABLE DEPOSITS, LANDLORDS

 

As of June 30, 2019 and March 31, 2019, long term deposits amounted to $2,050,219 and $2,157,275, 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.

 

Note 11 – OTHER NONCURRENT ASSETS

 

Other noncurrent assets consisted of the following:

 

    June 30,
2019
    March 31,
2019
 
Forest land use rights*   $ 1,065,434     $ 1,103,235  
Others     112,269       92,962  
Total   $ 1,177,703     $ 1,196,197  

 

* The prepayment for lease of forest land use rights is a payment made to a local government in connection with entering into an operating land lease agreement. The land is currently used to cultivate Ginkgo trees. The forest rights certificate from the local village extends the life of the lease to January 31, 2060.

 

The amortization of the prepayment for the lease of forest land use right was approximately $6,885 and $7,096 for the three months ended June 30, 2019 and 2018, respectively.

 

The Company’s amortizations of the prepayment for lease of land use right for the next five years and thereafter are as follows:

 

For the year ending June 30,   Amount  
2020   $ 27,541  
2021     27,541  
2022     27,541  
2023     27,541  
2024     27,541  
Thereafter     796,935  

 

Note 12 – Leases

 

The Company leases most of its retail stores corporate offices under operating leases, typically with initial terms of  3 to 10 years, and no lease terms include options to extend. The Company leases don’t include options to extend nor any restrictions or covenants. The Company does not have any leases entered into but which have not yet commenced. The net lease cost for the three months ended June 30, 2019 is $1,294,591. Supplemental cash flow information related to leases for the three months ended June 30, 2019 is as follows:

 

Cash paid for amounts included in the measurement of lease liabilities:      
Operating cash flows paid for operating leases   $ 1,115,138  
Right-of-use assets obtained in exchange for lease obligations:        
Operating leases     -  

 

22

 

 

Supplemental balance sheet information related to leases as of June 30, 2019 is as follows:

 

Operating leases:      
Operating lease right-of-use assets   $ 13,564,115  
         
Current portion of operating lease liabilities   $ 4,738,632  
Long-term operating lease liabilities     7,918,900  
Total operating lease liabilities   $ 12,657,532  
         
Weighted average remaining lease term        
Operating leases     4.5  
         
Weighted average discount rate        
Operating leases     2.10 %

 

The following table summarizes the maturity of lease liabilities under operating leases as of June 30, 2019:

 

    Operating  
For the year ending June 30,   Leases  
2020   $ 4,739,995  
2021     3,691,865  
2022     2,879,742  
2023     1,961,837  
2024     1,398,480  
Thereafter     1,444,296  
Total lease payments  (2)     16,116,215  
Less: imputed interest     (3,458,683 )
Total lease liabilities   $ 12,657,532  

 

Note 13 – INTANGIBLE ASSETS

 

Net intangible assets consisted of the following at:

 

    June 30,
2019
    March 31,
2019
 
License (1)   $ 1,866,487     $ 1,909,700  
Software (2)     1,091,268       676,336  
Land use rights (3)     1,419,845       1,452,718  
Total intangible assets     4,377,600       4,038,754  
Less: accumulated amortization     (488,752 )     (441,431 )
Intangible assets, net   $ 3,888,848     $ 3,597,323  

 

Amortization expense of intangibles amounted to $58,466 and $73,336 for the three months ended June 30, 2019 and 2018, 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 acquired drugstores agreed to cease their stores’ business and liquidate all of the stores’ accounts before Jiuzhou Pharmacy acquired them. As a result, Jiuzhou Pharmacy has not obtained any assets or liabilities from the stores, but was able to transfer the certificates to our new stores opened at the same time.
   
(2) They are the SAP ERP system, the Internet Clinic Diagnosis Terminal system and the Chronic Disease Management system. In 2017, we have installed a leading ERP system, SAP from Germany. SAP is a well-known management system used by many fortune 500 companies. It is being amortized over three years since its installation. As of June 30, 2019, the SAP system has a total value of $345,906(RMB2,375,697). The internet Clinic Diagnosis System costs approximately $ (RMB 2,688,709). The system is used to strengthen our ability to perform online diagnosis which may increase more customer spending.  Chronic Disease costs approximately $ (RMB ) and is used to better manage and monitor our members’ health.
   
(3) 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.

 

23

 

 

Note 14 – NOTES PAYABLE

 

The Company has credit facilities with Hangzhou United Bank (“HUB”) that provided working capital in the form of the following bank acceptance notes at June 30, 2019 and March 31, 2019:

 

        Origination   Maturity   June 30,     March 31,  
Beneficiary   Endorser   date   date   2019     2019  
Jiuzhou Pharmacy (1)   HUB   11/06/18   05/06/19             500,857  
Jiuzhou Pharmacy (1)   HUB   12/12/18   06/12/19             2,236,559  
Jiuzhou Pharmacy (1)   HUB   12/20/18   06/20/19             1,072,606  
Jiuzhou Pharmacy (1)   HUB   12/29/18   06/29/19     324,592        5,504,943  
Jiuzhou Pharmacy (1)   HUB   02/14/18   08/14/19     2,528,784        2,587,331  
Jiuzhou Pharmacy (1)   HUB   03/06/18   09/06/19     6,451,364       6,600,727  
Jiuxin Medicine (1)   HUB   10/11/18   04/11/19             4,461,531  
Jiuxin Medicine (1)   HUB   11/06/18   05/06/19             2,987,119  
Jiuzhou Pharmacy (1)   HUB   06/05/19   12/05/19     4,384,517           
Jiuzhou Pharmacy (1)   HUB   06/28/19   12/28/19     3,844,927           
Jiuxin Medicine (1)   HUB   04/10/19   10/10/19     4,112,456          
Jiuxin Medicine (1)   HUB   04/15/19   10/15/19        145,602          
Jiuxin Medicine (1)   HUB   05/10/19   11/10/19     2,782,713          
Jiuzhou Pharmacy (1)   HUB             -       -  
                             
Total               $ 24,574,955     $ 25,951,673  

 

(1) As of June 30, 2019, the Company had $24,574,955 (RMB 168,781,714) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $14,626,921 (RMB 100,458,244) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $10,209,998 three-year deposit (RMB 70,122,647) deposited into HUB as a collateral for current and future notes payable from HUB. As of March 31, 2019, the Company had $25,951,673 (RMB 174,203,868) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $15,114,740 (RMB 101,459,590) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $10,446,381 three-year deposit (RMB 70,122,647) deposited into HUB as a collateral for current and future notes payable from HUB.

 

As of June 30, 2019, the Company had a credit line of approximately $12.96 million in the aggregate from HUB, and BOH. By putting up three-year deposit of $10.21 million and the restricted cash of $4.42 million deposited in the banks, the total credit line was $27.59 million. As of June 30, 2019, the Company had approximately $24.57 million of bank notes payable and approximately $3.01 million bank credit line was still available for further borrowing. The bank notes are secured by three shops of Jiuzhou Pharmacy and guaranteed by the Company’s major shareholders.

 

24

 

 

Note 15 – TAXES

 

Income tax

 

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are calculated using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are provided against deferred income tax assets for amounts which are not considered “more likely than not” to be realized.

 

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

 

For the three months ended June 30, 2019 and 2018, the components of income tax expense consist of the following:

 

    For the three months ended  
    June 30,  
    2019     2018  
Current:            
Federal   -     -  
State   -     -  
Foreign     8,388       57,169  
      8,388       57,169  
                 
Deferred:                
Federal     -       -  
State     -       -  
Foreign     -       -  
      -       -  
Provision for income taxes     8,388       57,169  

 

The following table reconciles the U.S. statutory tax rates with the Company’s effective tax rate for the three months ended June 30, 2019 and 2018:

 

    For the three months ended  
    June 30,  
    2019     2018  
U.S. Statutory rates     21.0 %     21.0 %
Foreign income not recognized in the U.S.     (21.0 )     (21.0 )
China income taxes     25.0       25.0  
Change in valuation allowance (1)     (25.0 )     (25.0 )
Non-deductible expenses-permanent difference (2)     0.4       8.9  
Effective tax rate     (0.4 )%     (8.9 )%

 

(1) Represents a non-taxable expense reversal due to overall decrease in allowance for accounts receivable and advances to suppliers.

 

(2) The (0.4)% and (8.9)% rate adjustments for the three months ended June 30, 2019 and 2018 represent expenses that primarily include stock option expenses and legal, accounting and other expenses incurred by the Company that are not deductible for PRC income tax.

 

25

 

 

The components of the Company’s net deferred tax assets are as follows:

 

    As of
6/30/2019
    As of
3/31/2019
 
             
Allowance     1,152,638       986,665  
Long-lived assets impairment     573,031       586,298  
Depreciation and Amortization     -       -  
Accrued expense     1,628,792       1,569,683  
Net operating loss carry forward     1,438,560       1,164,735  
Foreign Tax Credit Carryover     195,000       195,000  
Total deferred tax assets (liabilities):     4,988,021       4,502,381  
                 
Valuation allowance     (4,988,021 )     (4,502,381 )
Net deferred tax assets (liabilities)     -       -  

 

The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Assumptions used to forecast future taxable income often require significant judgment. More weight is given to objectively verifiable evidence. In the event we determine that we would not be able to realize all or part of our net deferred tax assets in the future, a valuation allowance will be established against deferred tax assets in the period in which we make such determination. The need to establish a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.

 

As of June 30, 2019 and March 31, 2019, the estimated net operating loss carry forwards for U.S. income tax purposes amounted to $816,908, which may be available to reduce future years’ taxable income. These carry forwards will expire if not utilized by 2032. In addition, the Company carries a Foreign tax credit of $195,000. As of June 30, 2019 and March 31, 2019, the estimated net operating loss carry forwards for Hong Kong income tax purposes amounted to $1,993,833 and $1,960,933, which may be available to reduce future years’ taxable income. As of June 30, 2019 and March 31, 2019, the estimated net operating loss carry forwards for China income tax purposes amounted to $3,752,108 and $2,678,523, which may be available to reduce future years’ taxable income. These carry forwards will expire if not utilized in the next five years.

 

On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act includes a number of changes in existing tax law impacting businesses, including the transition tax, a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. ASC 740 requires companies to recognize the effect of tax law changes in the period of enactment, accordingly, the effects must be recognized on companies’ calendar year-end financial statements, even though the effective date for most provisions is January 1, 2018. As a result, we re-measured our net U.S. deferred tax assets at the 21% future tax rate. As of December 31, 2017, for estimating our foreign undistributed earnings according to the 2017 Tax Act, we estimated an aggregate deficit in “accumulated earnings and profits,” which is how foreign undistributed earnings are determined for the one-time transition tax and for U.S. income tax purposes. As a result, the one-time transition tax did not have a significant impact on the Company’s FY18 tax provision and there was no undistributed accumulated earnings and profits as of June 30, 2019.

 

The Company recorded net unrecognized tax benefits of $0.0 million as of June 30, 2019. It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.

 

Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years as the Company’s most significant tax jurisdiction. 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.

 

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 $341,024 and $363,784 in employment benefits and pension for the three months ended June 30, 2019 and 2018, respectively.

 

26

 

 

Note 17 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS

 

Amounts payable to related parties are summarized as follows:

 

    June 30,
2019
    March 31,
2019
 
Due to a director and CEO (1) :     326,778       795,179  
Total   $ 326,778     $ 795,179  

 

(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. In the three months ended June 30, 2019, the Company paid certain borrowings back to CEO.

 

The Company leases from Mr. Lei Liu a retail space; the lease expires in September 2020. Rent expenses totaled $6,785 and $4,532 for the three months ended June 30, 2019 and 2018, respectively. The amounts owed under the lease for the three months ended June 30, 2019 and 2018 were not paid to Mr. Liu as of June 30, 2019.

 

On April 28, 2018, 10% of Jiuxin Medicine was sold to Hangzhou Kangzhou Biotech Co. Ltd. for a total proceeds of approximately $75,643 (RMB507,760). Mr. Lei Liu owns 51% of Hangzhou Kangzhou Biotech Co. Ltd.

 

Note 18 – WARRANTS

 

In connection with the registered direct offering closed on July 19, 2015, the Company issued to an investor a warrant to purchase up to 600,000 shares of common stock at an exercise price of $3.10 per share. The warrant became exercisable on January 19, 2016 and will expire on January 18, 2021. In connection with the offering, the Company also issued a warrant to its placement agent of this offering, pursuant to which the agent may purchase up to 6% of the aggregate number of shares of common stock sold in the offering, i.e. 72,000 shares. Such warrant has the same terms as the warrant issued to investor in the offering.

 

The fair value of the warrants issued to purchase 672,000 shares as described above was estimated by using the binominal pricing model with the following assumptions:

 

    Common Stock
Warrants
    Common Stock
Warrants
 
    June 30,
2019  (1)
    March 31,
2019
 
             
Stock price   $ 1.10     $ 2.62  
Exercise price   $ 3.10     $ 3.10  
Annual dividend yield     0 %     0 %
Expected term (years)     1.56       1.80  
Risk-free interest rate     1.75 %     2.27 %
Expected volatility     72.47 %     67.69 %

 

(1) As of June 30, 2019, the warrants had not been exercised.

 

Upon evaluation, the warrants meet the definition of a derivative under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain circumstances. Accordingly, the fair value of the warrants was classified as a liability of $496,217 as of March 31, 2017. For the three months ended June 30, 2019 and June 30, 2018, the Company recognized a gain of $403,555 and a loss of $6,974 for the investor warrant and placement agent warrant, from the change in fair value of the warrant liability. As a result, the warrant liability is carried on the consolidated balance sheets at the fair value of $61,693 and $465,248 for the investor warrant and placement agent warrant, collectively, as of June 30, 2019 and March 31, 2019.

 

27

 

 

Note 19 – Financial Liability

 

To encourage operating team, which consists of doctors and nurses, to devote their efforts to run clinics, Linjia Medical allows them to put deposits in the clinic where doctors and nurses work, and take shares in any profit of the clinic. The principal amounts of these deposits are refundable in the event the doctors and nurses leave the clinic. In order to properly reflect Linjia Medical’s liabilities, the Company reclassified the deposit of $80,081 (RMB550,000) as financial liability as of June 30, 2019.

 

Note 20 – 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”)..

 

On April 15, 2019, we closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds of $10,000,020 from our effective shelf registration statement. In a concurrent private placement we issued to the investors unregistered warrants to purchase up to an aggregate of 3,000,006 shares of common stock at an exercise price of $3.00 per share. The placement agent receives warrants to purchase up to 240,000 shares of the common stock with an exercise price of $3.125 per share.

 

Stock warrants

 

Concurrent with the registered direct offering of common stock that closed on April 15, 2019, the Company issued to several investors in a private placement warrants to purchase up to 3,000,006 shares of common stock. 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. 240,000 shares at an exercise price of $3.125 per share. The warrant became exercisable on October 11, 2019 and will expire on April 11, 2024.

 

Upon evaluation, the warrants issued in April 2019 meet the definition of an equity under FASB ASC 815. Accordingly, the fair value of the warrants recorded as a part of additional paid-in capital.

 

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 March 30, 2018, the Company granted a total of 3,947,100 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 “Plan”). The stock awards vested on the grant date. On June 28, 2018, the compensation committee of the Company canceled 225,000 shares granted to the CEO in order to conform aggregate issuances to the 675,000 share limitation set forth in the Plan. The Tax Cuts and Jobs Act of 2017 removed the 162(m) qualified performance based compensation exemption to the $1 million cap on deductions for compensation to covered executives. Section 1.3.2 was in the Plan to permit grants under the Plan to fit within that exemption. As that exemption no longer applies for grants made in 2018 or thereafter, the Plan has been amended to remove the provisions intended to comply with that exemption, including the one in Section 1.3.2 of the Plan. All $5,328,585 of such expense has been recorded as a service compensation expense in the year ended March 31, 2018. 

 

Stock option

 

On November 18, 2014, the Company granted a total of 967,000 shares of stock options under the Plan to a group of a total of 46 grantees including directors, officers and employees. The exercise price of the stock option is $2.50. The option vests on November 18, 2017, provided that the grantees are still employed by the Company on such a date. The options will be exercisable for five years from the vesting date, or November 18, 2017 until November 17, 2022. For the three months ended June 30, 2019 and 2018, none was recorded as compensation expense. As of June 30, 2019, all compensation costs related to stock option compensation arrangements granted have been recognized.

 

28

 

 

Statutory reserves

 

Statutory reserves represent restricted retained earnings. Based on their legal formation, the Company is required to set aside 10% of its net income as reported in their statutory accounts on an annual basis to the Statutory Surplus Reserve Fund (the “Reserve Fund”). Once the total amount set aside in the Reserve Fund reaches 50% of the entity’s registered capital, further appropriations become discretionary. The Reserve Fund can be used to increase the entity’s registered capital upon approval by relevant government authorities or eliminate its future losses under PRC GAAP upon a resolution by its board of directors. The Reserve Fund is not distributable to shareholders, as cash dividends or otherwise, except in the event of liquidation.

 

Appropriations to the Reserve Fund are accounted for as a transfer from unrestricted earnings to statutory reserves. During the three months ended June 30, 2019 and 2018, 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 21 – (LOSS) PER SHARE

 

The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

The following is a reconciliation of the basic and diluted (loss) earnings per share computation:

 

    The three months ended
June 30,
 
    2019     2018  
Net (loss) attributable to controlling interest   $ (2,134,951 )   $ (696,615 )
Weighted average shares used in basic computation     32,453,269       28,936,778  
Diluted effect of stock options and warrants     -       -  
Weighted average shares used in diluted computation     32,453,269       28,936,778  
Loss per share – Basic:     -       -  
Net (loss) attributable to controlling interest   $ (0.07 )   $ (0.02 )
Loss per share – Diluted:                
Net (loss) attributable to controlling interest   $ (0.07 )   $ (0.02 )

 

For the three months ended June 30, 2019, 967,000 shares underlying employee stock options and 600,000 shares underlying outstanding purchase warrant to an investor, 72,000 shares underlying outstanding purchase warrant to an investment placement agent and a total of 3,240,006 warrants issued in S-3 financing in April 2019 were excluded from the calculation of diluted loss per share as the options were anti-dilutive.

 

Note 22 – SEGMENTS

 

The Company operates within four main reportable segments: retail drugstores, online pharmacy, drug wholesale and herb farming. The retail drugstores segment sells prescription and over-the-counter (“OTC”) medicines, TCM, dietary supplements, medical devices, and sundry items to retail customers. The online pharmacy sells OTC drugs, dietary supplements, medical devices and sundry items to customers through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s own platform all over China. The drug wholesale segment includes supplying the Company’s own retail drugstores with prescription and OTC medicines, TCM, dietary supplement, medical devices and sundry items (which sales have been eliminated as intercompany transactions), and also selling them to other drug vendors and hospitals. The Company’s herb farming segment cultivates selected herbs for sales to other drug vendors. The Company is also involved in online sales and clinic services that do not meet the quantitative thresholds for reportable segments and are included in the retail drugstores segment. The segments’ accounting policies are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before interest and income taxes not including nonrecurring gains and losses.

 

The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately because they require different operations and markets to distinct classes of customers.

 

29

 

 

The following table presents summarized information by segment of the continuing operations for the three months ended June 30, 2019.

 

    Retail drugstores     Online Pharmacy     Drug wholesale     Herb
farming
    Total  
Revenue   $ 16,734,988     $ 2,443,605       6,102,191             -       25,280,784  
Cost of goods     11,682,721       2,096,850       5,439,775       -       19,219,346  
Gross profit   $ 5,052,267     $ 346,755       662,416       -       6,061,438  
Selling expenses     4,835,666       473,380       659,505       -       5,968,551  
General and administrative expenses     1,733,704       55,123       1,062,785       -       2,851,612 *
Loss from operations   $ (1,517,103 )   $ (181,748 )     (1,059,874 )     -       (2,758,725 )
Depreciation and amortization   $ 504,463     $ -       8,486       -       512,949  
Total capital expenditures   $ 753,173     $ -               -       753,173  

 

* Includes accounts receivable allowance reversal of $558,779 and additional advance to suppliers allowance of $109,023.

 

The following table presents summarized information by segment of the continuing operations for the three months ended June 30, 2018.

 

    Retail drugstores     Online Pharmacy     Drug wholesale     Herb
farming
    Total  
Revenue   $ 15,968,341     $ 2,021,869       4,782,356             -       22,772,566  
Cost of goods     11,163,223       1,740,904       4,251,636       -       17,155,763  
Gross profit   $ 4,805,118     $ 280,965       530,720       -       5,616,803  
Selling expenses     3,477,677       401,362       747,939       -       4,626,978  
General and administrative expenses     1,301,468       187,224       65,836       -       1,554,528 *
Loss from operations   $ (25,973 )   $ (307,621 )     (283,055 )     -       (564,703 )
Depreciation and amortization   $ 130,657     $ -       5,786       -       136,443  
Total capital expenditures   $ 157,272     $ -       1,117       -       158,389  

 

* Includes accounts receivable allowance reversal of $112,386 and additional advance to suppliers allowance of $266,592.

 

30

 

 

The Company does not have long-lived assets located outside the PRC. In accordance with the enterprise-wide disclosure requirements of FASB’s accounting standard, the Company’s net revenue from external customers through its retail drugstores by main product category for the three months ended June 30, 2019 and 2018 were as follows:

 

    For the three months ended  
    June 30,  
    2019     2018  
Prescription drugs   $ 5,695,286       5,809,215  
OTC drugs     7,240,228       6,964,828  
Nutritional supplements     1,231,133       945,206  
TCM     1,104,050       1,582,568  
Sundry products     298,198       204,861  
Medical devices     1,166,093       461,663  
Total   $ 16,734,988       15,968,341  

 

The Company’s net revenue from external customers through online pharmacy by main product category is as follows:

 

    For the three months ended  
    June 30,  
    2019     2018  
Prescription drugs   $ -       -  
OTC drugs     1,024,602       775,993  
Nutritional supplements     107,194       143,096  
TCM     13,681       4,929  
Sundry products     438,736       1,037,166  
Medical devices     859,392       60,685  
Total   $ 2,443,605       2,021,869  

 

The Company’s net revenue from external customers through wholesale by main product category is as follows:

 

    For the three months ended  
    June 30,  
    2019     2018  
Prescription drugs   $ 4,880,491       3,419,536  
OTC drugs     1,074,261       1,274,919  
Nutritional supplements     21,691       25,381  
TCM     98,828       21,851  
Sundry products     5,682       4,755  
Medical devices     21,238       35,914  
Total   $ 6,102,191       4,782,356  

 

Note 23 – Subsequent Events

 

On July 26, 2019, Jiuzhou Pharmacy obtained a credit line of approximately $7,280,100 (RMB50,000,000) from Haihui Commercial Factoring (Tianjin) Co. Ltd (“Haihui Factoring”) for three years. Certain Jiuzhou Pharmacy drugstores’ sales collectibles from Hangzhou Medical Insurance Administration and Service Bureau (“HMIASB”) will be held in pledge. However, only at circumstances when the Company materially breaches the contract, Haihui Factoring will have the right to ask HMIASB to pay the collectible directly to Haihui Factoring. On August 2, 2019, Jiuzhou Pharmacy borrowed a total of $728,010 (RMB 5,000,000), which is counted in the credit line.

 

31

 

 

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, 2019 and filed with the SEC on July 1, 2019. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

 

Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See "Exchange Rates" below for information concerning the exchanges rates at which Renminbi ("RMB") were translated into U.S. Dollars (“USD” or “$”) at various pertinent dates and for pertinent periods.

 

Overview

 

We currently operate in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale of products similar to those that we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).

 

Our drugstores offer customers a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, TCM, personal and family care products, medical devices, and convenience products, including consumable, seasonal, and promotional items. Additionally, we have licensed doctors of both western medicine and TCM on site for consultation, examination and treatment of common ailments at scheduled hours. As of June 30, 2019, we had 115 pharmacies in Hangzhou city and its adjacent town Lin’an under the store brand of “Jiuzhou Grand Pharmacy” and 4 independent pharmacies controlled by Jiuzhou Pharmacy. During the three months ended June 30, 2019, we dissolved four independent pharmacies. Among the four dissolved pharmacies, two stores have merged into Jiuzhou Pharmacy and became Jiuzhou Pharmacy stores in Hangzhou. The other two stores’ licenses of government medical insurance, which qualify the stores for reimbursement from government, were transferred to two Jiuzhou Pharmacy stores in Hangzhou City.

 

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, Amazon.com and the Company’s own platform all over China. Our sales through our own platform are primarily generated by customers who use their private commercial medical insurances packages.

 

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 planted gingkgo trees but have not incurred sales in the three months ended June 30, 2019.

 

32

 

 

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..

 

Revenue recognition

 

In May 2014, the FASB issued ASU No. 2014-09, which creates Topic 606, Revenue from Contracts with Customers. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method. On April 1, 2018, we adopted the guidance in ASC 606 and all the related amendments and applied the new revenue standard to all contracts using the modified retrospective method. Based on the new standard our revenue recognition policies related to membership rewards programs will change. But the impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.

 

Impairment of definite-lived intangible assets

 

The Company evaluates the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. These long-lived assets are grouped and evaluated for impairment at the lowest level at which individual cash flows can be identified. When evaluating these long-lived assets for potential impairment, the Company first compares the carrying amount of the asset group to the asset group’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than that carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges).

 

The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns. There were no material impairment losses for definite-lived intangible assets recognized in the three months ended June 30, 2019 and 2018.

 

33

 

 

Results of Operations

 

Comparison of the three months ended June 30, 2019 and 2018

 

The following table summarizes our results of operations for the three months ended June 30, 2019 and 2018:

 

    Three months ended June 30,  
    2019     2018  
    Amount     Percentage
of total
revenue
    Amount     Percentage
of total
revenue
 
Revenue   $ 25,280,784       100.0 %   $ 22,772,566       100.0 %
Gross profit   $ 6,061,438       24.0 %   $ 5,616,803       24.7 %
Selling expenses   $ 5,968,551       23.6 %   $ 4,626,978       20.3 %
General and administrative expenses   $ 2,851,612       11.3 %   $ 1,554,528       6.8 %
Loss from operations   $ (2,758,725 )     (10.9 )%   $ (564,703 )     (2.5 )%
Interest income   $ 47,873       0.2 %   $ 47,172       0.2 %
Interest expenses   $ -       0.0 %   $ -       0.0 %
Other income, net   $ (62,485 )     (0.2 )%   $ (114,941 )     (0.5 )%
Change in fair value of derivative liability   $ 403,555       1.6 %   $ 6,974       0.0 %
Income tax expense   $ 8,388       0.0 %   $ 57,169       0.3 %
Net loss   $ (2,378,170 )     (9.4 )%   $ (696,615 )     (3.1 )%

 

Revenue

 

Due to the growth in our retail drugstores business, online pharmacy and wholesale business, revenue increased by $2,508,218 or 11.0% for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The following table breaks down the revenue for our four business segments for the three months ended June 30, 2019 and 2018:

 

Revenue by Segment

 

The following table breaks down the revenue of our four business segments for the three months ended June 30, 2019 and 2018:

 

    For the three months ended June 30,              
    2019     2018              
    Amount     % of total
  revenue
    Amount     % of total
revenue
    Variance by
amount
    % of
change
 
Revenue from retail drugstores   $ 16,734,988       66.2 %   $ 15,968,341       70.1 %   $ 766,647       4.8 %
Revenue from online sales     2,443,605       9.7 %     2,021,869       8.9 %     421,736       20.9 %
Revenue from wholesale business     6,102,191       24.1 %     4,782,356       21.0 %     1,319,835       27.6 %
Revenue from farming business     -       - %     -       - %     -       - %
Total revenue   $ 25,280,784       100.0 %   $ 22,772,566       100.0 %   $ 2,508,218       11.0 %

 

34

 

 

Retail drugstores sales, which accounted for approximately 66.2% of total revenue for the three months ended June 30, 2019, increased by $766,647, or 4.8% compared to the three months ended June 30, 2018, to $15,968,341. Same-store sales increased by approximately $773,184, or 5.0%, while new stores contributed approximately $107,889 in revenue in the three months ended June 30, 2019.

 

The increase in our retail drugstore sales is primarily due to consumer-facing benefits such as emphasis on on-site medical care, chronic disease management services, incremental DTP (Direct-to-Patient) business caused by continuous hospital medical reform, and maturing of stores opened a year ago. Convenient on-site medical support at our pharmacies has been our hallmark from the beginning of our business. Suitable medical support from our doctors has proven to be critical to our superior store sales. Linking doctor care with drug sales has become our business guidance for the future. By adding more doctor-provided services at stores, we have been able to promote our store sales. In January 2019, we had a grand opening of another flagship store in south Hangzhou. The store hosts both our drugstore and clinic and is expected to expand our business model.

 

DTP drugs are usually new medicines not sold at hospitals with low profit margin. As part of the PRC’s recent medical reform package, local governments require the revenue percentage from drug sales at public hospitals to decline. In order to achieve lower drug sales percentage out of their total revenue, the public hospitals chose to abandon sales of low-profit-margin DTP products first. As the biggest drugstore network in Hangzhou City, Jiuzhou Pharmacy had quite a few of our stores located adjacent to local hospitals. Additionally, we have actively contacted local vendors of certain DTP products that we were previously not selling and were able to sell these DTP products in our stores. By setting special counters selling DTP products at our stores, sales in our drugstores have increased.

 

Furthermore, in fiscal years 2018 and 2019, we have accelerated our expansion of new stores, which is expected to generate more retail drugstore revenues. Among the new stores, thirty stores have become qualified for municipal government insurance reimbursement after operation of a year or more. Sales reimbursed from municipal government insurance program usually account for more than 50% of our total sales at maturing stores. As these stores gained such qualifications, their sales increased quickly as compared to the previous year. Our store count is 119 at June 30, 2019 and 122 at June 30, 2018.

 

Our online pharmacy sales increased by approximately $421,736, or 20.9% for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The increase was primarily caused by an increase in sales via e-commerce platforms such as Tmall, offset slightly by the decline in sales via our official site. Popular products at reasonable prices are key to success in online business. In order to promote our sales, we focused on selection of medical equipment suitable to local customers. For example, sales of blood glucose meters and contact lens contributed significantly to our revenue in the three months ended June 30, 2019 as compared to the same period a year ago. Additionally, as more and more customers switch to online OTC drug shopping, our OTC drug sales grew too.

 

Wholesale revenue increased by $1,319,835 or 27.6% primarily as a result of our ability to resell certain products, which our retail stores made large order on, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name products, we were able to bargain for 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 increase in the wholesale volume. However, hospitals are still the dominant drug retailers in China. Local hospitals usually have strong 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 three months ended June 30, 2019 and 2018, we have not generated revenue from our farming business. We planted ginkgo and maidenhair trees during the year ended March 31, 2013, more than six years ago. A ginkgo tree may have a growth period of up to twenty-three months before it is mature enough for harvest. Usually, the longer a ginkgo tree grows the more valuable it becomes. Therefore, we have not yet harvested our ginkgo trees. We plan to continue cultivating the trees in order to maximize their market value in the future. We will continue to grow ginkgo trees in the future.

 

35

 

 

Gross Profit

 

Gross profit increased by $444,635 or 7.9% period over period primarily as a result of an increase in gross profit provided by retail pharmacy business, which increased significantly in the three months ended June 30, 2019. At the same time, gross margin decreased slightly from 24.7% to 24.0% due to lower wholesale profit margins. The average gross margins for each of our four business segments are as follows:

 

    For the three months ended
June 30,
 
    2019     2018  
Average gross margin for retail drugstores     30.2 %     30.1 %
Average gross margin for online sales     14.2 %     13.9 %
Average gross margin for wholesale business     10.9 %     11.1 %
Average gross margin for farming business     N/A       N/A  

 

Retail gross margins increased primarily because of introducing certain popular products with high profit margin, and renegotiating prices with our suppliers continuously. In order to promote our sales and profits, we specifically selected a series of popular products such as radix bupleuri, which we believe are suitable to local community. As a result, we were able to keep up with our sales profit margin. Additionally, we continuously renegotiate with our vendors and press price down to acceptable levels. For example, we explore more suppliers to search for lower prices. We also try to directly purchase from manufacturers instead of local vendors to cut off middle-man expenses. We expect to keep our profit margin at a reasonable level in the future.

 

Gross margin of online pharmacy sales slightly increased primarily due to profit margin increase in products we sold via third-party platforms, offset by slight decline in profit margin of sales via our official website, www.dada360.com. We focus on sales promotion at a reasonable profit margin instead of pursuing a high profit margin. The slight increase is primarily a payback as a result of our hard work in areas such as careful selection of suppliers, price negotiation with suppliers and more purchase rebate based on the increased sales volume. On the other side, although gross profit margin of sales via our official website decreased, the sales via our official website decreased too. As a result, the overall effect is slight. Consequently, our overall online sales profit margin increased in the three months ended June 30, 2019.

 

Wholesale gross margin decreased primarily due to various products with different profit margin we carried and sold to certain pharmaceutical vendors. Although we have attempted to market our products to major local hospitals and other pharmacies, we have not been able to make significant progress. Until we are able to obtain status as a provincial or national exclusive sale agent for certain popular drugs or have sales access to large local hospitals, we may have to maintain low profit margins in order to drive sales on our wholesale business.

 

36

 

 

Selling and Marketing Expenses

 

Selling and marketing expenses increased by $1,341,573, or 29.0%, as compared to the same period of last fiscal year, primarily due to increase in labor and rent related to our store expansions and rising local living cost. We opened over 50 stores at the end of calendar year 2017 and early in calendar year 2018.Thirty stores have become qualified for municipal government insurance reimbursement after operation of a year or more. As a result, sales of these stores have increased. In order to keep up with the sales growth, we hired additional staff or increased bonus to current stores staff. Rental cost also increased as the local real estate market is booming. Overall, such expenses as a percentage of our revenue were 23.6% and 20.3% respectively, in the three months ended June 30, 2019 and 2018.

 

General and Administrative Expenses

 

General and administrative expenses increased by $1,297,084, or 83.4%, as compared to the same period of last year. Such expenses as a percentage of revenue increased to 11.3% from 6.8% for the same period of last year Our retail business incurred additional administrative expense related to our store expansion. Additionally, Linjia Medical incurred additional administrative labor cost. The bad debt expense related to our accounts receivable increased by approximately $0.5 million due to certain aged accounts.

 

Loss from Operations

 

As a result of the above, we had loss from operations of $2,758,725 in the quarter ended June 30, 2019, as compared to loss from operations of $564,703 a year ago. Our operating margin for the three months ended June 30, 2019 and 2018 was (10.9)% and (2.5)%, respectively.

 

Income Taxes

 

Our income tax expense decreased by $48,781 period over period due to an increase in overall profit.

 

Net Loss

 

As a result of the foregoing, net loss is $2,378,170 in the three months ended June 30, 2019 as compared to a net loss of $696,615 in the three months ended June 30, 2018.

 

Accounts receivable

 

Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses. To prepare for potential loss in such accounts, we made corresponding reserves.

 

Our accounts receivable aging was as follows for the periods described below:

 

From date of invoice to customer   Retail
drugstores
    Online
Pharmacy
    Drug
wholesale
    Herb
farming
    Total
amount
 
1- 3 months   $ 5,399,360     $ 20,447     $ 414,762     $     -     $ 5,834,569  
4- 6 months     627,859       275,276       234,553       -       1,137,688  
7- 12 months     331,006       38,569       2,559,924       -       2,929,499  
Over one year     1,931,876       118,284       443,789               2,493,949  
Allowance for doubtful accounts     (2,174,317 )     (147,680 )     (1,483,633 )             (3,805,630 )
Total accounts receivable   $ 6,115,784     $ 304,896     $ 2,169,395     $ -     $ 8,590,075  

 

Accounts receivable from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health insurance programs. In the three months ended June 30, 2019, we wrote off an approximately $36,068 collectible from provincial and Hangzhou City government insurance, as such amount has been determined by the health insurance bureaus to be unqualified for reimbursement. In addition, as we gained experience in operating online pharmacy with good reputation, we have provided online operating and network technical support to an online business, which intends to run an online health products shop in Hong Kong in 2016. As a result, we recognized revenue and incurred accounts receivables. As the online business company was not able to make profit from its online shop, it has not paid off its account on time. As a result, we made additional reserve on these aged accounts.

 

37

 

 

Accounts receivable from our online pharmacy business mainly consists of collectibles from third-party platforms such as Tmall and JD.com where we sell products. Usually the third-party platforms will collect from customers ordering on their platforms and then reimburse us in times ranging from several days to a month after orders are placed.

 

Accounts receivable from our drug wholesale business and herb farming business consist of receivables from our customers such as pharmaceutical distributors. Our drug wholesale business transitioned away from focusing on sales volume beginning in the second half of fiscal 2013, and it tightened its customer credit policy and strengthened monitoring of uncollected receivables. Furthermore, the new management team expended significant efforts in clearing outstanding balances with certain customers and suppliers.

 

Subsequent to June 30, 2019 and through July 31, 2019, we collected approximately $2.9 million in receivables relating to our drugstore business, approximately $0.9 million in receivables relating to our online pharmacy business, approximately $1.5 million relating to our wholesale business, and $0 relating to our herb farming business.

 

Advances to suppliers

 

Advances to suppliers are mainly prepayments to secure certain products or services at favorable pricing. The aging of our advances to suppliers is as follows for the periods described below:

 

From date of cash prepayment to suppliers   Retail
drugstores
    Online
Pharmacy
    Drug
wholesale
    Herb
farming
    Total
amount
 
1- 3 months   $ 178,653     $      -     $ 111,762     $      -     $ 290,415  
4- 6 months     33,711       -       1,133,506       -       1,167,217  
7- 12 months     18,597       -       261,632       -       280,229  
Over one year     100,905       -       341,363       -       442,268  
Allowance for doubtful accounts     (132,188 )     -       (503,809 )     -       (635,997 )
Total advances to suppliers   $ 199,678     $ -     $ 1,344,454     $ -     $ 1,544,132  

 

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 of certain non-medical products. As a result, our retail chain had little advances to suppliers as of June 30, 2019.

 

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 past experience and any supplier-specific issues such as the discontinuation of inventory supply that have been identified. If we are having difficulty receiving products from a vendor, we take the following steps: ceasing purchasing products from the vendor, asking for return of our prepayment promptly, and if necessary, taking legal actions. If all of these steps are unsuccessful, management then determines whether or not the prepayments should be reserved or written off.  In fiscal 2019, in order to use our cash more efficiently, we accelerated the collection of deposits from quite a few suppliers, especially aged accounts. We chose to only leave deposits with critical suppliers who supply large quantities of merchandise. As a result, the outstanding advances to suppliers decreased dramatically. 

 

Liquidity and Capital Resources

 

Our cash flows for the periods indicated are as follows:

 

    For the three months ended
June 30,
 
    2019     2018  
Net cash provided by/used in operating activities   $ (8,164,764 )   $ (2,582,197 )
Net cash provided by/used in investing activities   $ (1,171,543 )   $ (257,897 )
Net cash provided by/used in financing activities   $ 8,018,325     $ (5,211,985 )

 

38

 

 

For the three months ended June 30, 2019, cash used in operating activities amounted to $(8,164,764), as compared to $(2,582,197) for the same period a year ago. The change is primarily attributable to a decrease in cash provided by accounts payable of $6,598,962, a decrease in cash provided by accounts receivable of $2,037,099, a decrease in cash provided by other current assets of $1,004,090 offset by an increase of $3,310,455 in inventories and biological assets, and an increase in cash provided by advances to suppliers of $1,017,666.

 

For the three months ended June 30, 2019, net cash used in investing activities amounted to $(1,171,543), as compared to $(257,897) provided by investing activities for the same period a year ago. The change is attributable to an increase in additions to leasehold improvements and increased intangible assets such as the Internet Clinic Diagnosis System implementation in the three months ended June 30, 2019.

 

For the three months ended June 30, 2019, net cash provided by financing activities amounted to $8,018,325, as compared to $(5,211,985) net cash used in financing activities for the same period a year ago. The increase is primarily due to proceeds of notes payable and proceeds from equity financing. On April 15, 2019, we closed a registered direct offering of 4,000,008 shares of our common stock at a price of $2.50 per share with gross proceeds of $10,000,020 from our effective shelf registration statement on Form S-3.

 

As of June 30, 2019, we had cash of approximately $8,341,167. Our total current assets as of June 30, 2019, were $50,156,769 and total current liabilities were $48,660,016, which resulted in a working capital of $1,496,753.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

The following table summarizes our contractual obligations:

 

Contractual obligations   Payments due by period  
    Total     Less than
1 year
    1-3 years     3-5 years     More than
5 years
 
Long-Term Debt Obligations   $ -       -       -       -       -  
Capital Lease Obligations     -       -       -       -       -  
Long term operating lease  liabilities     7,918,900               4,574,445       2,339,091       1,005,364  
Purchase Obligations     -       -       -       -       -  
Financial Liability     80,081       -       80,081       -       -  
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP*     61,693       61,693       -       -       -  
Total   $ 8,060,674       61,693       4,654,526       2,339,091       1,005,364  

 

* This refers to warrants to purchase shares of common stock issued to an institutional investor and a placement agent (See Note 18).

 

39

 

 

Off-balance Sheet Arrangements

 

We do not have any outstanding financial guarantees or commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Exchange Rates

 

Our subsidiaries and affiliated companies in the PRC maintain their books and records in RMB, the lawful currency of the PRC. In general, for consolidation purposes, we translate their assets and liabilities into USD using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial statements are recorded as accumulated other comprehensive income.

 

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the audited consolidated financial statements or otherwise disclosed in this report were as follows:

 

    June 30,
2019
  March 31,
2019
Balance sheet items, except for the registered and paid-up capital, as of end of period   USD1: RMB 0.1456   USD1: RMB 0.1490
         
Amounts included in the statement of Operations and statement of cash flows for the period ended   USD1: RMB 0.1466   USD1: RMB 0.1491

 

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.

 

40

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2019, 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. 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, 2019:

 

Accounting and Finance Personnel Weaknesses - As noted in Item 9A of our annual reports on Form 10-K for the preceding fiscal years, management concluded that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control deficiencies can be detected or prevented.

 

Management’s assessment of the control deficiency over accounting and finance personnel as of June 30, 2019 considered the same factors, including:

 

  the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes;
     
  how adequately we complied with U.S. GAAP on transactions; and
     
  how accurately we prepared supporting information to provide to our independent auditors on a quarterly and annual basis.

 

Based on the above factors, management concluded that the lack of timely reconciliation of booking and recording from China GAAP to US GAAP and lack of accounting staff with sufficient U.S. GAAP experiences are material weaknesses.

 

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, other than the following:

 

Remediation of Material Weakness for the quarter ended June 30, 2019

 

Subsequent to the identification of the material weakness, we have enhanced existing controls and design and implemented new controls. We have devoted significant time and attention to remediate the above material weakness. For example, we redesigned our system to retrieve data faster, so we are able to identify and reconcile the GAAP difference more efficiently. In addition, we trained our accounting staff with U.S. GAAP knowledge, so they can meet the requirement from our auditors more efficiently. These improvements to our internal control infrastructure were implemented, and were in place in connection with the preparation of our financial statements for the three months ended June 30, 2019. As such, we believe that the remediation initiative outlined above will be sufficient to remediate as the changes become operational for future years the material weakness in internal control over financial reporting as discussed.

 

41

 

 

PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS.

 

EXHIBIT INDEX

 

Exhibit
Number
  Description
31.1   Section 302 Certification by the Corporation’s Chief Executive Officer
31.2   Section 302 Certification by the Corporation’s Chief Financial Officer
32.1   Section 906 Certification by the Corporation’s Chief Executive Officer and Chief Financial Officer
101.INS   XBRL Instance Document  
101.SCH   XBRL Taxonomy Extension Schema Document  
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document  
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document  
101.LAB   XBRL Taxonomy Extension Label Linkbase Document  
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document  

 

42

 

 

SIGNATURES

 

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

 

  CHINA JO-JO DRUGSTORES, INC.
                        (Registrant)
     
Date: August 14, 2019 By: /s/ Lei Liu
   

Lei Liu

Chief Executive Officer

     
Date: August 14, 2019 By: /s/ Ming Zhao
    Ming Zhao
    Chief Financial Officer

 

 

43

 

 

China Jo Jo Drugstores (NASDAQ:CJJD)
Historical Stock Chart
From Apr 2020 to May 2020 Click Here for more China Jo Jo Drugstores Charts.
China Jo Jo Drugstores (NASDAQ:CJJD)
Historical Stock Chart
From May 2019 to May 2020 Click Here for more China Jo Jo Drugstores Charts.