Company Quick10K Filing
China Jo-Jo Drugstores
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 33 $36
10-Q 2020-02-14 Quarter: 2019-12-31
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
S-1 2019-05-23 Public Filing
10-K 2019-07-01 Annual: 2019-03-31
10-Q 2019-02-14 Quarter: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-K 2018-06-29 Annual: 2018-03-31
10-Q 2018-02-14 Quarter: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-K 2017-06-29 Annual: 2017-03-31
10-Q 2017-02-10 Quarter: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-K 2016-06-28 Annual: 2016-03-31
10-Q 2016-02-12 Quarter: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-12 Quarter: 2015-06-30
10-K 2015-06-29 Annual: 2015-03-31
10-Q 2015-02-17 Quarter: 2014-12-31
10-Q 2014-11-13 Quarter: 2014-09-30
10-Q 2014-08-12 Quarter: 2014-06-30
10-K 2014-06-27 Annual: 2014-03-31
10-Q 2014-02-19 Quarter: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-K 2013-07-01 Annual: 2013-03-31
10-Q 2013-02-14 Quarter: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-K 2012-07-02 Annual: 2012-03-31
10-Q 2012-02-14 Quarter: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-K 2011-06-29 Annual: 2011-03-31
10-Q 2011-02-14 Quarter: 2010-12-31
10-Q 2010-11-15 Quarter: 2010-09-30
10-Q 2010-08-16 Quarter: 2010-06-30
10-K 2010-06-29 Annual: 2010-03-31
10-Q 2010-02-08 Quarter: 2009-12-31
10-K 2010-04-12 Annual: 2009-07-31
8-K 2020-02-14 Earnings, Exhibits
8-K 2019-11-14 Earnings, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-07-01 Earnings, Exhibits
8-K 2019-04-22 Regulation FD, Exhibits
8-K 2019-04-15 Regulation FD, Exhibits
8-K 2019-04-11 Enter Agreement, Sale of Shares, Exhibits
8-K 2019-03-11 Shareholder Vote
8-K 2019-03-04 Regulation FD, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-11-07 Officers, Exhibits
8-K 2018-10-26 Officers, Exhibits
8-K 2018-09-04 Officers, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-06-29 Earnings, Exhibits
8-K 2018-03-30 Officers
8-K 2018-02-14 Earnings, Exhibits
CJJD 2019-12-31
Part I - Financial Information
Item 1.Financial Statements
Note 1 - Description of Business and Organization
Note 2 - Liquidity
Note 3 - Summary of Significant Accounting Policies
Note 4 - Trade Accounts Receivable
Note 5 - Other Current Assets
Note 6 - Property and Equipment
Note 7 - Advances To Suppliers
Note 8 - Inventory
Note 9 - Farmland Assets
Note 10 - Long Term Refundable Deposits, Landlords
Note 11 - Other Noncurrent Assets
Note 12 - Leases
Note 13 - Intangible Assets
Note 14 - Notes Payable
Note 15 - Loan Payable
Note 16 - Taxes
Note 17 - Employee Social Benefits
Note 18 - Related Party Transactions and Arrangements
Note 19 - Warrants
Note 20 - Financial Liability
Note 21 - Stockholder's Equity
Note 22 - Earnings (Loss) per Share
Note 23 - Segments
Note 24 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II - Other Information
Item 1Arisk Factors.
Item 6. Exhibits.
EX-31.1 f10q1219ex31-1_chinajojo.htm
EX-31.2 f10q1219ex31-2_chinajojo.htm
EX-32.1 f10q1219ex32-1_chinajojo.htm

China Jo-Jo Drugstores Earnings 2019-12-31

CJJD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
MTEX 40 67 40 166 132 -1 7 9 80% 1.3 -1%
CJJD 36 80 57 110 26 -3 -1 21 23% -20.8 -4%
OBCI 31 37 8 34 15 3 5 32 43% 7.0 8%
CYAN 18 34 18 31 12 -2 -0 25 40% -85.2 -7%
CTIB 12 36 32 51 9 -7 -4 12 18% -2.8 -21%
FFHL 7 455 258 304 42 -9 -9 -40 14% 4.5 -2%
CDXC 0 45 29 30 21 -33 -31 -10 68% 0.3 -74%
CRON
HAPP
HEXO

10-Q 1 f10q1219_chinajojo.htm QUARTERLY REPORT
 

 

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 December 31, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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.

 

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 February 13, 2020, 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 DECEMBER 31, 2019

 

    Page
PART I FINANCIAL INFORMATION  
Item 1. Financial Statements 1
  Unaudited condensed consolidated balance sheets as of December 31, 2019 and March 31, 2019 1
  Unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2019 and 2018 2
  Unaudited condensed consolidated statements of changes in stockholders’ equity for the three and nine months ended December 31, 2019 and 2018 3
  Unaudited condensed consolidated statements of cash flows for the nine months ended December 31, 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 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Item 4. Controls and Procedures 42
     
PART II OTHER INFORMATION  
Item 1A. Risk Factors 43
Item 6. Exhibits 43
Signatures 44

 

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)

 

   December 31,   March 31, 
   2019   2019 
ASSETS        
CURRENT ASSETS        
Cash  $11,858,985   $9,322,463 
Restricted cash   12,035,385    15,422,739 
Financial assets available for sale   159,946    180,928 
Notes receivable   48,768    177,278 
Trade accounts receivable   11,465,402    8,692,514 
Inventories   10,962,677    13,955,202 
Other receivables, net   5,862,408    4,438,230 
Advances to suppliers   1,393,247    1,950,252 
Other current assets   1,505,995    2,063,375 
Total current assets   55,292,813    56,202,981 
           
PROPERTY AND EQUIPMENT, net   8,097,428    8,727,358 
           
OTHER ASSETS          
Long-term investment   9,846    24,243 
Farmland assets   747,782    825,259 
Long term deposits   1,481,929    2,157,275 
Other noncurrent assets   1,134,643    1,196,197 
Operating lease right-of-use assets   15,318,428    - 
Intangible assets, net   3,715,629    3,597,323 
Total other assets   22,408,257    7,800,297 
           
Total assets  $85,798,498   $72,730,636 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable, trade   15,870,874    23,106,230 
Notes payable   21,758,227    25,951,673 
Other payables   2,590,186    3,197,221 
Other payables - related parties   375,068    795,179 
Customer deposits   1,201,464    771,942 
Taxes payable   433,026    125,859 
Accrued liabilities   793,942    1,264,182 
Long-term loan - current portion   2,302,924    - 
Current portion of operating lease liabilities   409,756    - 
Total current liabilities   45,735,467    55,212,286 
           
Long-term loan   4,773,114    - 
Long term operating lease  liabilities   12,670,694    - 
Purchase option and warrants liability   120,000    465,248 
Financial liability   71,757    81,935 
Total liabilities   63,371,032    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 December 31, 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 December 31, 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   (33,415,600)   (30,587,468)
Accumulated other comprehensive income   1,926,259    2,508,964 
Total stockholders’ equity   24,062,006    18,165,206 
Noncontrolling interests   (1,634,540)   (1,194,039)
Total equity   22,427,466    16,971,167 
Total liabilities and stockholders’ equity  $85,798,498   $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 INCOME (LOSS) 

(UNAUDITED)

 

   For the three months ended
December 31,
   For the nine months ended
December 31,
 
   2019   2018   2019   2018 
                 
REVENUES, NET  $33,363,282   $30,916,549   $86,997,845   $81,098,161 
                     
COST OF GOODS SOLD   26,079,910    23,780,763    66,959,671    62,548,471 
                     
GROSS PROFIT   7,283,372    7,135,786    20,038,174    18,549,690 
                     
SELLING EXPENSES   5,676,400    6,688,577    18,130,799    16,539,078 
GENERAL AND ADMINISTRATIVE EXPENSES   1,054,060    2,572,862    5,729,607    6,342,874 
TOTAL OPERATING EXPENSES   6,730,460    9,261,439    23,860,406    22,881,952 
                     
INCOME (LOSS) FROM OPERATIONS   552,912    (2,125,653)   (3,822,232)   (4,332,262)
                     
INTEREST INCOME   272,773    18,964    661,160    92,196 
OTHER INCOME (LOSS), NET   (302,408)   32,795    (437,118)   12,436 
                     
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES   (65,172)   (85,115)   345,248    (173,955)
                     
INCOME (LOSS) BEFORE INCOME TAXES   458,105    (2,159,009)   (3,252,942)   (4,401,585)
                     
PROVISION FOR INCOME TAXES   2,184    47,958    16,274    104,712 
                     
NET INCOME (LOSS)   455,921    (2,206,967)   (3,269,216)   (4,506,297)
                     
ADD: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST   75,861    528,736    441,084    594,796 
                     
NET INCOME (LOSS) ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.   531,782    (1,678,231)   (2,828,132)   (3,911,501)
                     
Foreign currency translation adjustments   358,868    (130,619)   (582,705)   (957,646)
                     
COMPREHENSIVE INCOME (LOSS)  $814,789   $(2,337,586)  $(3,851,921)  $(5,463,943)
                     
WEIGHTED AVERAGE NUMBER OF SHARES:                    
Basic   32,936,786    28,936,778    32,776,786    28,936,778 
Diluted   32,936,786    28,936,778    32,776,786    28,936,778 
                     
EARNINGS PER SHARES:                    
Basic  $0.02   $(0.06)  $(0.09)  $(0.14)
Diluted  $0.02   $(0.06)  $(0.09)  $(0.14)

 

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 
Stock based compensation   -    -    49,680    -    -    -    -    49,680 
Net loss   -    -    -    -    (1,587,414)   -    (15,298)   (1,602,712)
Foreign currency translation loss   -    -    -    -    -    (1,448,661)   48,872    (1,399,789)
BALANCE, September 30, 2018.   28,936,778    28,937    43,697,909    1,309,109    (31,894,456)   2,759,433    (634,932)   15,266,000 
Stock based compensation   -    -    49,680    -    -    -    -    49,680 
Net loss   -    -    -    -    (1,678,232)   -    (528,736)   (2,206,968)
Foreign currency translation loss   -    -    -    -    -    (130,619)   726,326    595,707 
BALANCE, December 31, 2018.   28,936,778    28,937    43,747,589    1,309,109    (33,572,688)   2,628,814    (437,342)   13,704,419 
                                         
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 
Net loss   -    -    -    -    (1,224,963)   -    (122,004)   (1,346,967)
Foreign currency translation loss   -    -    -    -    (3)   (536,335)   9,708    (526,630)
BALANCE, September 30, 2019.   32,936,786    32,937    54,209,301    1,309,109    (33,947,382)   1,567,391    (1,547,939)   21,623,417 
Net loss   -    -    -    -    531,782    -    (75,861)   455,921 
Foreign currency translation loss   -    -    -    -         358,868    (10,740)   348,128 
BALANCE, December 31, 2019.   32,936,786    32,937    54,209,301    1,309,109    (33,415,600)   1,926,259    (1,634,540)   22,427,466 

 

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
nine months ended
December 31,
 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(3,269,216)  $(4,506,297)
Adjustments to reconcile net income to net cash provided by operating activities:          
Bad debt direct write-off and provision   (29,038)   1,266,994 
Depreciation and amortization   1,572,925    937,268 
Stock based compensation   34,560    121,547 
Change in fair value of purchase option derivative liability   (345,248)   173,955 
Accounts receivable, trade   (2,581,208)   (4,061,698)
Notes receivable   122,175    (43,024)
Inventories and biological assets   2,484,432    1,828,232 
Other receivables   (1,353,544)   (681,667)
Advances to suppliers   (222,928)   (911,061)
Other current assets   (1,758,533)   476,909 
Long term deposit   597,084    18,548 
Other noncurrent assets   17,744    23,206 
Accounts payable, trade   (6,397,104)   (3,945,980)
Other payables and accrued liabilities   (917,398)   815,725 
Customer deposits   458,415    (2,258,202)
Taxes payable   312,192    422,665 
Net cash used in operating activities   (11,274,690)   (10,322,880)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Disposal of financial assets available for sale   14,370    87,471 
Purchase of financial assets available for sale   -    (104,577)
Acquisition of equipment   (561,677)   (5,368,240)
Increase in intangible assets   (461,013)   (29,879)
Investment in a joint venture   -    - 
Additions to leasehold improvements   (705,856)   (1,432,060)
Net cash used in investing activities   (1,714,176)   (6,847,285)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from third parties loan   7,085,406    - 
Proceeds from notes payable   36,537,832    32,903,549 
Repayment of notes payable   (39,784,592)   (24,930,903)
Increase in financial liability   (7,185)   82,167 
Proceeds from equity financing   9,273,077    7,544 
Repayment of other payables-related parties   (406,506)   (82,866)
Net cash provided by financing activities   12,698,032    7,979,491 
           
EFFECT OF EXCHANGE RATE ON CASH   (559,998)   (1,653,988)
           
DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH   (850,832)   (10,844,662)
           
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  $23,894,370   $20,607,529 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:          
Cash paid for income taxes  $17,215   $56,539 

 

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 of “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 the Company’s common stock were issued to the stockholders of Renovation in exchange for 100% of the capital stock of Renovation. The completion of the share exchange transaction resulted in a change of control. The share exchange transaction was accounted for as a reverse acquisition and recapitalization and, as a result, the consolidated financial statements of the Company (the legal acquirer) are, in substance, those of Renovation (the accounting acquirer), with the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of the share exchange transaction. Renovation has no substantive operations of its own except for its holdings of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”), Zhejiang Shouantang Medical Technology Co., Ltd. (“Shouantang Technology”), Hangzhou Jiutong Medical Technology Co., Ltd (“Jiutong Medical”), and Hangzhou Jiuyi Medical Technology Co. Ltd. (“Jiuyi Technology”), its wholly-owned subsidiaries.

 

The Company is an online and offline retailer and wholesale distributor of pharmaceutical and other healthcare products in the People’s Republic of China (“China” or the “PRC”). The Company’s offline retail business is comprised primarily of pharmacies, which are operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company that the Company controls through contractual arrangements. On March 31, 2017, Jiuxin Management established a subsidiary, Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”) to operates drugstores in Lin’an City.

 

During the nine months ended December 31, 2019, the Company dissolved eight independent pharmacies. Among the eight dissolved pharmacies, two stores have merged into Jiuzhou Pharmacy and became Jiuzhou Pharmacy stores in Hangzhou. The other six stores’ licenses of government medical insurance, which qualify the stores for government reimbursement, were transferred to six 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 specializing 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 operates two new clinics in Hangzhou as of March 31, 2019. On March 29, 2019, Jiuzhou Pharmacy formed 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. On September 10, 2015, Renovation set up Jiuyi Technology to provide additional technical support such as webpage development to our online pharmacy business. In November 2015, the technical support function was 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 nine months ended December 31, 2019.

 

5

 

 

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

 

Entity Name   Background   Ownership
Renovation   ● Incorporated in Hong Kong SAR on September 2, 2008   100%
         
Jiuxin Management   ● Established in the PRC on October 14, 2008   100%
         
    ● Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law    
         
    ● Registered capital of $14.5 million fully paid    
         
Shouantang Technology   ● Established in the PRC on July 16, 2010 by Renovation with registered capital of $20 million   100%
         
    ● Registered capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid    
         
    ● Deemed a WFOE under PRC law    
         
    ● Invests and finances the working capital of Quannuo Technology    
         
Qianhong Agriculture   ● Established in the PRC on August 10, 2010 by Jiuxin Management   100%
         
    ● Registered capital of RMB 10 million fully paid    
         
    ● Carries out herb farming business    
         
Jiuzhou Pharmacy (1)   ● Established in the PRC on September 9, 2003   VIE by contractual arrangements (2)
         
    ● Registered capital of RMB 5 million fully paid    
         
    ● Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou    
         
Jiuzhou Clinic (1)   ● Established in the PRC as a general partnership on October 10, 2003   VIE by contractual arrangements (2)
         
    ● Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s  stores    
         
Jiuzhou Service (1)   ● Established in the PRC on November 2, 2005   VIE by contractual arrangements (2)
         
    ● Registered capital of RMB 500,000 fully paid    
         
    ● Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores    
         
Jiuxin Medicine    

● Established in PRC on December 31, 2003

 

● Acquired by Jiuzhou Pharmacy in August 2011
  VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
         
    ● 10% of shares sold    
         
    ● Registered capital of RMB 10 million fully paid    
         
    ● Carries out pharmaceutical distribution services    
         
Jiutong Medical     ● Established in the PRC on December 20, 2011 by Renovation   100%
         
    ● Registered capital of $2.6 million fully paid      
         
    ● Currently has no operation    

 

6

 

 

Entity Name   Background   Ownership
Shouantang Bio   ● Established in the PRC in October, 2014 by Shouantang Technology   100%
         
    ● 100% held by Shouantang Technology    
         
    ● Registered capital of RMB 1,000,000 fully paid    
         
    ● Sells nutritional supplements under its own brand name    
         
Jiuyi Technology   ● Established in the PRC on September 10, 2015   100%
         
    ● 100% held by Renovation    
         
    ● Technical support to online pharmacy    
         
Kahamadi Bio   ● Established in the PRC in May 2016   49%
         
    ● 49% held by Shouantang Bio    
         
    ● Registered capital of RMB 10 million    
         
    ● Develop brand name for nutritional supplements    
         
Lin’An Jiuzhou   ● Established in the PRC in March 31, 2017   100%
         
    ● 100% held by Jiuxin Management    
         
    ● Registered capital of RMB 5 million    
         
    ● Explore retail pharmacy market in Lin’An City    
         
Linjia Medical  

● Established in the PRC in September 27, 2017

 

● 51% held by Jiuzhou Pharmacy
  VIE by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)
         
    ● Registered capital of RMB 20 million    
         
    ● Operates local clinics    
         
Ayi Health  

● Established in the PRC in March 29, 2019

 

● 51% held by Jiuzhou Pharmacy
  VIE by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)
         
    ● Registered capital of RMB 10 million    
         
    ● Provide technical Support for medial service    

 

(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, collectively, 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.

 

7

 

 

Note 2 – LIQUIDITY

 

Our accounts have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US 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 the PRC. Several large drugstore chains and a variety of single stores operate in Hangzhou City and Zhejiang Province. In order to increase our competitive advantages and gain more local retail pharmacy market share, during fiscal year 2018, we opened 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 December 31, 2019, we have obtained thirty-five reimbursement certificates for stores opened in fiscal 2018 and later. Historically, sales reimbursed from the government insurance agency contributed more than half of total revenue in a mature store. We are in the process of actively 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. As of December 31, 2019, approximately $3.05 million of the aforementioned bank credit line was still available for further borrowing. Additionally, Jiuzhou Pharmacy obtained a credit line of approximately $7,175,000 (RMB50,000,000) from Haihui Commercial Factoring (Tianjin) Co. Ltd. (“Haihui Commercial”) for three years beginning July 26, 2019. Any borrowing thereunder is guaranteed by a third-party guarantor company, and secured by the Company’s assets pursuant to a collateral agreement, as well as personal guarantees of some of its principal shareholders.

 

The Company has also obtained additional government insurance reimbursement certificates for its stores opened in the last two years. As the sales reimbursed from the government account for more than half of sales in a mature store, the certificates may significantly increase the sales of these stores in the next 12 months. Additionally, with the proceeds from the registered direct financing closed on April 15, 2019 and increased credit line, the Company believes it can support its operations for at least the next 12 months. 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, possible deterioration of the new coronavirus outbreak in China, including Hangzhou, where the Company is headquartered, 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.

 

8

 

 

Note 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and consolidation

 

The accompanying condensed consolidated financial statements are prepared in accordance with US GAAP. The condensed 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.

 

9

 

 

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 December 31, 2019, the fair values of our derivative instruments were carried at fair value (See Note 19). As of December 31, 2019, the fair values of our financial liability were carried at fair value (See Note 20)

 

   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   23,894,370    -   $-    23,894,370 
Financial assets available for sale   -    -    159,946    159,946 
Notes payable   -    21,758,227    -    21,758,227 
Financial liability   -    -    71,757    71,757 
Warrants liability   -    120,000   $-    120,000 
                     
Total   23,894,370    21,878,227   $231,703    46,004,300 

 

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).

 

10

 

 

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 the PRC tax authorities with 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, over-the-counter (“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 refundable after the customers leave the counter. Returns 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 losses from denial of reimbursement on certain unqualified drugs is made to the receivables from the government agency. Additionally, several onsite clinics adjacent to our pharmacies provide limited medical services. Revenue from medical services is recognized after the service has been rendered to a customer. As revenue from medical services is 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 a 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 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.

 

11

 

 

Disaggregation of Revenue

 

The following table disaggregates the Company’s revenue by major source in each segment for the three and nine months ended December 31, 2019:

 

For the three months ended December 31  2019   2018 
Retail drugstores
Prescription drugs  $7,496,469   $6,756,073 
OTC drugs   10,260,883    9,393,148 
Nutritional supplements   1,602,407    1,869,351 
TCM   1,416,126    1,342,768 
Sundry products   188,484    248,729 
Medical devices   611,597    1,257,180 
Total retail revenue  $21,575,966   $20,867,249 
Online pharmacy          
Prescription drugs  $-   $- 
OTC drugs   1,981,871    837,126 
Nutritional supplements   245,249    220,776 
TCM   42,331    28,785 
Sundry products   729,179    573,993 
Medical devices   966,393    832,526 
Total online revenue  $3,965,023   $2,493,206 
Drug wholesale          
Prescription drugs  $6,358,031   $3,933,441 
OTC drugs   1,310,927    3,341,676 
Nutritional supplements   47,736    167,069 
TCM   67,507    77,216 
Sundry products   19,789    5,949 
Medical devices   18,303    30,743 
Total wholesale revenue  $7,822,293   $7,556,094 
Total revenue  $33,363,282   $30,916,549 

 

For the nine months ended December 31  2019   2018 
Retail drugstores
Prescription drugs  $19,214,689   $17,835,700 
OTC drugs   24,964,312    24,018,263 
Nutritional supplements   4,510,514    4,750,013 
TCM   4,474,676    4,615,033 
Sundry products   777,432    799,554 
Medical devices   2,370,604    2,953,326 
Total retail revenue  $56,312,227   $54,971,889 
Online pharmacy          
Prescription drugs  $-   $- 
OTC drugs   4,133,128    2,412,057 
Nutritional supplements   488,956    575,862 
TCM   77,981    54,417 
Sundry products   1,542,372    2,128,282 
Medical devices   2,517,455    1,467,304 
Total online revenue  $8,759,892   $6,637,922 
Drug wholesale          
Prescription drugs  $18,054,557   $11,708,683 
OTC drugs   3,433,730    7,246,356 
Nutritional supplements   104,475    240,666 
TCM   247,465    156,525 
Sundry products   30,809    21,479 
Medical devices   54,690    114,641 
Total wholesale revenue  $21,925,726   $19,488,350 
Total revenue  $86,997,845   $81,098,161 

 

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.

 

12

 

 

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

 

   December 31,
2019
   March 31,
2019
 
Trade receivable(included in accounts receivable, net)  $11,465,402   $8,692,514 
Contract liabilities (included in accrued expenses)   1,634,032    1,689,099 

 

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 December 31, 2019 and March 31, 2019:

 

   December 31,
2019
   March 31,
2019
 
Cash and cash equivalents  $11,858,985   $9,322,463 
Restricted cash   12,035,385    15,422,739 
Cash, cash equivalents and restricted cash  $23,894,370   $24,745,202 

 

Accounts receivable

 

Accounts receivable represent 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.

 

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Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. Herbs that the Company cultivates are recorded at their cost, which includes direct costs such as seed selection, fertilizer, labor costs expended 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 cultivates 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 nine months ended December 31, 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.

 

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Long-term loans

 

Long-term loans from non-banking financial institutions are stated at their cost. The loan term is up to three years. The Company makes installment payments on principal and interest every month. Interest expense is paid and recorded every month. The principal amount due within a year will be classified as current portion of long-term loan.

 

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 December 31, 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 $60,781 and $259,064 for the three months ended December 31, 2019 and 2018, respectively, and $217,768 and $657,968 for the nine months ended December 31, 2019 and 2018, respectively. Such costs consist primarily of costs of print and promotional materials such as flyers to local communities.

 

15

 

 

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.

 

Generally, 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 as of 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 December 31, 2019 and at March 31, 2019 were translated at 1 RMB to 0.1435 USD and at 1 RMB to 0.1490 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the nine months ended December 31, 2019 and 2018 were at 1 RMB to 0.1437 USD and at 1 RMB to 0.1494 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 December 31, 2019 and March 31, 2019, the Company had deposits totaling $23,884,133 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 December 31, 2019, two largest vendors accounted for 45.1% of the Company’s total purchases and one vendor accounted for 24.4% of the Company’s total advances to suppliers. For the three months ended December 31, 2018, three largest vendors accounted for 70.3% of the Company’s total purchases and one vendor accounted for 32.6% of the Company’s total advances to suppliers.

 

For the nine months ended December 31, 2019, two vendors accounted for 48.7% of the Company’s total purchases and two vendors accounted for more than 10% of total advances to suppliers. For the nine months ended December 31, 2018, two vendors accounted for 46.9% of the Company’s total purchases and two vendors accounted for more than 10% of total advances to suppliers.

 

For the three months and nine months ended December 31, 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 and nine months ended December 31, 2018, no customer accounted for more than 10% of the Company’s total sales and more than 10% of total accounts receivable.

 

Leases

 

In February 2016, 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.

 

16

 

 

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 incremental borrowing rate, 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 using straight line method. A majority of the Company’s retail drugstore leases have a 3 to 10 year term. Usually within one to three months prior to the expiration date of a lease, the Company is required to notify the lessor and has a priority to continue renting the lease property if a lessor intends to lease property. The lease itself does not have restriction or covenants. If both parties agree to continue, a new lease contract with new lease terms has to been signed by both parties. Usually the rent may increase year by year based on the lease contract. Sublease is typically not allowed. Any damage, if made by the lessee, to the property and equipment within the property has to been fixed or reimbursed by the lessee. 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. The weighted average remaining lease term is 4.25 years and the weighted average discount rate is 4.19%. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the leases. See Note 12 “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 

 

17

 

 

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 our 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®. ASU No. 2017-11 has no impact 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.

 

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NOTE 4 – TRADE ACCOUNTS RECEIVABLE

 

Trade accounts receivable consisted of the following:

 

   December 31,
2019
   March 31,
2019
 
Accounts receivable  $13,856,012   $11,939,364 
Less: allowance for doubtful accounts   (2,390,700)   (3,246,850)
Trade accounts receivable, net  $11,465,402   $8,692,514 

 

For the three months ended December 31, 2019 and 2018, $47,110 and $36,077 in accounts receivable were directly written off respectively. For the nine months ended December 31, 2019 and 2018, $184,838 and $64,412 in accounts receivable were directly written off, respectively. As of December 31, 2019, $1,179,741 were pledged as collateral for borrowings from financial institutions. As of March 31, 2019, 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:

 

   December 31,
2019
   March 31,
2019
 
Rental deposits (1)  $1,304,177   $1,979,852 
Prepaid and other current assets   201,818    83,523 
Total  $1,505,995   $2,063,375 

 

(1) The balance as of December 31, 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.

 

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Note 6 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   December 31,
2019
   March 31,
2019
 
Building  $5,984,927   $6,436,297 
Leasehold improvements   9,321,200    8,944,025 
Farmland development cost   1,716,340    1,781,627 
Office equipment and furniture   5,664,322    5,470,084 
Motor vehicles   566,993    551,927 
Total   23,253,782    23,183,960 
Less: Accumulated depreciation   (12,897,207)   (12,111,409)
Impairment*   (2,259,147)   (2,345,193)
Property and equipment, net  $8,097,428   $8,727,358 

 

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

 

Depreciation expenses for property and equipment totaled $413,411 and $338,946 for the three months ended December 31, 2019 and 2018, respectively. Depreciation expenses for property and equipment totaled $1,352,400 and $770,919 for the nine months ended December 31, 2019 and 2018, respectively. There were no fixed assets impaired in the three and nine months ended December 31, 2019 and December 31, 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 December 31, 2019 and March 31, 2019, advance to suppliers consist of the following:

 

   December 31,
2019
   March 31,
2019
 
Advance to suppliers*  $2,609,083   $2,477,226 
Less: allowance for unrefundable advances   (1,215,836)   (526,974)
Advance to suppliers, net  $1,393,247   $1,950,252 

 

For the three and nine months ended December 31, 2019 and 2018, none of the advances to suppliers were written off against previous allowance for non-refundable advances, respectively.

 

Note 8 – INVENTORY

 

Inventory consisted of finished goods, valued at $10,962,677 and $13,955,202 as of December 31, 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 December 31, 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 December 31, 2019 and March 31, 2019, farmland assets are valued as follows:

 

   December 31,   March 31, 
   2019   2019 
Farmland assets  $2,208,497   $2,341,537 
Less: Impairment*   (1,460,715)   (1,516,278)
Farmland assets, net  $747,782   $825,259 

 

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

 

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Note 10 – LONG TERM REFUNDABLE DEPOSITS, LANDLORDS

 

As of December 31, 2019 and March 31, 2019, long term deposits amounted to $1,481,929 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:

 

   December 31,
2019
   March 31,
2019
 
Forest land use rights*  $1,024,851   $1,103,235 
Others   109,792    92,962 
Total  $1,134,643   $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 $12,652 and $6,812 for the three months ended December 31, 2019 and 2018, respectively. The amortization of the prepayment for the lease of forest land use right was approximately $37,957 and $20,487 for the nine months ended December 31, 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 December 31,  Amount 
2020  $26,966 
2021   26,966 
2022   26,966 
2023   26,966 
2024   26,966 
Thereafter   755,191 

 

Note 12 – Leases

 

The Company leases most of its retail stores and corporate offices under operating leases, typically with initial terms of 3 to 10 years. Usually within one to three months prior to the expiration date of a lease, the Company is required to notify the lessor and has a priority to continue renting the lease property if a lessor intends to lease property. The lease itself does not have restriction or covenants. If both parties agree to continue, a new lease contract with new lease terms has to been signed by both parties. Usually the rent may increase year by year based on the lease contract. Sublease is typically not allowed. Any damage, if made by the lessee, to the property and equipment within the property has to been fixed or reimbursed by the lessee. The Company does not have any leases entered into but which have not yet commenced. The net lease cost for the nine months ended December 31, 2019 is $4,029,285. The Company does not have finance lease according to the definition of ASU 2016-02, Leases (Topic 842). Supplemental cash flow information related to leases for the nine months ended December 30, 2019 is as follows:

 

Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows paid for operating leases  $4,846,933 
Right-of-use assets obtained in exchange for lease obligations:     
Operating leases   - 

 

21

 

 

Supplemental balance sheet information related to leases as of December 31, 2019 is as follows:

 

Operating leases:    
Operating lease right-of-use assets  $15,318,428 
      
Current portion of operating lease liabilities  $409,756 
Long-term operating lease liabilities   12,670,694 
Total operating lease liabilities  $13,080,450 
      
Weighted average remaining lease term     
Operating leases   4.00 
      
Weighted average discount rate     
Operating leases   4.19%

 

The following table summarizes the maturity of lease liabilities under operating leases as of December 31, 2019:

 

   Operating 
For the year ending December 31,  Leases 
2020  $4,680,826 
2021   3,812,529 
2022   2,782,493 
2023   1,913,469 
2024   1,135,072 
Thereafter   1,536,028 
Total lease payments (2)   15,860,417 
Less: imputed interest   (2,779,967)
Total lease liabilities  $13,080,450 

 

Note 13 – INTANGIBLE ASSETS

 

Net intangible assets consisted of the following at:

 

   December 31,
2019
   March 31,
2019
 
License (1)  $1,853,749   $1,909,700 
Software(2)   1,097,928    676,336 
Land use rights (3)   1,399,484    1,452,718 
Total intangible assets   4,351,161    4,038,754 
Less: accumulated amortization   (635,532)   (441,431)
Intangible assets, net  $3,715,629   $3,597,323 

 

Amortization expense of intangibles amounted to $107,666 and $50,342 for the three months ended December 31, 2019 and 2018, respectively, and $210,555 and $166,349 for the nine months ended December 31, 2018 and 2017, 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 December 31, 2019, the SAP system has a total value of $280,439 (RMB1,954,091). The internet Clinic Diagnosis System costs approximately $385,867 (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 $16,702 (RMB116,379) 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 land 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.

 

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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 December 31, 2019 and March 31, 2019:

 

      Origination  Maturity  December 31,   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        5,504,943 
Jiuzhou Pharmacy(1)  HUB  02/14/18  08/14/19        2,587,331 
Jiuzhou Pharmacy(1)  HUB  03/06/18  09/06/19        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  07/05/19  01/05/20   608,499      
Jiuzhou Pharmacy(1)  HUB  07/17/19  01/17/20   1,435,140      
Jiuzhou Pharmacy(1)  HUB  08/08/19  02/08/20   1,877,491      
Jiuzhou Pharmacy(1)  HUB  09/06/19  03/06/20   2,934,013      
Jiuzhou Pharmacy(1)  HUB  10/09/19  04/09/20   3,539,950      
Jiuzhou Pharmacy(1)  HUB  11/06/19  05/06/20   167,501      
Jiuzhou Pharmacy(1)  HUB  12/05/19  06/05/20   3,161,570      
Jiuzhou Pharmacy(1)  HUB  12/07/19  03/17/20   294,103      
Jiuzhou Pharmacy(1)  HUB  12/31/19  06/30/20   2,329,911      
Jiuxin Medicine(1)  HUB  12/26/19  06/26/20   1,396,325      
Jiuxin Medicine(1)  HUB  12/31/19  06/30/20   4,013,724      
Jiuzhou Pharmacy(1)  HUB         -    - 
                    
Total           $21,758,227   $25,951,673 

 

(1) As of December 31, 2019, the Company had $21,758,227 (RMB 151,610,485) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $12,037,319 (RMB 83,875,575) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $7,709,089 three-year deposit (RMB 53,716,636) 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 December 31, 2019, the Company had a credit line of approximately $12.77 million in the aggregate from HUB, and BOH. By putting up three-year deposit of $7.71million and the restricted cash of $4.33 million deposited in the banks, the total credit line was $24.81 million. As of December 31, 2019, the Company had approximately $21.76 million of bank notes payable and approximately $3.05 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.

 

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Note 15 – Loan Payable

 

On August 2, 2019 and December 11, 2019, the Company borrowed $717,570 and $6,458,130 from Haihui Commercial , respectively. After deducting processing fee and deposits which are refundable at the end of loan period, the Company received $617,084 and $5,876,885 respectively. The Company is required to pledge accounts receivable of three drugstores to Haihui Commercial. As of December 31, 2019, the remaining loan balance is $7,076,038. The Company is scheduled to make monthly repayments, among which $2,302,924 is due within a year. The Company has an option to pay off the debts earlier than the repayment schedule upon approval from Haihui Commercial.

 

Note 16 – 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 and nine months ended December 31, 2019 and 2018, the components of income tax expense consist of the following:

 

   For the three months ended   For the nine months ended 
   December 31,   December 31, 
   2019   2018   2019   2018 
Current:                
Federal   -    -    -    - 
State   -    -    -    - 
Foreign   2,184    47,958    16,274    104,712 
    2,184    47,958    16,274    104,712 
                     
Deferred:                    
Federal   -    -    -    - 
State   -    -    -    - 
Foreign   -    -    -    - 
    -    -    -    - 
Provision for income taxes   2,184    47,958    16,274    104,712 

 

The following table reconciles the U.S. statutory tax rates with the Company’s effective tax rate for the three and nine months ended December 31, 2019 and 2018:

 

   For the three months ended   For the nine months ended 
   December 31,   December 31, 
   2019   2018   2019   2018 
U.S. Statutory rates   21.0%   21.0%   21.0%   21.0%
Foreign income not recognized in the U.S.   (21.0)   (21.0)   (21.0)   (21.0)
China income taxes   25.0    25.0    25.0    25.0 
Change in valuation allowance (1)   (25.0)   (25.0)   (25.0)   (25.0)
Non-deductible expenses-permanent difference (2)   0.5    (2.2)   (0.5)   (2.4)
Effective tax rate   0.5%   (2.2)%   (0.5)%   (2.4)%

 

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

 

(2) The 0.5% and (2.2)% rate adjustments for the three months ended December 31, 2019 and 2018 and the (0.5)% and (2.4)% rate adjustments for the nine months ended December 31, 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.

 

24

 

 

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

 

   As of
December 31,
2019
   As of
March 31,
2019
 
         
Allowance   943,258    986,665 
Long-lived assets impairment   564,787    586,298 
Depreciation and Amortization   -    - 
Accrued expense   1,628,865    1,569,683 
Net operating loss carry forward   1,589,447    1,164,735 
Foreign Tax Credit Carryover   195,000    195,000 
Total deferred tax assets (liabilities):   4,921,357    4,502,381 
           
Valuation allowance   (4,921,357)   (4,502,381)
Net deferred tax assets (liabilities)   -    - 

 

The Company regularly assesses the reliability 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 December 31, 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 December 31, 2019 and March 31, 2019, the estimated net operating loss carry forwards for Hong Kong income tax purposes amounted to $2,125,465 and $1,960,933, which may be available to reduce future years’ taxable income. As of December 31, 2019 and March 31, 2019, the estimated net operating loss carry forwards for China income tax purposes amounted to $4,268,778 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 Cuts and Jobs Act (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 fiscal 2018 tax provision and there was no undistributed accumulated earnings and profits as of December 31, 2019.

 

The Company recorded net unrecognized tax benefits of $0 as of December 31, 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 17 – EMPLOYEE SOCIAL BENEFITS

 

Regulations in the PRC require the Company to contribute to a defined medical, employment injury, unemployment, birth, and 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 $364,477 and $338,083 in employment benefits and pension for the three months ended December 31, 2019 and 2018, respectively. The Company contributed $1,045,798 and $1,039,163 in employment benefits and pension for the nine months ended December 31, 2019 and 2018, respectively.

 

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Note 18 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS

 

Amounts payable to related parties are summarized as follows:

 

    December 31,
2019
    March 31,
2019
 
Due to a director and CEO (1) :     375,068       795,179  
Total   $ 375,068     $ 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 nine months ended December 31, 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 $6,572 and $16,136 for the three months ended December 31, 2019 and 2018, respectively. Rent expenses totaled $19,956 and $25,100 for the nine months ended December 31, 2019 and 2018, respectively. The amounts owed under the lease for the nine months ended December 31, 2019 and 2018 were not paid to Mr. Liu as of December 31, 2019.

 

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

 

Note 19 – 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 the 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
 
    December 31,
2019 (1)
    March 31,
2019
 
             
Stock price   $ 1.82     $ 2.62  
Exercise price   $ 3.10     $ 3.10  
Annual dividend yield     0 %     0 %
Expected term (years)     1.05       1.80  
Risk-free interest rate     1.59 %     2.27 %
Expected volatility     66.64 %     67.69 %

 

(1) As of December 31, 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 December 31, 2019 and December 31, 2018, the Company recognized a loss of $65,172 and a loss of $85,115 for the investor warrant and placement agent warrant, from the change in fair value of the warrant liability. For the nine months ended December 31, 2019 and December 31, 2018, the Company recognized a gain of $345,248 and a loss of $173,955 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 $54,828 and $465,248 for the investor warrant and placement agent warrant, collectively, as of December 31, 2019 and March 31, 2019.

 

26

 

 

Note 20 – 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 $71,757 (RMB500,000) as financial liability as of December 31, 2019.

 

Note 21 – STOCKHOLDER’S EQUITY

 

Common stock

 

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 does not 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 such stock options is $2.50. The options vested on November 18, 2017, provided that the grantees are still employed by the Company on that date. The options will be exercisable for five years from the vesting date, or from November 18, 2017 through November 17, 2022. As of November 18, 2017, the vesting date, all compensation costs related to stock option compensation arrangements granted have been recognized. For the nine months ended December 31, 2019 and 2018, no compensation costs related to stock option compensation arrangements were recorded as compensation expense.

 

27

 

 

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

 

Appropriations to the Reserve Fund are accounted for as a transfer from unrestricted earnings to statutory reserves. During the three and nine months ended December 31, 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 22 – Earnings (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 earnings (loss) per share computation:

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2019   2018   2019   2018 
Net income (loss) attributable to controlling interest  $531,782   $(1,678,231)  $(2,828,132)  $(3,911,501)
Weighted average shares used in basic computation   32,936,786    28,936,778    32,776,786    28,936,778 
Diluted effect of purchase options and warrants   -    -    -    - 
Weighted average shares used in diluted computation   32,936,786    28,936,778    32,776,786    28,936,778 
Income per share – Basic:                    
Net income (loss) attributable to controlling interest  $0.02   $(0.06)  $(0.09)  $(0.14)
Loss per share – Diluted:                    
Net income (loss) attributable to controlling interest  $0.02   $(0.06)  $(0.09)  $(0.14)

 

For the three and nine months ended December 31, 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 warrants were anti-dilutive.

 

Note 23 – 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 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 the business segments require different operations and markets to distinct classes of customers.

 

28

 

 

The following table presents summarized information by segment of the continuing operations for the three months ended December 31, 2019.

 

   Retail
drugstores
   Online
Pharmacy
   Drug
wholesale
   Herb
farming
   Total 
Revenue  $21,575,965   $3,965,023    7,822,294          -    33,363,282 
Cost of goods   15,388,580    3,639,995    7,051,335    -    26,079,910 
Gross profit  $6,187,385   $325,028    770,959    -    7,283,372 
Selling expenses   4,836,140    507,393    332,867    -    5,676,400 
General and administrative expenses   1,403,350    61,193    (410,483)   -    1,054,060*
Income (Loss) from operations  $(52,105)  $(243,558)   848,575    -    552,912 
Depreciation and amortization  $459,184   $-    36,402    -    495,586 
Total capital expenditures  $277,480   $-         -    277,480 

 

* The Company negotiated with certain customers and collected certain aged accounts receivable after making its collection efforts and reversed the allowance made on these accounts.

 

The following table presents summarized information by segment of the continuing operations for the three months ended December 31, 2018.

 

   Retail
drugstores
   Online
Pharmacy
   Drug
wholesale
   Herb
farming
   Total 
Revenue  $20,867,250   $2,493,205    7,556,094          -    30,916,549 
Cost of goods   14,903,761    2,232,994    6,644,008    -    23,780,763 
Gross profit  $5,963,489   $260,211    912,086    -    7,135,786 
Selling expenses   4,819,081    438,235    1,431,261    -    6,688,577 
General and administrative expenses   1,443,634    47,703    1,081,525    -    2,572,862 
Income(Loss) from operations  $(299,226)  $(225,727)   (1,600,700)   -    (2,125,653)
Depreciation and amortization  $449,893   $-    433    -    450,326 
Total capital expenditures  $6,415,414   $-    314    -    6,415,728 

 

The following table presents summarized information of the continuing operation by segment for the nine months ended December 31, 2019:

 

   Retail
drugstores
   Online
pharmacy
   Drug
wholesale
   Herb
farming
   Total 
Revenue  $56,312,226   $8,759,892    21,925,727          -    86,997,845 
Cost of goods   39,542,348    7,769,309    19,648,014    -    66,959,671 
Gross profit  $16,769,878   $990,583    2,277,713    -    20,038,174 
Selling expenses   15,067,432    1,442,927    1,620,440    -    18,130,799 
General and administrative expenses   4,396,589    176,792    1,156,226    -    5,729,607*
Income (Loss) from operations  $(2,694,143)  $(629,136)   (498,953)   -    (3,822,232)
Depreciation and amortization  $1,495,216   $-    67,740    -    1,562,956 
Total capital expenditures  $1,267,614   $-    -    -    1,267,614 

 

The following table presents summarized information of the continuing operation by segment for the nine months ended December 31, 2018:

 

   Retail
drugstores
   Online
pharmacy
   Drug
wholesale
   Herb
farming
   Total 
Revenue  $54,971,889   $6,637,922    19,488,350           -    81,098,161 
Cost of goods   39,344,927    5,883,301    17,320,243    -    62,548,471 
Gross profit  $15,626,962   $754,621    2,168,107    -    18,549,690 
Selling expenses   12,453,077    1,316,945    2,769,056    -    16539,078 
General and administrative expenses   4,644,077    292,544    1,406,081    -    6,342,874*
Income (Loss) from operations  $(1,470,364)  $(854,868)   (2,007,030)   -    (4,332,262)
Depreciation and amortization  $980,845   $-    7,446    -    988,291 
Total capital expenditures  $6,789,129   $-    1,437    -    6,790,566 

 

29

 

 

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 and nine months ended December 31, 2019 and 2018 were as follows:

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2019   2018   2019   2018 
Prescription drugs  $7,496,469   $6,756,073   $19,214,689   $17,835,700 
OTC drugs   10,260,883    9,393,148    24,964,312    24,018,263 
Nutritional supplements   1,602,407    1,869,351    4,510,514    4,750,013 
TCM   1,416,126    1,342,768    4,474,676    4,615,033 
Sundry products   188,484    248,729    777,432    799,554 
Medical devices   611,597    1,257,180    2,370,604    2,953,326 
Total  $21,575,966   $20,867,249   $56,312,227   $54,971,889 

 

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

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2019   2018   2019   2018 
Prescription drugs  $-   $-   $-   $- 
OTC drugs   1,981,871    837,126    4,133,128    2,412,057 
Nutritional supplements   245,249    220,776    488,956    575,862 
TCM   42,331    28,785    77,981    54,417 
Sundry products   729,179    573,993    1,542,372    2,128,282 
Medical devices   966,393    832,526    2,517,455    1,467,304 
Total  $3,965,023   $2,493,206   $8,759,892   $6,637,922 

 

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

 

   Three months ended
December 31,
   Nine months ended
December 31,
 
   2019   2018   2019   2018 
Prescription drugs  $6,358,031   $3,933,441   $18,054,557   $11,708,683 
OTC drugs   1,310,927    3,341,676    3,433,730    7,246,356 
Nutritional supplements   47,736    167,069    104,475    240,666 
TCM   67,507    77,216    247,465    156,525 
Sundry products   19,789    5,949    30,809    21,479 
Medical devices   18,303    30,743    54,690    114,641 
Total  $7,822,293   $7,556,094   $21,925,726   $19,488,350 

 

Note 24 – Subsequent Events

 

In January 2020, in order to continue expanding and strengthening its local drugstore network, the Company acquired a local drugstore chain with ten stores.

 

30

 

 

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 this report and 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 December 31, 2019, we had 114 pharmacies in Hangzhou city and its adjacent town Lin’an under the store brand of “Jiuzhou Grand Pharmacy”. During the nine months ended December 31, 2019, we dissolved eight independent pharmacies. Among the eight dissolved pharmacies, two stores have merged into Jiuzhou Pharmacy and became Jiuzhou Pharmacy stores in Hangzhou. The other six stores’ licenses of government medical insurance, which qualify the stores for reimbursement from government, were transferred to six Jiuzhou Pharmacy stores in Hangzhou City.

 

In January 2020, in order to continue expanding and strengthening our local drugstore network, we acquired a local drugstore chain with ten stores. We are currently in the process of restructuring these newly acquired stores, which will be operated under the same brand “Jiuzhou Pharmacy” at the end.

 

Since May 2010, we have been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online. Our online pharmacy sells through several third-party platforms such as Alibaba’s Tmall, JD.com, and 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 ginkgo trees but have not incurred sales in the three and nine months ended December 31, 2019.

 

Critical Accounting Policies and Estimates

 

The preparation of condensed consolidated financial statements in conformity with US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. If these estimates differ significantly from actual results, the impact to the condensed consolidated financial statements may be material. Except for the adoption of ASU 2016-02, Leases (Topic 842) as disclosed in Note 12, there have been no material changes in our critical accounting policies and estimates from those disclosed in the annual report on Form 10-K for the fiscal year ended March 31, 2019. Please refer to Part II, Item 7 of such a report for a discussion of our critical accounting policies and estimates.

 

Recent Accounting Pronouncements

 

For details of applicable new accounting standards, please, refer to Recent Accounting Pronouncements in Note 3 of our condensed consolidated financial statements in this report.

 

31

 

 

Results of Operations

  

Comparison of the three months ended December 31, 2019 and 2018

  

The following table summarizes our results of operations for the three months ended December 31, 2019 and 2018:

 

   Three months ended December 31, 
   2019    2018 
   Amount   Percentage
of total
revenue
    Amount   Percentage
of total
revenue
 
Revenue  $33,363,282    100.0%   $30,916,549    100.0%
Gross profit  $7,283,372    21.8.%   $7,135,786    23.1%
Selling expenses  $5,676,400    17.0%   $6,688,577    21.6%
General and administrative expenses  $1,054,060    3.2%   $2,572,862    8.3%
Income(Loss) from operations  $552,912    1.7%   $(2,125,653)   (6.9)%
Interest income  $272,773    0.8%   $18,964    0.1%
Interest expenses  $-    -%   $-    -%
Other income (loss), net  $(302,408)   (0.9)%   $32,795    0.1%
Change in fair value of derivative liability  $(65,172)   (0.2)%   $(85,115)   (0.3)%
Income tax expense  $2,184    0.0%   $47,958    0.2%
Net income(loss)  $455,921    1.4%   $(2,206,967)   (7.1)%

 

Revenue

  

Due to the growth in our retail drugstores and online pharmacy business, revenue increased by $2,446,733 or 7.9% for the three months ended December 31, 2019, as compared to the three months ended December 31, 2018.

  

Revenue by Segment

  

The following table breaks down the revenue of our four business segments for the three months ended December 31, 2019 and 2018:

  

   For the three months ended December 31,         
   2019   2018         
   Amount   % of total
  revenue
   Amount   % of total
revenue
   Variance by
amount
   % of
change
 
Revenue from retail drugstores  $21,575,965    64.7%  $20,867,249    67.5%  $708,716    3.4%
Revenue from online sales   3,965,023    11.9%   2,493,206    8.1%   1,471,817    59.0%
Revenue from wholesale business   7,822,294    23.4%   7,556,094    24.4%   266,200    3.5%
Revenue from farming business   -    -%   -    -%   -    -%
Total revenue  $33,363,282    100.0%  $30,916,549    100.0%  $2,446,733    7.9%

 

32

 

 

Retail drugstores sales, which accounted for approximately 64.7% of total revenue for the three months ended December 31, 2019, increased by $708,716, or 3.4% compared to the three months ended December 31, 2018, to $20,867,249. However, the RMB depreciates dramatically against USD from the three months ended December 31, 2018. Excluding exchange rate variance, the retail drugstores sales increased by approximately 5.7%. Same-store sales increased by approximately $523,299, or 2.6%. New stores contributed approximately $150,338 in revenue in the three months ended December 31, 2019.

  

The increase in our retail drugstore sales is primarily attributable to the consumer-facing benefits we provided, such as on-site medical care, chronic disease management services, incremental “Direct-to-Patient” (“DTP”) business caused by continuous hospital medical reform, and maturing of stores opened a year ago. Although our primary business focus has been selling pharmaceutical products, simple and convenient on-site medical services have proven to be our competitive advantage to attract customers. 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 with low profit margins. As part of the PRC’s recent medical reform package, local governments require decreases in revenue percentage from drug sales at public hospitals. 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 a result, the DTP drug manufacturers or vendors switched to local drugstores to explore the market. 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 approached local vendors of certain DTP products, which we have not sold at our stores in the past. 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-five 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. We closed all of our nine single stores, among which, seven of their licenses of government medical insurance were transferred to existing Jiuzhou Pharmacy stores that do not have the licenses, and two were reopened as a Jiuzhou Pharmacy stores. Additionally, we closed a store under Jiuzhou Pharmacy. As a result, our store count is 114 at December 31, 2019 and 122 at December 31, 2018.

  

Our online pharmacy sales increased by approximately $1,471,817, or 59.0% for the three months ended December 31, 2019, as compared to the three months ended December 31, 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 December 31, 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 $266,200 or 3.5% 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 December 31, 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 years 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.

 

33

 

 

Gross Profit

  

Gross profit increased by $147,586 or 2.1% 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 December 31, 2019. At the same time, gross margin decreased slightly from 23.1% to 21.8% due to lower wholesale business and online sales profit margins. The average gross margins for each of our four business segments are as follows:

  

   For the three months ended
December 31,
 
   2019   2018 
Average gross margin for retail drugstores   28.7%   28.6%
Average gross margin for online sales   8.2%   10.4%
Average gross margin for wholesale business   9.9%   12.1%
Average gross margin for farming business   N/A    N/A 

 

Retail gross margins increased primarily because we introduced certain popular products with high profit margin, and renegotiated prices with our suppliers continuously. In order to promote our sales and profits, we specifically selected a series of popular products such as radix bupleurum, 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 consistently 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 decreased primarily due to profit margin decrease in products we sold via third-party platforms and slight decline in profit margin of sales via our official website, www.dada360.com. In order to promote our sales at national events such as “Double 11” hosted by Tmall, we provided our merchandise at competitive prices. As a result, our online profit margin declined. However, as our sales increased by 59% period over period, our overall gross profit increased.

 

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.

 

34

 

 

Selling and Marketing Expenses

  

For the three months ended December 31, 2019, selling and marketing expenses decreased by $1,012,177, or 15.1%, as compared to the same period of last fiscal year, primarily because we have outsourced logistic service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd (“Astro Boy Logistic”) since April 2019. Prior to the outsourcing, we ran our own warehouse and incurred logistic service expense of approximately $0.91 million in the three months ended December 31, 2018. Excluding such an effect, selling and marketing expenses decreased by approximately $0.1 million. Overall, such expenses as a percentage of our revenue were 17.0% and 21.6%, respectively, in the three months ended December 31, 2019 and 2018.

  

General and Administrative Expenses

  

For the three months ended December 31, 2019, general and administrative expenses decreased by $1,518,802, or 59.0%, as compared to the same period of last year. Such expenses as a percentage of revenue decreased to 3.2% from 8.3% for the same period of last year. As the medical reform has been moving along in China, the central government of China promulgated a series of policies to significantly push down the prices of certain drugs covered by the National Health Insurance. Local government even deferred payments to certain clinics and drugstores on the drugs which the local government believes were sold above the government’s designated price range. The price restriction and potential payment deferral may cut the profit and affect our operating cash flow. To be safe, in the three months ended December 31, 2019, we actively negotiated with certain customers and made efforts to collect certain aged accounts receivable. As a result, we reversed bad debt allowance of $0.79 million. In comparison, we recorded additional bad debts allowance of $0.37 million in the three months ended December 31, 2018. Excluding such an effect from bad debt allowance, G&A expense increased by approximately $0.36 million period over period, which primarily reflects the additional expenses occurred in connection with the increase in the size of our management team due to expansion of our stores and online business.

  

Income (Loss) from Operations

 

As a result of the above, we had income from operations of $552,912 in the quarter ended December 31, 2019, as compared to loss from operations of $2,125,653 for the same period a year ago. Our operating margin for the three months ended December 31, 2019 was 1.7% and operating loss for the three months ended December 31, 2018 was 6.9%, respectively.

  

Income Taxes

  

Our income tax expense decreased by $45,774 period over period although the overall profit increased. This is because such profit caused by reversal of bad debts allowance is not taxable. As a result, the overall tax expenses decreased.

 

Net Income (Loss)

  

As a result of the foregoing, our net income is $455,921 in the three months ended December 31, 2019 as compared to a net loss of $2,206,967 in the three months ended December 31, 2018.

  

Comparison of nine months ended December 31, 2019 and 2018

  

The following table summarizes our results of operations for the nine months ended December 31, 2019 and 2018:

 

   Nine months ended December 31, 
   2019   2018 
   Amount   Percentage
of total
revenue
   Amount   Percentage
of total
revenue
 
Revenue  $86,997,845    100.0%   81,098,161    100.0%
Gross profit  $20,038,174    23.0%   18,549,690    22.9%
Selling expenses  $18,130,799    20.8%   16,539,078    20.4%
General and administrative expenses  $5,729,607    6.6%   6,342,874    7.8%
Loss from operations  $(3,822,232)   (4.4)%   (4,332,262)   (5.3)%
Interest income  $661,160    0.8%   92,196    0.1%
Other income (loss), net  $(437,118)   (0.5)%   12,436    0.0%
Change in fair value of derivative liability  $345,248    0.4%   (173,955)   (0.2)%
Income tax expense  $16,274    0.0%   104,712    0.1%
Net loss  $(3,269,216)   (3.8)%   (4,506,297)   (5.6)%

35

 

 

Revenue

  

Primarily due to the increase in our wholesale and online sales business, our revenue increased by $5,899,684 or 7.3% for the nine months ended December 31, 2019, as compared to the nine months ended December 31, 2018. The following table breaks down the revenue for our four business segments for the nine months ended December 31, 2019 and 2018.

  

Nine Months’ Revenue by Segment

  

The following table breaks down the revenue for our four business segments for the nine months ended December 31, 2019 and 2018:

  

   Nine months ended December 31,         
   2019   2018         
   Amount   % of total
revenue
   Amount   % of total
revenue
   Variance by
amount
   % of
change
 
Revenue from retail drugstores  $56,312,226    64.7%  $54,971,889    67.8%  $1,340,337    2.4%
Revenue from online sales   8,759,892    10.1%   6,637,922    8.2%   2,121,970    32.0%
Revenue from wholesale business   21,925,727    25.2%   19,488,350    24.0%   2,437,377    12.5%
Revenue from farming business   -    -%   -    -%   -    -%
Total revenue  $86,997,845    100.0%  $81,098,161    100.0%  $5,899,684    7.3%

 

Retail drugstores sales, which accounted for approximately 64.7% of total revenue for the nine months ended December 31, 2019, increased by $1,340,337, or 2.4% as compared to the nine months ended December 31, 2018, to $54,971,889. However, the RMB depreciates dramatically against USD from the nine months ended December 31, 2018. Excluding exchange rate variance, the retail drugstores sales increased by approximately 7.0%. Same-store sales increased by approximately $1,138,846, or 2.2%. New stores contributed approximately $413,598 in revenue in the nine months ended December 31, 2019.

 

The increase in our retail drugstore sales is primarily attributable to the consumer-facing benefits we provided, such as onsite medical care, chronic disease management, incremental DTP business caused by continuous hospital medical reform, and maturing of stores opened a year ago. Convenient onsite 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. It is our long-term goal to add more medical care into our store chain and create a new retail drugstore model. By adding more medical service at stores, we have been able to promote our store sales.

 

As the PRC medical reform goes on, more and more drug prescriptions have flowed out of hospitals. DTP drugs are usually new medicines with low profit margins. As part of such medical reform package, local governments require the revenue percentage from drug sales at public hospitals to decline year by year. In order to achieve lower drug sales percentage out of their total revenue, the public hospitals chose to abandon sales of low profit margin DTP products first. As a result, the DTP drug manufacturers or vendors switched to local drugstores to explore the market. As the biggest drugstore network in Hangzhou City, quite a few of our stores are located adjacent to local hospitals. Additionally, we have actively approached local vendors of certain DTP products, which we have not sold at our stores in the past. By opening special counters at some stores and selling more DTP products, sales in our drugstores increased.

  

Furthermore, starting in fiscal year 2018, we have accelerated our new store expansion, which is expected to generate more retail drugstore revenues in the future. In fact, 35 stores have become qualified for municipal government insurance reimbursement after operating for approximately one year. Sales reimbursed from municipal government insurance program usually account for more than 50% of our total store sales. As these stores gained the qualification, their sales increased quickly as compared to the previous year. As explained above, our store count is 114 at December 31, 2019 and 122 at December 31, 2018.

  

Our online pharmacy sales increased by approximately $2,121,970, or 32.0% for the nine months ended December 31, 2019, as compared to the nine months ended December 31, 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 the 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 nine months ended December 31, 2019 as compared to the same period a year ago. The sales via our official website were primarily made by certain pharmacy benefit management providers. Although the business with these providers declined slightly, we have signed a contract with a giant health insurance carrier to provide suitable health products to its health insurance policy holders in fiscal year 2020. We believe the close cooperation with the insurance carrier may contribute to our sales via our official website.

 

36

 

  

Wholesale revenue increased by $2,437,377 or 12.5%, primarily as a result of our ability to resell certain products, for which our retail stores made large orders, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name products, we were able to bargain lower purchase prices than the market level on these merchandises. As a result, vendors who were unable to obtain a better price than ours, turned to us for these products, causing the wholesale volume to grow. However, hospitals still act as a major source of drug retailers in China. Local hospitals usually have stronger ties with their existing suppliers and we have not been able to make significant progress in becoming a major supplier to local hospitals.

  

In the nine months ended December 31, 2019 and 2018, we have not harvested and generated revenue from our farming business. We planted ginkgo and maidenhair trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the longer it grows the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their market value in the future. During the nine months ended December 31, 2019, we have been evaluating feasibility of planting other herbs with short period of growth. We anticipate that we will continue to grow ginkgo trees and start cultivating other herbs in the future.

  

Gross Profit

 

Gross profit increased by $1,488,484 or 8.0% period over period primarily as a result of an increase in gross margin of retail drugstores. At the same time, gross margin increased from 22.9% to 23.0% due to higher retail profit margins. The average gross margins for each of our four business segments are as follows:

 

   Nine months ended
December 31,
 
   2019   2018 
Average gross margin for retail drugstores   29.8%   28.4%
Average gross margin for online sales   11.3%   11.4%
Average gross margin for wholesale business   10.4%   11.1%
Average gross margin for farming business   N/A    N/A 

 

Retail gross margins increased primarily because we introduced certain popular products with high profit margin, and renegotiated 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 consistently 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 decreased primarily due to profit margin decrease in products we sold via third-party platforms. 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, our gross profit margin of sales via our official website decreased, which is in line with the decrease in the sales via our official website. As a result, the overall effect is slight. Consequently, our overall online sales profit margin decreased in the nine months ended December 31, 2019.

  

Wholesale gross margin decreased primarily due to various products with different profit margins we carried and sold to certain pharmaceutical vendors. In the nine months ended December 31, 2019, certain prescription drugs we sold are at low profit margin. As a result, the overall profit margin is lower as compared to the same period last year. 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.

 

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Selling and Marketing Expenses

 

For the nine months ended December 31, 2019, sales and marketing expenses increased by $1,591,721 or 9.6% period over period, primarily due to increase in labor 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-five stores have become qualified for municipal government insurance reimbursement after the 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 staff in current stores. Overall, such expenses as a percentage of our revenue kept at 20.8% and 20.4% in the nine months ended December 31, 2019 and 2018, respectively.

 

General and Administrative Expenses

 

For the nine months ended December 31, 2019, general and administrative expenses decreased by $613,267 or 9.7% period over period. Such expenses as a percentage of revenue decreased to 6.6% from 7.8% for the same period a year ago. In the nine months ended December 31, 2019, we reversed bad debt allowance of $0.2 million. In comparison, we recorded additional bad debts allowance of $1.27 million for the nine months ended December 31, 2018. Excluding such an effect from bad debt allowance, G&A expense increased by approximately $0.67 million period over period, which primarily reflects the additional expenses occurred in connection with the increase in the size of our management team due to expansion of our stores and online business.

  

Loss from Operations

  

As a result of the above, we had loss from operations of $3,822,232 for the nine months ended December 31, 2019, as compared to loss from operations of $4,332,262 for the same period a year ago. Our operating loss for the nine months ended December 31, 2019 and 2018 was 4.4% and 5.3%, respectively.

  

Income Taxes

  

Our income tax expense decreased by $88,438 period over period due to overall increase in operation loss in retail profit.

  

Net Loss

  

As a result of the foregoing, our net loss decreased by $1,237,081 period over period for the nine months ended December 31, 2019.

  

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  $7,700,491   $525,559   $2,041,345   $           -   $10,267,395 
4- 6 months   461,181    408,410    64,904    -    934,495 
7- 12 months   631,781    94,449    7,213    -    733,443 
Over one year   1,742,111    153,771    24,887    -    1,920,769 
Allowance for doubtful accounts   (2,080,599)   (258,670)   (51,431)   -    (2,390,700)
Total accounts receivable  $8,454,965   $923,519   $2,086,918   $-   $11,465,402 

 

Accounts receivable from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health insurance programs. In the nine months ended December 31, 2019, we wrote off an approximately $184,838 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 used 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.

 

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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 customer orders 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 and has made progresses.

  

Subsequent to December 31, 2019 through January 31, 2020, we collected approximately $4.89 million receivables relating to our drugstore business, among which approximately $0.62 million receivables were related to our online pharmacy business, approximately $1.52 million were related to our wholesale business, and $0 was related 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  $190,791   $-   $293,818   $-   $484,609 
4- 6 months   63,179           -    183,744                -    246,923 
7- 12 months   85,171    -    1,065,700    -    1,150,871 
Over one year   110,578    -    616,101    -    726,679 
Allowance for doubtful accounts   (161,329)   -    (1,054,506)   -    (1,215,835)
Total advances to suppliers  $288,390   $-   $1,104,857   $-   $1,393,247 

 

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 December 31, 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 year 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 nine months ended
December 31,
 
   2019   2018 
Net cash used in operating activities  $(11,274,690)  $(10,322,880)
Net cash used in investing activities  $(1,714,176)  $(6,847,285)
Net cash provided by financing activities  $12,698,032   $7,979,491 

 

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For the nine months ended December 31, 2019, cash used in operating activities amounted to $11,274,690, as compared to cash used in operating activities of $10,322,880 for the same period a year ago. The change is primarily attributable to a decrease in cash provided by other payables and accrued liabilities of $1,733,123, a decrease in cash provided by accounts payable of $2,451,124, a decrease in cash provided by other current assets of $2,235,442, offset by an increase of $2,716,617 in customer deposits, an increase in cash provided by accounts receivable of $1,480,490, and an increase in cash provided by advances to suppliers of $688,133.

  

For the nine months ended December 31, 2019, net cash used in investing activities amounted to $1,714,176, as compared to $6,847,285 for the same period a year ago. The change is attributable to a decrease in additions to leasehold improvements and the acquisition of equipment in the nine months ended December 31, 2019 and 2018.

 

For the nine months ended December 31, 2019, net cash provided by financing activities amounted to $12,698,032, as compared to $7,979,491 for the same period a year ago. The increase is primarily due to the receipt of proceeds from equity financing and proceeds of loans from Haihui Commercial Factoring (Tianjin) Co., Ltd. (“Haihui Commercial”). 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. In the nine months ended December 31, 2019, we borrowed a total of approximately $7,175,700(RMB50,000,000) from Haihui Commercial, a financial institute.

 

As of December 31, 2019, we had cash of approximately $11,858,985. Our total current assets as of December 31, 2019 were $55,292,813 and total current liabilities were $45,735,467, which resulted in a working capital of $9,557,346.

 

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   -    -    -    -    - 
Operating lease liabilities   13,080,450    409,756    7,474,648    3,455,147    1,740,899 
Purchase Obligations   -    -    -    -    - 
Financial Liability   71,757    -    71,757    -    - 
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP*   120,000    120,000    -    -    - 
Total  $13,272,207    529,756    7,546,405    3,455,147    1,740,899 

 

*This refers to warrants to purchase shares of common stock issued to an institutional investor and a placement agent (See Note 19).

 

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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:

 

    December 31,
2019
  March 31,
2019
Balance sheet items, except for the registered and paid-up capital, as of end of period   USD1: RMB0.1435   USD1: RMB0.1490
         
Amounts included in the statement of Operations and statement of cash flows for the period ended   USD1: RMB0.1437   USD1: RMB0.1491

 

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.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 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 US 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 December 31, 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 US 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 US 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 December 31, 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 US 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 December 31, 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.

 

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PART II – OTHER INFORMATION

 

ITEM 1ARISK FACTORS.

 

We face risks related to health epidemics that could impact our sales and operating results.

 

Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, and other adverse public health developments, particularly in China, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or the facilities of our suppliers or customers. Any disruption or delay of our suppliers, manufacturers or customers would likely impact our sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of China and many other countries, resulting in an economic downturn that could affect demand for our products and significantly impact our operating results.

  

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  

 

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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: February 14, 2020 By:  /s/ Lei Liu                                 
   

Lei Liu

Chief Executive Officer

     
Date: February 14, 2020 By: /s/ Ming Zhao
    Ming Zhao
    Chief Financial Officer

 

 

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