CHINA
JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
5,619,051
|
|
|
$
|
15,132,640
|
|
Restricted cash
|
|
|
14,988,478
|
|
|
|
16,319,551
|
|
Financial assets available for sale
|
|
|
176,560
|
|
|
|
175,140
|
|
Notes receivable
|
|
|
296,687
|
|
|
|
279,082
|
|
Trade accounts receivable
|
|
|
10,637,316
|
|
|
|
8,322,393
|
|
Inventories
|
|
|
10,483,059
|
|
|
|
13,429,568
|
|
Other receivables, net
|
|
|
3,718,546
|
|
|
|
3,098,079
|
|
Advances to suppliers
|
|
|
3,489,010
|
|
|
|
3,447,452
|
|
Other current assets
|
|
|
1,468,188
|
|
|
|
2,116,237
|
|
Total current assets
|
|
|
50,876,895
|
|
|
|
62,320,142
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
8,427,870
|
|
|
|
2,843,640
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Long-term investment
|
|
|
34,208
|
|
|
|
40,890
|
|
Farmland assets
|
|
|
727,064
|
|
|
|
796,286
|
|
Long term deposits
|
|
|
2,266,420
|
|
|
|
2,501,968
|
|
Other noncurrent assets
|
|
|
1,121,814
|
|
|
|
1,253,352
|
|
Intangible assets, net
|
|
|
3,570,986
|
|
|
|
4,056,414
|
|
Total other assets
|
|
|
7,720,492
|
|
|
|
8,648,910
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67,025,257
|
|
|
$
|
73,812,692
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
|
19,223,835
|
|
|
|
25,259,526
|
|
Notes payable
|
|
|
25,271,064
|
|
|
|
19,180,200
|
|
Other payables
|
|
|
3,851,366
|
|
|
|
4,272,523
|
|
Other payables - related parties
|
|
|
726,219
|
|
|
|
850,342
|
|
Customer deposits
|
|
|
1,492,122
|
|
|
|
4,040,867
|
|
Taxes payable
|
|
|
745,518
|
|
|
|
366,040
|
|
Accrued liabilities
|
|
|
1,618,006
|
|
|
|
841,993
|
|
Total current liabilities
|
|
|
52,928,130
|
|
|
|
54,811,491
|
|
|
|
|
|
|
|
|
|
|
Financial liability
|
|
|
79,957
|
|
|
|
|
|
Purchase option and warrants liability
|
|
|
312,751
|
|
|
|
138,796
|
|
Total liabilities
|
|
|
53,320,838
|
|
|
|
54,950,287
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock; $0.001 par value; 250,000,000 shares authorized; 28,936,778 and 28,936,778 shares issued and outstanding as of December 31, 2018 and March 31, 2018
|
|
|
28,937
|
|
|
|
28,937
|
|
Preferred stock; $0.001 par value; 10,000,000 shares authorized; nil issued and outstanding as of December 31, 2018 and March 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
43,747,589
|
|
|
|
43,599,089
|
|
Statutory reserves
|
|
|
1,309,109
|
|
|
|
1,309,109
|
|
Accumulated deficit
|
|
|
(33,572,688
|
)
|
|
|
(29,661,190
|
)
|
Accumulated other comprehensive income
|
|
|
2,628,814
|
|
|
|
3,586,460
|
|
Total stockholders’ equity
|
|
|
14,141,761
|
|
|
|
18,862,405
|
|
Noncontrolling interests
|
|
|
(437,342
|
)
|
|
|
-
|
|
Total equity
|
|
|
13,704,419
|
|
|
|
18,862,405
|
|
Total liabilities and stockholders’ equity
|
|
$
|
67,025,257
|
|
|
$
|
73,812,692
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CHINA
JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
For the three months ended
December 31,
|
|
|
For the nine months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES, NET
|
|
$
|
30,916,549
|
|
|
$
|
26,812,242
|
|
|
$
|
81,098,161
|
|
|
$
|
71,973,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
23,780,763
|
|
|
|
21,240,629
|
|
|
|
62,548,471
|
|
|
|
56,666,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
7,135,786
|
|
|
|
5,571,613
|
|
|
|
18,549,690
|
|
|
|
15,306,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING EXPENSES
|
|
|
6,688,577
|
|
|
|
5,020,971
|
|
|
|
16,539,078
|
|
|
|
13,288,602
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
2,572,862
|
|
|
|
2,737,782
|
|
|
|
6,342,874
|
|
|
|
7,318,780
|
|
TOTAL OPERATING EXPENSES
|
|
|
9,261,439
|
|
|
|
7,758,753
|
|
|
|
22,881,952
|
|
|
|
20,607,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(2,125,653
|
)
|
|
|
(2,187,140
|
)
|
|
|
(4,332,262
|
)
|
|
|
(5,300,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
|
18,964
|
|
|
|
76,266
|
|
|
|
92,196
|
|
|
|
479,509
|
|
OTHER INCOME, NET
|
|
|
32,795
|
|
|
|
301,292
|
|
|
|
12,436
|
|
|
|
263,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES
|
|
|
(85,115
|
)
|
|
|
221,859
|
|
|
|
(173,955
|
)
|
|
|
420,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(2,159,009
|
)
|
|
|
(1,587,723
|
)
|
|
|
(4,401,585
|
)
|
|
|
(4,137,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
47,958
|
|
|
|
38,106
|
|
|
|
104,712
|
|
|
|
76,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(2,206,967
|
)
|
|
|
(1,625,829
|
)
|
|
|
(4,506,297
|
)
|
|
|
(4,213,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(130,619
|
)
|
|
|
588,543
|
|
|
|
(957,646
|
)
|
|
|
1,680,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
$
|
(2,337,586
|
)
|
|
$
|
(1,037,286
|
)
|
|
$
|
(5,463,943
|
)
|
|
$
|
(2,533,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
Diluted
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CHINA
JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,506,297
|
)
|
|
$
|
(4,213,842
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad debt direct write-off and provision
|
|
|
1,266,994
|
|
|
|
1,948,887
|
|
Depreciation and amortization
|
|
|
937,268
|
|
|
|
1,063,170
|
|
Impairment of leasehold improvement
|
|
|
-
|
|
|
|
(362,737
|
)
|
Stock based compensation
|
|
|
121,547
|
|
|
|
976,816
|
|
Change in fair value of purchase option derivative liability
|
|
|
173,955
|
|
|
|
(420,610
|
)
|
Accounts receivable, trade
|
|
|
(4,061,698
|
)
|
|
|
(4,830,933
|
)
|
Notes receivable
|
|
|
(43,024
|
)
|
|
|
79,250
|
|
Inventories and biological assets
|
|
|
1,828,232
|
)
|
|
|
(2,945,926
|
)
|
Other receivables
|
|
|
(681,667
|
)
|
|
|
(149,447
|
)
|
Advances to suppliers
|
|
|
(911,061
|
)
|
|
|
(990,309
|
)
|
Other current assets
|
|
|
476,909
|
|
|
|
562,148
|
|
Long term deposit
|
|
|
18,548
|
|
|
|
(1,345,486
|
)
|
Other noncurrent assets
|
|
|
23,206
|
|
|
|
(63,263
|
)
|
Accounts payable, trade
|
|
|
(3,945,980
|
)
|
|
|
853,598
|
|
Other payables and accrued liabilities
|
|
|
815,725
|
|
|
|
(127,969
|
)
|
Customer deposits
|
|
|
(2,258,202
|
)
|
|
|
387,458
|
|
Taxes payable
|
|
|
422,665
|
|
|
|
(222,207
|
)
|
Net cash used in operating activities
|
|
|
(10,322,880
|
)
|
|
|
(9,801,402
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Disposal of financial assets available for sale
|
|
|
87,471
|
|
|
|
-
|
|
Purchase of financial assets available for sale
|
|
|
(104,577
|
)
|
|
|
(136,074
|
)
|
Acquisition of equipment
|
|
|
(5,368,240
|
)
|
|
|
(237,108
|
)
|
Increase in construction-in-progress
|
|
|
-
|
|
|
|
(1,125,110
|
)
|
Increase intangible assets
|
|
|
(29,879
|
)
|
|
|
-
|
|
Investment in a joint venture
|
|
|
-
|
|
|
|
(9,601
|
)
|
Additions to leasehold improvements
|
|
|
(1,432,060
|
)
|
|
|
(249,097
|
)
|
Net cash used in investing activities
|
|
|
(6,847,285
|
)
|
|
|
(1,756,990
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
32,903,549
|
|
|
|
28,352,683
|
|
Repayment of notes payable
|
|
|
(24,930,903
|
)
|
|
|
(22,501,743
|
)
|
Increase in financial liability
|
|
|
82,167
|
|
|
|
-
|
|
Proceeds from equity and debt financing
|
|
|
7,544
|
|
|
|
-
|
|
Repayment of other payables-related parties
|
|
|
(82,866
|
)
|
|
|
(278,691
|
)
|
Net cash used in financing activities
|
|
|
7,979,491
|
|
|
|
5,572,249
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH
|
|
|
(1,653,988
|
)
|
|
|
2,408,839
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(10,844,662
|
)
|
|
|
(3,577,304
|
)
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year
|
|
|
31,452,191
|
|
|
|
27,795,810
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of period
|
|
$
|
20,607,529
|
|
|
$
|
24,218,506
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
56,539
|
|
|
$
|
27,856
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Note
1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China
Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19,
2006, originally under the name “Kerrisdale Mining Corporation”. On September 24, 2009, the Company changed its name
to “China Jo-Jo Drugstores, Inc.” in connection with a share exchange transaction as described below.
On
September 17, 2009, the Company completed a share exchange transaction with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”),
whereby 7,900,000 shares of common stock were issued to the stockholders of Renovation in exchange for 100% of the capital stock
of Renovation. The completion of the share exchange transaction resulted in a change of control. The share exchange transaction
was accounted for as a reverse acquisition and recapitalization and, as a result, the consolidated financial statements of the
Company (the legal acquirer) are, in substance, those of Renovation (the accounting acquirer), with the assets and liabilities,
and revenues and expenses, of the Company being included effective from the date of the share exchange transaction. Renovation
has no substantive operations of its own except for its holdings of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin
Management”), Zhejiang Shouantang Medical Technology Co., Ltd. (“Shouantang Technology”), Hangzhou Jiutong Medical
Technology Co., Ltd (“Jiutong Medical”), and Hangzhou Jiuyi Medical Technology Co. Ltd. (“Jiuyi Technology”),
its wholly-owned subsidiaries.
The
Company is an online and offline retailer and wholesale distributor of pharmaceutical and other healthcare products in the People’s
Republic of China (“China” or the “PRC”). The Company’s offline retail business is comprised primarily
of pharmacies, which are operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company
that the Company controls through contractual arrangements. On March 31, 2017, Jiuxin Management established a subsidiary, Lin’An
Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”) to operates drugstores in Lin’an City. As of December 31,
2018, Jiuzhou Pharmacy has established the following companies, each of which operates a drugstore in Hangzhou City:
Entity
Name
|
|
Date
Established
|
Hangzhou
Jiuben Pharmacy Co., Ltd (“Jiuben Pharmacy”)
|
|
April
27, 2017
|
|
|
|
Hangzhou
Jiuli Pharmacy Co., Ltd (“Jiuli Pharmacy”)
|
|
May
22, 2017
|
|
|
|
Hangzhou
Jiuxiang Pharmacy Co., Ltd (“Jiuxiang Pharmacy”)
|
|
May
26, 2017
|
|
|
|
Hangzhou
Jiuheng Pharmacy Co., Ltd (“Jiuheng Pharmacy”)
|
|
June
6, 2017
|
|
|
|
Hangzhou
Jiujiu Pharmacy Co., Ltd (“Jiujiu Pharmacy”)
|
|
June
8, 2017
|
|
|
|
Hangzhou
Jiuyi Pharmacy Co., Ltd (“Jiuyi Pharmacy”)
|
|
June
8, 2017
|
|
|
|
Hangzhou
Jiuyuan Pharmacy Co., Ltd (“Jiuyuan Pharmacy”)
|
|
July
13, 2017
|
|
|
|
Hangzhou
Jiumu Pharmacy Co., Ltd (“Jiumu Pharmacy”)
|
|
July
21, 2017
|
|
|
|
Hangzhou
Jiurui Pharmacy Co., Ltd (“Jiurui Pharmacy”)
|
|
August
4, 2017
|
|
|
|
Zhejiang
Jiuzhou Linjia Medical Investment and Management Co. Ltd (“Linjia Medical”)
|
|
September
27, 2017
|
During
the nine month period ending December 31, 2018, the Company opened two new stores. All of the new stores were without government
insurance reimbursement certificates at their openings.
The
Company’s offline retail business also includes three medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional
and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou
Service”), both of which are also controlled by the Company through contractual arrangements. On December 18, 2013, Jiuzhou
Service established, and held 51% of, Hangzhou Shouantang Health Management Co., Ltd. (“Shouantang Health”), a PRC
company licensed to sell health care products. Shouantang Health was closed in April 2015. In May 2016, Hangzhou Shouantang Bio-technology
Co., Ltd. (“Shouantang Bio”) set up and held 49% of Hangzhou Kahamadi Bio-technology Co., Ltd.(“Kahamadi Bio”),
a joint venture specialized in brand name development for nutritional supplements. In 2018, Jiuzhou Pharmacy invested a total
of $741,540 (5,100,000RMB) in and held 51% of Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd (“Linjia
Medical”), which opened nine new clinics in Hangzhou as of December 31, 2018.
The
Company currently conducts its online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online
pharmacy license. Prior to November 2015, the Company primarily conducted its online retail pharmacy business through Zhejiang
Quannuo Internet Technology Co., Ltd.. In May 2015, the Company established Zhejiang Jianshun Network Technology Co. Ltd, a joint
venture with Shanghai Jianbao Technology Co., Ltd. (“Jianshun Network”), in order to develop its online pharmaceutical
sales from large commercial medical insurance companies. On September 10, 2015, Renovation set up a new entity Jiuyi Technology
to provide additional technical support such as webpage development to our online pharmacy business. In November 2015, the Company
sold all of the equity interests of Quannou Technology to six individuals for approximately $17,121 (RMB107,074). After the sale,
its technical support function has been transferred back to Jiuzhou Pharmacy, which hosts our online pharmacy.
The
Company’s wholesale business is primarily conducted through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”),
which is licensed to distribute prescription and non-prescription pharmaceutical products throughout China. Jiuzhou Pharmacy acquired
Jiuxin Medicine on August 25, 2011. 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, which operates a cultivation project of herbal plants used for traditional Chinese
medicine (“TCM”).
The
accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
Entity
Name
|
|
Background
|
|
Ownership
|
Renovation
|
|
●
|
Incorporated
in Hong Kong SAR on September 2, 2008
|
|
100%
|
|
|
|
|
|
|
Jiuxin Management
|
|
●
|
Established
in the PRC on October 14, 2008
|
|
100%
|
|
|
|
|
|
|
|
|
●
|
Deemed a
wholly foreign owned enterprise (“WFOE”) under PRC law
|
|
|
|
|
|
|
|
|
|
|
●
|
Registered
capital of $14.5 million fully paid
|
|
|
|
|
|
|
|
|
Shouantang
Technology
|
|
●
|
Established
in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
|
|
100%
|
|
|
|
|
|
|
|
|
●
|
Registered
capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid
|
|
|
|
|
|
|
|
|
|
|
●
|
Deemed a
WFOE under PRC law
|
|
|
|
|
|
|
|
|
|
|
●
|
Invests and
finances the working capital of Quannuo Technology
|
|
|
|
|
|
|
|
|
Qianhong
Agriculture
|
|
●
|
Established
in the PRC on August 10, 2010 by Jiuxin Management
|
|
100%
|
|
|
|
|
|
|
|
|
●
|
Registered
capital of RMB 10 million fully paid
|
|
|
|
|
|
|
|
|
|
|
●
|
Carries out
herb farming business
|
|
|
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
●
|
Established
in the PRC on September 9, 2003
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
|
|
|
●
|
Registered
capital of RMB 5 million fully paid
|
|
|
|
|
|
|
|
|
|
|
●
|
Operates
the “Jiuzhou Grand Pharmacy” stores in Hangzhou
|
|
|
|
|
|
|
|
|
Jiuzhou Clinic
(1)
|
|
●
|
Established
in the PRC as a general partnership on October 10, 2003
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
|
|
|
●
|
Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
|
|
|
|
|
|
|
Jiuzhou Service
(1)
|
|
●
|
Established
in the PRC on November 2, 2005
|
|
VIE by contractual
arrangements (2)
|
|
|
|
|
|
|
|
|
●
|
Registered
capital of RMB 500,000 fully paid
|
|
|
|
|
|
|
|
|
|
|
●
|
Operates
a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
|
|
|
|
|
|
|
|
|
Jiuxin Medicine
|
|
●
●
|
Established
in PRC on December 31, 2003
Acquired
by Jiuzhou Pharmacy in August 2011
|
|
VIE by contractual
arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)
|
|
|
●
|
Registered
capital of RMB 10 million fully paid
|
|
|
|
|
|
|
|
|
|
|
●
|
Carries out
pharmaceutical distribution services
|
|
|
Entity
Name
|
|
Background
|
|
Ownership
|
Jiutong
Medical
|
|
● Established
in the PRC on December 20, 2011 by Renovation
● Registered
capital of $2.6 million fully paid
● Currently
has no operation
|
|
100%
|
|
|
|
|
|
Jiuben
Pharmacy
|
|
● Established
in the PRC on April 27, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiuli
Pharmacy
|
|
● Established
in the PRC on May 22, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiuxiang
Pharmacy
|
|
● Established
in the PRC on May 26, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiuheng
Pharmacy
|
|
● Established
in the PRC on June 6, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiujiu
Pharmacy
|
|
● Established
in the PRC on June 8, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiuyi
Pharmacy
|
|
● Established
in the PRC on June 8, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiuyuan
Pharmacy
|
|
● Established
in the PRC on July 13, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Jiumu
Pharmacy
|
|
● Established
in the PRC on July 21, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
Entity
Name
|
|
Background
|
|
Ownership
|
Jiurui
Pharmacy
|
|
● Established
in the PRC on August, 2017 by Jiuzhou Pharmacy
● Registered
capital of $15,920 fully paid
● Operates
a pharmacy in Hangzhou
|
|
VIE
by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)
|
|
|
|
|
|
Shouantang
Bio
|
|
● Established
in the PRC in October, 2014 by Shouantang Technology
● 100%
held by Shouantang Technology
● Registered
capital of RMB 1,000,000 fully paid
● Sells
nutritional supplements under its own brand name
|
|
100%
|
|
|
|
|
|
Jiuyi
Technology
|
|
● Established
in the PRC on September 10, 2015
● 100%
held by Renovation
● Technical
support to online pharmacy
|
|
100%
|
|
|
|
|
|
Kahamadi
Bio
|
|
● Established
in the PRC in May 2016
● 49%
held by Shouantang Bio
● Registered
capital of RMB 10 million
● Develop
brand name for nutritional supplements
|
|
49%
|
|
|
|
|
|
Lin’An
Jiuzhou
|
|
● Established
in the PRC on March 31, 2017
● 100%
held by Jiuxin Management
● Registered
capital of RMB 5 million
● Explore
retail pharmacy market in Lin’An City
|
|
100%
|
|
|
|
|
|
Linjia
Medical
|
|
● Established
in the PRC on September 27, 2017
● 51%
held by Jiuzhou Pharmacy
● Registered
capital of RMB 20 million
● Operates
local clinics
|
|
VIE
by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)
|
(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 of Renovation (the “Owners”) since their respective establishment dates, pursuant
to agreements among the Owners to vote their interests in concert as memorialized in a voting rights agreement. Based on such
voting agreement, the Company has determined that common control exists among these three companies. The Owners have operated
these three companies in conjunction with one another since each company’s respective establishment date. Jiuxin Medicine
is also deemed under the common control of the Owners as a subsidiary of Jiuzhou Pharmacy.
|
|
|
(2)
|
To
comply with certain foreign ownership restrictions of pharmacy and medical clinic operators, Jiuxin Management entered into
a series of contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service on August 1, 2009. These contractual
arrangements are comprised of five agreements: a consulting services agreement, operating agreement, equity pledge agreement,
voting rights agreement and option agreement. Because such agreements obligate Jiuxin Management to absorb all of the risks
of loss from the activities of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and enable the Company (through Jiuxin
Management) to receive all of their expected residual returns, the Company accounts for each of the three companies (as well
as subsidiaries of Jiuzhou Pharmacy) as a variable interest entity (“VIE”) under the accounting standards of the
Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Jiuzhou Pharmacy, Jiuzhou
Clinic and Jiuzhou Service, as well as the subsidiary under the control of Jiuzhou Pharmacy, Jiuxin Medicine and Shouantang
Bio are consolidated into the financial statements of the Company.
|
Note
2 – LIQUIDITY
Our
accounts have been prepared in accordance with U.S. GAAP on a going concern basis. The going concern basis assumes that assets
are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements.
Our ability to continue as a going concern depends upon aligning our sources of funding (debt and equity) with our expenditure
requirements and repayment of the short-term debts as and when they become due.
The
drug retail business is a highly competitive industry in PRC. Several large drugstore chains and a variety of single stores operate
in Hangzhou City and Zhejiang Province. In order to increase our competitive advantages and gain more local retail pharmacy market
share, during fiscal year 2018, we opened 57 new stores in Hangzhou. As a result, we incurred significant expenses related to
rent, hiring and training employees, and marketing activities. As the retail pharmaceutical market has become more competitive
in recent years, a new store is generally not profitable in its first year of operation. In fact, we incurred significant expense
with limited incremental revenue in the period we opened new stores.
As
of December 31, 2018, all but 43 of the new stores have not obtained government insurance reimbursement certificates. It usually
takes more than one year for a new store to apply for and obtain the local government insurance reimbursement certificate. Historically,
sales reimbursed from the government insurance agency accounts for more than half of total revenue in a mature store. We are actively
in the process of applying for certificates for all of our new stores. As more and more new stores obtain certificates, we expect
our new store revenue will 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 January 23, 2017, we completed a private placement with a single healthcare-focused institutional
investor for the purchase of an aggregate of 4,840,000 shares of our common stock at a price of $2.20 per share and received gross
proceeds of approximately $10,648,000. The Company has two credit line agreements from a local bank as displayed in detail in Note
14. Approximately $2.39 million bank credit line was still available for further borrowing as of December 31, 2018. Any borrowing
therefrom is guaranteed by a third-party guarantor company, and secured by the Company’s assets pursuant to a collateral
agreement, as well as the personal guarantees of some of its principal shareholders.
However,
in the event the banks withdraw their credit lines with us, or our existing store performance suddenly deteriorates due to unexpected
government policy changes, or our operating license is canceled as a result of violation of industry regulations, the Company
may or may not be able to 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.
Note
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and consolidation
The
accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”). The consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiaries and VIEs. All significant inter-company transactions and balances between the Company,
its subsidiaries and VIEs are eliminated upon consolidation.
Consolidation
of variable interest entities
In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial support from other parties or whose equity holders
lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting
purposes.
The
Company has concluded, based on the contractual arrangements, that Jiuzhou Pharmacy (including its subsidiaries and controlled
entities), Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly-owned subsidiary, Jiuxin Management,
absorbs a majority of the risk of loss from the activities of these companies, thereby enabling the Company, through Jiuxin Management,
to receive a majority of their respective expected residual returns.
Additionally,
as Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are under common control, the consolidated financial statements have been
prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial
statements.
Control
and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members
who hold more than 50 percent of the voting ownership interest of each entity.” Because the Owners collectively own 100%
of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and have agreed to vote their interests in concert since the establishment
of each of these three companies as memorialized in the voting rights agreement, the Company believes that the Owners collectively
have control and common control of the three companies. Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic
and Jiuzhou Service were constructively held under common control by Jiuxin Management as of the time the Contractual Agreements
were entered into, establishing Jiuxin Management as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation,
which is owned by the Company.
Risks
and Uncertainties
The
operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results
of operations may be influenced by the 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 and instead
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 may cancel these agreements or permit them
to expire at the end of the agreement terms, as a result of which the Company would not retain control of the VIEs.
Use
of estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant
estimates made in the preparation of the accompanying unaudited condensed consolidated financial statements relate to the assessment
of the carrying values of accounts receivable, advances to suppliers and related allowance for doubtful accounts, useful lives
of property and equipment, inventory reserve and fair value of its purchase option derivative liability. Because of the use of
estimates inherent in the financial reporting process, actual results could materially differ from those estimates.
Fair
value measurements
The
Company has adopted FASB ASC Topic 820, “Fair Value Measurement and Disclosure,” which defines fair value, establishes
a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new
fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify
the source of the information. It establishes a three-level valuation hierarchy of valuation techniques based on observable and
unobservable inputs, which may be used to measure fair value and include the following:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The
Company’s financial assets and liabilities, which include financial instruments as defined by FASB ASC 820, include cash
and cash equivalents, accounts receivable, accounts payable, long-term debt and derivatives. The carrying amounts of cash and
cash equivalents, financial assets available for sales, accounts receivable, notes receivables, and accounts payable are a reasonable
approximation of fair value due to the short maturities of these instruments (Level 1). The carrying amount of notes payable approximates
fair value based on borrowing rates of similar bank loan currently available to the Company (Level 2) (See Note 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). As of December 31, 2018, the fair values of our derivative instruments that were carried
at fair value (See Note 18 and 19).
|
|
Active Market
for Identical
Assets
(Level 1)
|
|
|
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Total
Carrying
Value
|
|
Cash and cash equivalents
|
|
|
5,619,051
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
5,619,051
|
|
Restricted Cash
|
|
|
14,988,478
|
|
|
|
|
|
|
|
|
|
|
|
14,988,478
|
|
Notes payable
|
|
|
-
|
|
|
|
25,271,064
|
|
|
|
-
|
|
|
|
25,271,064
|
|
Financial liability
|
|
|
|
|
|
|
|
|
|
|
79,957
|
|
|
|
79,957
|
|
Warrants liability
|
|
|
-
|
|
|
|
312,751
|
|
|
$
|
-
|
|
|
|
312,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,607,529
|
|
|
|
25,583,815
|
|
|
$
|
79,957
|
|
|
|
46,271,301
|
|
Revenue
recognition
Revenue
from sales of prescription medicine at drugstores is recognized when the prescription is filled and the customer picks up and
pays for the prescription.
Revenue
from sales of other merchandise at drugstores is recognized at the point of sale, which occurs when a customer pays for and receives
the merchandise. Usually the majority of our merchandise, such as prescription and OTC drugs, are not allowed to be returned after
the customers leave the counter. Return of other products, such as sundry products, are minimal. Sales of drugs reimbursed by
the local government medical insurance agency and receivables from the agency are recognized when a customer pays for the drugs
at a store. Based on historical experience, a reserve for potential loss from denial of reimbursement on certain unqualified drugs
is made to the receivables from the government agency.
Revenue
from medical services is recognized after the service has been rendered to a customer.
Revenue
from online pharmacy sales is recognized when merchandise is shipped to customers. While most deliveries take one day, certain
deliveries may take longer depending on a customer’s location. Any loss caused in a shipment will be reimbursed by the Company’s
courier company. Our sales policy allows for the return of certain merchandises without reason within seven days after customer’s
receipt of the applicable merchandise. A proper sales reserve is made to account for the potential loss from returns from customers.
Historically, sales returns seven days after merchandise receipts have been minimal.
Revenue
from sales of merchandise to non-retail customers is recognized when the following conditions are met: (1) persuasive evidence
of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement);
(2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received
by the customer at its designated location in accordance with the sales terms; (3) the sales price is fixed or determinable; and
(4) collectability is probable. Historically, sales returns have been minimal.
The
Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to
the sales of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying
consolidated balance sheets until it is paid to the relevant PRC tax authorities.
Restricted
cash
The
Company’s restricted cash consists of cash and long-term deposits in a bank as security for its notes payable. The Company
has notes payable outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal
restrictions. The notes payable are generally short term in nature due to their short maturity period of six to nine months; thus,
restricted cash is classified as a current asset.
Accounts
receivable
Accounts
receivable represents the following: (1) amounts due from banks relating to retail sales that are paid or settled by the customers’
debit or credit cards, (2) amounts due from government social security bureaus and commercial health insurance programs relating
to retail sales of drugs, prescription medicine, and medical services that are paid or settled by the customers’ medical
insurance cards, (3) amounts due from non-bank third party payment instruments such as Alipay and certain e-commerce platforms
and (4) amounts due from non-retail customers for sales of merchandise.
Accounts
receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts,
as necessary. In the Company’s retail business, accounts receivable mainly consist of reimbursements due from the government
insurance bureaus and commercial health insurance programs and are usually collected within two or three months. The Company directly
writes off delinquent account balances, which it determines to be uncollectible after confirming with the appropriate bureau or
program each month. Additionally, the Company also makes estimated reserves on related outstanding accounts receivable based on
historical trends.
In
the Company’s online pharmacy business, accounts receivable primarily consist of amounts due from non-bank third party payment
instruments such as Alipay and certain e-commerce platforms. To purchase pharmaceutical products from an e-commerce platforms
such as Tmall, customers are required to submit payment to certain non-bank third party payment instruments, such as Alipay, which,
in turn, reimburse the Company within seven days to a month. Except for customer returns of sold products, the receivables from
these payments instruments are rarely uncollectible.
In
its wholesale business, the Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances.
Under the aging method, bad debt percentages are determined by management, based on historical experience and the current economic
climate, are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding.
At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the aging method. When
facts subsequently become available to indicate that the allowance provided requires an adjustment, a corresponding adjustment
is made to the allowance account as a change in estimate.
Advances
to suppliers
Advances
to suppliers consist of prepayments to our vendors, such as pharmaceutical manufacturers and other distributors. Since the acquisition
of Jiuxin Medicine, we have transferred almost all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou Pharmacy
only directly purchases certain non-medical products, such as certain nutritional supplements. As a result, almost all advances
to suppliers are made by Jiuxin Medicine.
Advances
to suppliers for our drug wholesale business consist of prepayments to our vendors, such as pharmaceutical manufacturers and other
distributors. We typically receive products from vendors within three to nine months after making prepayments. We continuously
monitor delivery from, and payments to, our vendors while maintaining a provision for estimated credit losses based upon historical
experience and any specific supplier issues, such as discontinuing of inventory supply, that have been identified. If we have
difficulty receiving products from a vendor, we take the following steps: cease purchasing products from such vendor, ask for
return of our prepayment promptly, and if necessary, take legal action. If all of these steps are unsuccessful, management then
determines whether the prepayments should be reserved or written off.
Inventories
Inventories
are stated at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Market value is
the lower of replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at
each store and warehouse location. Herbs that the Company farms are recorded at their cost, which includes direct costs such as
seed selection, fertilizer, labor costs that are spent in growing herbs on the leased farmland, and indirect costs such as amortization
of farmland development cost. All costs are accumulated until the time of harvest and then allocated to harvested herbs costs
when the herbs are sold. The Company periodically reviews its inventory and records write-downs to inventories for shrinkage losses
and damaged merchandise that are identified. The Company provides a reserve for estimated inventory obsolescence or excess quantities
on hand equal to the difference, if any, between the cost of the inventory and its estimated realizable value.
Farmland
assets
Herbs
that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, and labor costs
that are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development costs.
Since April 2014, amortization of farmland development costs has been expensed instead of allocated into inventory due to unpredictable
future market value of planted gingko trees.
All
related costs described in the above are accumulated until the time of harvest and then allocated to harvested herbs when they
are sold.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold
improvements are amortized over the shorter of lease term or remaining lease period of the underlying assets. Following are the
estimated useful lives of the Company’s property and equipment:
|
|
Estimated Useful Life
|
Leasehold improvements
|
|
3-10 years
|
Motor vehicles
|
|
3-5 years
|
Office equipment & furniture
|
|
3-5 years
|
Buildings
|
|
35 years
|
Maintenance,
repairs and minor renewals are charged to expenses as incurred. Major additions and betterment to property and equipment are capitalized.
Intangible
assets
Intangible
assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost of
a group of assets acquired in a transaction is allocated to the individual assets based on their relative fair values.
The
estimated useful lives of the Company’s intangible assets are as follows:
|
|
Estimated
Useful Life
|
Land use rights
|
|
50 years
|
Software
|
|
3 years
|
The
Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might
be impaired.
Impairment
of long lived assets
The
Company evaluates long lived tangible and intangible assets for impairment, whenever events or changes in circumstances indicate
that the carrying value may not be recoverable from its estimated future cash flows. Recoverability is measured by comparing the
assets’ net book value to the related projected undiscounted cash flows from these assets, considering a number of factors
including past operating results, budgets, economic projections, market trends and product development cycles. If the net book
value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed
to measure the amount of impairment loss. There were no fixed assets and farmland assets impaired for the three and nine months
ended December 31, 2018.
Notes
payable
During
the normal course of business, the Company regularly issues bank acceptance bills as a payment method to settle outstanding accounts
payables with various material suppliers. The Company records such bank acceptance bills as notes payable. Such notes payable
are generally short term in nature due to their short maturity period of six to nine months.
Income
taxes
The
Company follows FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates,
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be realized.
The
Company has adopted FASB ASC Topic 740-10-25, which provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely
than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company performed a self-assessment and
the Company’s liability for income taxes includes liability for unrecognized tax benefits, interest and penalties which
relate to tax years still subject to review by taxing authorities. Audit periods remain open for review until the statute of limitations
has passed, which in the PRC is usually 5 years. The completion of review or the expiration of the statute of limitations for
a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could
be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results
of operations for the given period. As of September 30, 2018 and March 31, 2018, the management of the Company considered that
the Company had no additional liabilities for uncertain tax positions affecting its consolidated financial position and results
of operations or cash flows, and will continue to evaluate for any uncertain position in the future. There are no estimated interest
costs and penalties provided in the Company’s consolidated financial statements for the three months ended September 30,
2018 and 2017, respectively. The Company’s tax positions related to open tax years are subject to examination by the relevant
tax authorities, the most significant of which is the China Tax Authority.
Value
added tax
Sales
revenue represents the invoiced value of goods, net of VAT. All of the Company’s products are sold in the PRC and are subject
to a VAT on the gross sales price. Since April 2018, The VAT rates have been adjusted to range up to 16%, depending on the type
of products sold. The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of
producing or acquiring its finished products. The Company recorded a VAT payable net of payments in the accompanying financial
statements.
The
accounting standards clarify the accounting and disclosure requirements for uncertain tax positions and prescribe a recognition
threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return.
The accounting standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. No significant penalties, uncertain tax provisions or interest relating to income taxes
were incurred during the periods ended December 31, 2018 and 2017.
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 $259,064 and $197,326 for the three months ended December 31, 2018
and 2017, respectively, and $657,968 and $518 060 for the nine months ended December 31, 2018 and 2017, respectively. Such costs
consist primarily of print and promotional materials such as flyers to local communities.
Operating
leases
The
Company leases premises for retail drugstores, offices and wholesale warehouse under non-cancellable operating leases. Operating
lease payments are expensed over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 10 year
term with a renewal option upon the expiration of the lease; the wholesale warehouse lease has a 10-year term with a renewal option
upon the expiration of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the
terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease. In
addition, land leased from the government is amortized on a straight-line basis over a 30-year term.
Foreign
currency translation
The
Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The
Company’s subsidiaries and VIEs maintain their books and records in their functional currency the Renminbi (“RMB”),
the currency of the PRC.
In
general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S.
dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows
are translated at average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported
on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity
accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the subsidiaries
and VIEs are recorded as accumulated other comprehensive income.
The
balance sheet amounts, with the exception of equity, at December 31, 2018 and at March 31, 2018 were translated at 1 RMB to 0.1454
USD and at 1 RMB to 0.1592 USD, respectively. The average translation rates applied to income and cash flow statement amounts
for the nine months ended December 31, 2018 and 2017 were at 1 RMB to 0.1494 USD and at 1 RMB to 0.1512 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 insured up to RMB 500,000 (USD 75,916) per bank. As of December 31, 2018
and March 31, 2018, the Company had deposits totaling $20,593,311 and $31,433,969 that were covered by such limited insurance,
respectively. Any balance over RMB 500,000 (USD 75,916) 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, 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 three months ended December 31, 2017,
three largest vendors accounted for 31.0% of the Company’s total purchases and one vendor accounted for 13.6% of the Company’s
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 nine months ended December 31, 2017, the Company’s two
largest vendors accounted for 26.1% of the Company’s total purchases and one vendor accounted for 18.1% of the Company’s
total advances to suppliers.
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. For the three months and six months ended December 31, 2017, no customer
accounted for more than 10% of the Company’s total sales or more than 10% of total accounts receivable.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued No. 2016-02 “Leases (Topic 842): Increasing transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.”
The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years, for any of the following: 1. A public business entity; 2. A not-for-profit entity that has issued, or is a
conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market; 3. An employee
benefit plan that files financial statements with the U.S. Securities and Exchange Commission (SEC). For all other entities, the
amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early application of the amendments in this update is permitted for all entities. We
are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments,” providing financial statement users with more decision-useful information about the expected
credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this update are
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities
may adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial
statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and
Cash Payments,” addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice.
The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity
early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments
in this update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply
the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the
earliest date practicable. The impact of adoption on its Condensed Consolidated Financial Statements for any period presented
is not material.
In
July 2017, the FASB issued Accounting Standards update (“ASU”) No. 2017-11, “Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments
with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update
addresses the complexity of accounting for certain financial instruments with down round features. Part II of this update addresses
the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending
content in the FASB Accounting Standards Codification®. We are currently evaluating the impact of the adoption of ASU 2017-11
on our consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards update (“ASU”) No. 2017-04, “Intangibles—Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from
the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as
the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated
to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business
entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this ASU for its annual or any interim
goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption
of ASU 2017-04 on our consolidated financial statements.
In
February 2018, the FASB released ASU 2018-2, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income.” This standard update addresses a specific consequence of the Tax Cuts and Jobs Act (“U.S. tax reform”)
and allows a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects resulting
from U.S. tax reform. Consequently, the update eliminates the stranded tax effects that were created as a result of the historical
U.S. federal corporate income tax rate to the newly enacted U.S. federal corporate income tax rate. The Company is required to
adopt this standard in the first quarter of fiscal year 2021, with early adoption permitted. The amendments in this update should
be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is recognized.We are currently evaluating the impact of adoption on its
Condensed Consolidated Financial Statements.
Adoption
of New Revenue Recognition Standard
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09,
Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for companies to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. In March 2016, the FASB issued ASU 2016-08,“Principal Versus Agent Considerations (Reporting Revenue Gross Versus
Net),” which amends the principal versus-agent implementation guidance and in April 2016 the FASB issued ASU 2016-10, “Identifying
Performance Obligations and Licensing,” which amends the guidance in those areas in the new revenue recognition standard.
On April 1, 2018, we adopted the guidance in ASC 606 and all the related amendments and applied the new revenue standard to all
contracts using the modified retrospective method. Based on the new standard our revenue recognition policies related to membership
rewards programs will change. But the impact of the new revenue standard was not material and there was no adjustment required
to the opening balance of retained earnings. We expect the impact of the adoption of the new revenue standard to be immaterial
to our net income on an ongoing basis.
The
following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting
standard:
Pharmacy
retail sales
The
physical pharmacies sell prescription drugs, OTC drugs, traditional Chinese medicine, nutritional supplements, medical devices
and sundry products. Revenue from sales of prescription medicine at drugstores is recognized when the prescription is filled and
the customer picks up and pays for the prescription. Revenue from sales of other merchandise at drugstores is recognized at the
point of sale, which is when a customer pays for and receives the merchandise. Usually the majority of our merchandise, such as
prescription and OTC drugs, are not allowed to be returned after the customers leave the counter. Return of other products, such
as sundry products, are minimal. Sales of drugs reimbursed by the local government medical insurance agency and receivables from
the agency are recognized when a customer pays for the drugs at a store. Based on historical experience, a reserve for potential
loss from denial of reimbursement on certain unqualified drugs is made to the receivables from the government agency. Revenue
from medical services is recognized after the service has been rendered to a customer. As revenue from medical services are minimal
compared to pharmacy retail sales, it is included as part of the pharmacy retail sales.
Online
pharmacy sales
The
online pharmacy sells various health products except for prescription drugs. Revenue from online pharmacy sales is recognized
when merchandise is shipped to customers. While most deliveries take one day, certain deliveries may take longer depending on
a customer’s location. Any loss caused in a shipment will be reimbursed by the Company’s courier company. Our sales
policy allows for the return of certain merchandises without reason within seven days after customer’s receipt of the applicable
merchandise. A proper sales reserve is made to account for the potential loss from returns from customers. Historically, sales
returns seven days after merchandise receipts have been minimal.
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 following conditions are met: (1) persuasive evidence
of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement);
(2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received
by the customer at its designated location in accordance with the sales terms; (3) the sales price is fixed or determinable; and
(4) collectability is probable. Historically, sales returns have been minimal.
The
Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to
the sales of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying
consolidated balance sheets until it is paid to the relevant PRC tax authorities.
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, 2018:
Three months ended December 31
|
|
2018
|
|
|
2017
|
|
Retail drugstores
|
|
|
|
|
|
|
|
|
Prescription drugs
|
|
$
|
6,756,073
|
|
|
$
|
5,373,870
|
|
OTC drugs
|
|
|
9,393,148
|
|
|
|
9,168,708
|
|
Nutritional supplements
|
|
|
1,869,351
|
|
|
|
1,883,020
|
|
TCM
|
|
|
1,342,768
|
|
|
|
1,185,004
|
|
Sundry products
|
|
|
248,729
|
|
|
|
180,338
|
|
Medical devices
|
|
|
1,257,180
|
|
|
|
497,282
|
|
Total retail revenue
|
|
$
|
20,867,249
|
|
|
$
|
18,288,222
|
|
Online pharmacy
|
|
|
|
|
|
|
|
|
Prescription drugs
|
|
$
|
-
|
|
|
$
|
-
|
|
OTC drugs
|
|
|
837,126
|
|
|
|
1,535,383
|
|
Nutritional supplements
|
|
|
220,776
|
|
|
|
514,952
|
|
TCM
|
|
|
28,785
|
|
|
|
8,802
|
|
Sundry products
|
|
|
573,993
|
|
|
|
224,514
|
|
Medical devices
|
|
|
832,526
|
|
|
|
1,111,396
|
|
Total online revenue
|
|
$
|
2,493,206
|
|
|
$
|
3,395,047
|
|
Drug wholesale
|
|
|
|
|
|
|
|
|
Prescription drugs
|
|
$
|
3,933,441
|
|
|
$
|
2,777,566
|
|
OTC drugs
|
|
|
3,341,676
|
|
|
|
2,303,726
|
|
Nutritional supplements
|
|
|
167,069
|
|
|
|
19,123
|
|
TCM
|
|
|
77,216
|
|
|
|
20,876
|
|
Sundry products
|
|
|
5,949
|
|
|
|
-
|
|
Medical devices
|
|
|
30,743
|
|
|
|
7,682
|
|
Total wholesale revenue
|
|
$
|
7,556,094
|
|
|
$
|
5,128,973
|
|
Total revenue
|
|
$
|
30,916,549
|
|
|
$
|
26,812,242
|
|
Nine months ended December 31
|
|
2018
|
|
|
2017
|
|
Retail drugstores
|
Prescription drugs
|
|
$
|
17,835,700
|
|
|
$
|
14,860,659
|
|
OTC drugs
|
|
|
24,018,263
|
|
|
|
21,593,385
|
|
Nutritional supplements
|
|
|
4,750,013
|
|
|
|
4,558,383
|
|
TCM
|
|
|
4,615,033
|
|
|
|
3,136,203
|
|
Sundry products
|
|
|
799,554
|
|
|
|
804,817
|
|
Medical devices
|
|
|
2,953,326
|
|
|
|
1,402,760
|
|
Total retail revenue
|
|
$
|
54,971,889
|
|
|
$
|
46,356,207
|
|
Online pharmacy
|
|
|
|
|
|
|
|
|
Prescription drugs
|
|
$
|
-
|
|
|
$
|
-
|
|
OTC drugs
|
|
|
2,412,057
|
|
|
|
4,038,674
|
|
Nutritional supplements
|
|
|
575,862
|
|
|
|
1,365,834
|
|
TCM
|
|
|
54,417
|
|
|
|
18,984
|
|
Sundry products
|
|
|
2,128,282
|
|
|
|
1,065,935
|
|
Medical devices
|
|
|
1,467,304
|
|
|
|
3,106,325
|
|
Total online revenue
|
|
$
|
6,637,922
|
|
|
$
|
9,595,752
|
|
Drug wholesale
|
|
|
|
|
|
|
|
|
Prescription drugs
|
|
$
|
11,708,683
|
|
|
$
|
9,252,199
|
|
OTC drugs
|
|
|
7,246,356
|
|
|
|
6,652,879
|
|
Nutritional supplements
|
|
|
240,666
|
|
|
|
47,660
|
|
TCM
|
|
|
156,525
|
|
|
|
21,480
|
|
Sundry products
|
|
|
21,479
|
|
|
|
-
|
|
Medical devices
|
|
|
114,641
|
|
|
|
47,476
|
|
Total wholesale revenue
|
|
$
|
19,488,350
|
|
|
$
|
16,021,694
|
|
Total revenue
|
|
$
|
81,098,161
|
|
|
$
|
71,973,653
|
|
Contract
Balances
Contract
liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which
the Company has received consideration, for example membership points. The consideration received remains a contract liability
until goods or services have been provided to the retail customer.
The
following table provides information about receivables and contract liabilities from contracts with customers:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Trade receivable(included in accounts receivable, net)
|
|
$
|
10,637,316
|
|
|
$
|
8,322,393
|
|
Contract liabilities (included in accrued expenses)
|
|
|
2,196,478
|
|
|
|
4,461,136
|
|
Impact
of New Revenue Recognition Standard on Financial Statement Line Items
The
Company adopted ASU 2014-09 using the modified retrospective method. The cumulative effect of applying the new guidance to all
contracts was recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective
method to adopt the new revenue guidance, the following adjustments were made to accounts on the condensed statement of operation
for the three and nine months ended December 31, 2018:
|
|
Impact of Change in Accounting Policy
|
|
|
|
As Reported Balances
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Balance
|
|
|
|
Ended
|
|
|
|
|
|
without
|
|
In thousands
|
|
December 31,
2018
|
|
|
Adjustments
|
|
|
Adoption of
Topic 606
|
|
Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
30,916
|
|
|
|
(36
|
)
|
|
|
30,880
|
|
Cost of revenues
|
|
|
23,780
|
|
|
|
-
|
|
|
|
23,776
|
|
Gross profit
|
|
|
7,135
|
|
|
|
(36
|
)
|
|
|
7,099
|
|
SELLING EXPENSES
|
|
|
6,688
|
|
|
|
36
|
|
|
|
6,724
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
2,572
|
|
|
|
-
|
|
|
|
2,572
|
|
Operating profit
|
|
|
(2,125
|
)
|
|
|
-
|
|
|
|
(2,125
|
)
|
Income (loss) before income tax provision
|
|
|
(2,159
|
)
|
|
|
-
|
|
|
|
(2,159
|
)
|
Income tax provision
|
|
|
47
|
|
|
|
-
|
|
|
|
47
|
|
Income (loss) from continuing operations
|
|
|
(2,206
|
)
|
|
|
-
|
|
|
|
(2,206
|
)
|
Net income (loss)
|
|
|
(2,206
|
)
|
|
|
-
|
|
|
|
(2,206
|
)
|
|
|
Impact of Change in Accounting Policy
|
|
|
|
As Reported Balances
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Balance
|
|
|
|
Ended
|
|
|
|
|
|
without
|
|
In thousands
|
|
December 31,
2018
|
|
|
Adjustments
|
|
|
Adoption of
Topic 606
|
|
Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
81,098
|
|
|
|
106
|
|
|
|
81,024
|
|
Cost of revenues
|
|
|
62,548
|
|
|
|
-
|
|
|
|
62,548
|
|
Gross profit
|
|
|
18,550
|
|
|
|
106
|
|
|
|
18,656
|
|
SELLING EXPENSES
|
|
|
16,539
|
|
|
|
(106
|
)
|
|
|
16,433
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
6,342
|
|
|
|
-
|
|
|
|
6,342
|
|
Operating profit
|
|
|
(4,332
|
)
|
|
|
-
|
|
|
|
(4,332
|
)
|
Income (loss) before income tax provision
|
|
|
(4,401
|
)
|
|
|
-
|
|
|
|
(4,401
|
)
|
Income tax provision
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Income (loss) from continuing operations
|
|
|
(4,506
|
)
|
|
|
-
|
|
|
|
(4,506
|
)
|
Net income (loss)
|
|
|
(4,506
|
)
|
|
|
-
|
|
|
|
(4,506
|
)
|
The
adoption of ASU 2014-09 has no effect on consolidated balance sheet and statement of cash flow.
Adoption
of Statement of Cash Flows
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends Accounting Standard Codification
(“ASC”) Topic 230. This ASU requires entities to show the changes in the total of cash, cash equivalents,
restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash
and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a
reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also
have to disclose the nature of their restricted cash and restricted cash equivalent balances. The guidance is required to be
applied retrospectively. The Company adopted this new accounting guidance. The following represents a reconciliation of cash
and cash equivalents in the condensed consolidated balance sheet to total cash, cash equivalents and restricted cash in the
condensed consolidated statement of cash flows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2018
|
|
Cash and cash equivalents
|
|
|
5,619,051
|
|
|
|
15,132,640
|
|
Restricted cash
|
|
|
14,988,478
|
|
|
|
16,319,551
|
|
Total cash, cash equivalents and restricted cash in the statement of cash flows
|
|
|
20,607,529
|
|
|
|
31,452,191
|
|
Restricted
cash in the condensed consolidated balance sheets primarily represents deposits required by 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. All restricted cash is invested in time deposits and money markets, which are classified within Level
1 of the fair value hierarchy.
Restricted cash activity was previously reported
in “Change in restricted cash” within financing activities cash flows on the Company’s condensed consolidated
statement of cash flows. The following is a reconciliation of the effect on the relevant line items on the statement of cash flows
for the nine months ended December 31, 2017 as a result of adopting this new accounting guidance:
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Revised
|
|
Nine Months Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
-5,743,155
|
|
|
|
5,743,155
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
-170,906
|
|
|
|
5,743,155
|
|
|
|
5,572,249
|
|
Effects of exchange rate on cash
|
|
|
1,760,935
|
|
|
|
647,905
|
|
|
|
2,408,840
|
|
Net decrease in cash, cash equivalents and restricted cash
|
|
|
-9,968,364
|
|
|
|
6,391,060
|
|
|
|
-3,577,304
|
|
Cash, cash equivalents, and restricted cash at the beginning of the period
|
|
|
18,364,424
|
|
|
|
9,431,386
|
|
|
|
27,795,810
|
|
Cash, cash equivalents, and restricted cash at the end of the period
|
|
|
8,396,060
|
|
|
|
15,822,446
|
|
|
|
24,218,506
|
|
Note
4 – FINANCIAL ASSETS AVAILABLE FOR SALE
As of December 31, 2018 and March 31, 2018,
financial assets available for sale amounted to $176,560 (RMB1,214,500) and $175,140 (RMB 1,100,000), respectively. In the year
ended March 31, 2018, the Company invested a total of $159,915 as a limited partner (LP) in a private equity fund (PE fund), which
is intended to invest in retail pharmaceutical business. However, as the PE fund has not been able to use its proceeds, it agreed
to refund $85,118 (RMB585,000) as of December 31, 2018. Additionally, the Company has signed an investment agreement with Inter
Mongolia Songlu Pharmaceutical Co.(“Songlu Pharmaceutical”) and invested a total of $87,225 (RMB600,000), which accounts
for 0.5% shares of Songlu Pharmaceutical. The Company has also invested in a mutual fund a total of $14,538 (RMB100,000), which
can be liquidated by giving notice.
Note
5 – TRADE ACCOUNTS RECEIVABLE
Trade
accounts receivable consisted of the following:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Accounts receivable
|
|
$
|
15,489,718
|
|
|
$
|
12,883,707
|
|
Less: allowance for doubtful accounts
|
|
|
(4,852,402
|
)
|
|
|
(4,561,314
|
)
|
Trade accounts receivable, net
|
|
$
|
10,637,316
|
|
|
$
|
8,322,393
|
|
For
the three months ended December 31, 2018 and 2017, $36,077 and $33,738 in accounts receivable were directly written off respectively.
For the nine months ended December 31, 2018 and 2017, $64,412 and $158,721 in accounts receivable were directly written off, respectively.
As of December 31, 2018 and March 31, 2018, no trade accounts receivables were pledged as collateral for borrowings from financial
institutions.
Note
6 – OTHER CURRENT ASSETS
Other
current assets consisted of the following:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Prepaid rental expenses
(1)
|
|
$
|
1,285,752
|
|
|
$
|
1,984,856
|
|
Prepaid and other current assets
|
|
|
182,436
|
|
|
|
131,381
|
|
Total
|
|
$
|
1,468,188
|
|
|
$
|
2,116,237
|
|
(1)
|
Represents
store and office rental expenses that were usually prepaid and amortized over the prepayment period.
|
Note
7 – PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Building*
|
|
$
|
6,280,935
|
|
|
$
|
1,707,145
|
|
Leasehold improvements
|
|
|
8,338,779
|
|
|
|
7,606,496
|
|
Farmland development cost
|
|
|
1,738,621
|
|
|
|
1,904,151
|
|
Office equipment and furniture
|
|
|
5,252,629
|
|
|
|
5,581,554
|
|
Motor vehicles
|
|
|
579,891
|
|
|
|
456,442
|
|
Total
|
|
|
22,190,875
|
|
|
|
17,255,788
|
|
Less: Accumulated depreciation
|
|
|
(11,474,422
|
)
|
|
|
(11,905,893
|
)
|
Impairment**
|
|
|
(2,288,583
|
)
|
|
|
(2,506,255
|
)
|
Property and equipment, net
|
|
$
|
8,427,870
|
|
|
$
|
2,843,640
|
|
*
|
The
increase of property and equipment from March 31, 2018 to December 31, 2018 is due to the purchase of Yueming shop, a new
store which cost $4,722,193 (RMB32,482,394). The new store is located downtown south Hangzhou and adjacent to a super
shopping mall. The Company plans to create a new flagship store.
|
**
|
The
variance of impairment from March 31, 2018 to December 31, 2018 is solely caused by exchange rate variance.
|
Depreciation
expenses for property and equipment totaled $338,946 and $406,048 for the three months ended December 31, 2018 and 2017, respectively.
Depreciation expenses for property and equipment totaled $770,919 and $982,202 for the nine months ended December 31, 2018 and
2017, respectively. There were no fixed assets impaired in the three and nine months ended December 31, 2018.
Note
8 – ADVANCES TO SUPPLIERS
Advances
to suppliers consist of deposits, with or advances to, outside vendors for future inventory purchases. Most of the Company’s
suppliers require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchase
on a timely basis. This amount is refundable and bears no interest. As of December 31, 2018 and March 31, 2018, advance to suppliers
consist of the following:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Advance to suppliers*
|
|
$
|
6,826,569
|
|
|
$
|
6,505,545
|
|
Less: allowance for unrefundable advances
|
|
|
(3,337,559
|
)
|
|
|
(3,058,092
|
)
|
Advance to suppliers, net
|
|
$
|
3,489,010
|
|
|
$
|
3,447,452
|
|
*
|
In
order to achieve a larger rebate for certain merchandise, such as colla coril asini (donkey-hide gelatin), from certain suppliers,
the Company made a significant cash advance to such suppliers.
|
For
the three and nine months ended December 31, 2018 and 2017, none of the advances to suppliers were written off against previous
allowance for unrefundable advances, respectively.
Note
9 – INVENTORY
Inventory
consisted of finished goods, valued at $10,483,059 and $13,429,568 as of December 31, 2018 and March 31, 2018, 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, 2018 and March 31, 2018.
Note
10 – FARMLAND ASSETS
Farmland
assets consist of ginkgo trees planted in 2012 and expected to be harvested and sold in several years. As of December 31, 2018
and March 31, 2018, farmland assets are valued as follows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2018
|
|
Farmland assets
|
|
$
|
2,206,741
|
|
|
$
|
2,416,839
|
|
Less: Impairment*
|
|
|
(1,479,677
|
)
|
|
|
(1,620,553
|
)
|
Farmland assets, net
|
|
$
|
727,064
|
|
|
$
|
796,286
|
|
*
|
The
estimated fair value is estimated to be lower than its investment value as of December 31, 2018 and March 31, 2018.
|
Note
11 – LONG TERM DEPOSITS, LANDLORDS
As
of December 31, 2018 and March 31, 2018, long term deposits amounted to $2,266,420 and $2,501,968, 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
12 – OTHER NONCURRENT ASSETS
Other
noncurrent assets consisted of the following:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Forest land use rights*
|
|
$
|
1,089,421
|
|
|
$
|
1,235,253
|
|
Others
|
|
|
32,393
|
|
|
|
18,099
|
|
Total
|
|
$
|
1,121,814
|
|
|
$
|
1,253,352
|
|
|
*
|
The
prepayment for lease of forest land use rights is a payment made to a local government in connection with entering into an operating
land lease agreement. The land is currently used to cultivate Ginkgo trees. The forest rights certificate from the local village
extends the life of the lease to January 31, 2060.
|
The
amortization of the prepayment for the lease of forest land use right was approximately $6,812 and $7,765 for the three months
ended December 31, 2018 and 2017, respectively. The amortization of the prepayment for the lease of forest land use right was
approximately $20,487 and $21,653 for the nine months ended December 31, 2018 and 2017, 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
|
|
2019
|
|
$
|
28,071
|
|
2020
|
|
|
28,071
|
|
2021
|
|
|
28,071
|
|
2022
|
|
|
28,071
|
|
2023
|
|
|
28,071
|
|
Thereafter
|
|
|
949,066
|
|
Note
13 – INTANGIBLE ASSETS
Net
intangible assets consisted of the following at:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
License
(1)
|
|
$
|
1,863,603
|
|
|
$
|
1,967,934
|
|
SAP software
(2)
|
|
|
660,010
|
|
|
|
764,104
|
|
Land use rights
(3)
|
|
|
1,417,651
|
|
|
|
1,552,622
|
|
Total intangible assets
|
|
|
3,941,264
|
|
|
|
4,284,660
|
|
Less: accumulated amortization
|
|
|
(370,279
|
)
|
|
|
(228,246
|
)
|
Intangible assets, net
|
|
$
|
3,570,986
|
|
|
$
|
4,056,414
|
|
Amortization
expense of intangibles amounted to $50,342 and $38,412 for the three months ended December 31, 2018 and 2017, respectively, and
$166,349 and $52,876 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)
|
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. As of December 31, 2018, the system has been completely installed and has been running for eleven months in
the Company. By automatically connecting commodity flow data with accounting recording, the system minimizes the manual errors
made by accounting staff. Additionally, the system provides a view of overall and instant cash information by electronically
linking local banking systems with SAP. Additional benefits include automatically-generated customized monthly company performance
reports, instant inventory monitoring and reporting, and punctual maintenance of customer and supplier accounts.
|
|
|
(3)
|
In
July 2013, the Company purchased the land use rights of a plot of farmland in Lin’an, Hangzhou, intended for the establishment
of an herb processing plant in the future. However, as our farming business in Lin’an has not grown, the Company does
not expect completion of the plant in the near future.
|
Note
14 – NOTES PAYABLE
The
Company has credit facilities with Hangzhou United Bank (“HUB”), Bank of Hangzhou (“BOH”), and China Merchant
Bank (“CMB”) that provided working capital in the form of the following bank acceptance notes at December 31, 2018
and March 31, 2018:
|
|
|
|
Origination
|
|
Maturity
|
|
December 31,
|
|
|
March 31,
|
|
Beneficiary
|
|
Endorser
|
|
date
|
|
date
|
|
2018
|
|
|
2018
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
10/10/17
|
|
04/10/18
|
|
|
|
|
|
|
2,552,769
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
11/24/17
|
|
05/24/18
|
|
|
|
|
|
|
21,972
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/05/17
|
|
06/05/18
|
|
|
|
|
|
|
377,347
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/29/17
|
|
06/29/18
|
|
|
|
|
|
|
1,194,135
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/29/17
|
|
06/29/18
|
|
|
|
|
|
|
1,443,554
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
02/05/18
|
|
08/05/18
|
|
|
|
|
|
|
2,618,500
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
03/05/18
|
|
09/05/18
|
|
|
|
|
|
|
3,072,638
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
11/06/17
|
|
05/06/18
|
|
|
|
|
|
|
3,553,014
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/05/17
|
|
06/05/18
|
|
|
|
|
|
|
1,937,683
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/29/17
|
|
06/29/18
|
|
|
|
|
|
|
1,687,711
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
11/06/18
|
|
05/06/19
|
|
|
488,767
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/12/18
|
|
06/12/19
|
|
|
2,182,572
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/20/18
|
|
03/20/19
|
|
|
110,767
|
|
|
|
-
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/20/18
|
|
06/20/19
|
|
|
1,046,714
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
12/29/18
|
|
06/29/19
|
|
|
5,372,061
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
07/05/18
|
|
01/05/19
|
|
|
2,989,780
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
08/06/18
|
|
02/06/19
|
|
|
1,357,129
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
08/17/18
|
|
02/17/19
|
|
|
277,657
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
08/31/18
|
|
02/28/19
|
|
|
2,300,155
|
|
|
|
|
|
Jiuzhou Pharmacy
(1)
|
|
HUB
|
|
09/05/18
|
|
03/05/19
|
|
|
1,876,612
|
|
|
|
|
|
Jiuxin Medicine
(2)
|
|
HUB
|
|
10/11/18
|
|
04/11/19
|
|
|
4,353,836
|
|
|
|
|
|
Jiuxin Medicine
(2)
|
|
HUB
|
|
11/07/18
|
|
05/07/19
|
|
|
2,915,014
|
|
|
|
|
|
Jiuxin Medicine
(2)
|
|
CMB
|
|
02/02/18
|
|
08/02/18
|
|
|
|
|
|
|
71,648
|
|
Jiuxin Medicine
(2)
|
|
CMB
|
|
02/07/18
|
|
08/07/18
|
|
|
|
|
|
|
95,530
|
|
Jiuxin Medicine
(2)
|
|
CMB
|
|
03/07/18
|
|
09/07/18
|
|
|
|
|
|
|
538,857
|
|
Jiuxin Medicine
(2)
|
|
CMB
|
|
03/15/18
|
|
09/15/18
|
|
|
|
|
|
|
44,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
25,271,064
|
|
|
$
|
19,180,200
|
|
(1)
|
As of December 31,
2018, the Company had $25,271,064 (RMB 173,831,238) of notes payable from HUB. The Company is required to hold restricted
cash in the amount of $14,723,476 (RMB 101,277,889) with HUB as collateral against these bank notes. Included in the restricted
cash is a total of $10,194,220three-year deposit (RMB 70,122,647) deposited into HUB as a collateral for current and future
notes payable from HUB. As of March 31, 2018, the Company had $18,429,322 (RMB 115,748,985) of notes payable from HUB. The
Company is required to hold restricted cash in the amount of $13,565,300 (RMB 85,199,540) with HUB as collateral against these
bank notes. Included in the restricted cash is a total of $7,269,509 three-year deposit (RMB 45,657,584) deposited into HUB
as a collateral for current and future notes payable from HUB.
|
|
|
(2)
|
As of December 31,
2018, the Company had $0 (RMB0) of notes payable from CMB, with restricted cash in the amount of $0 (RMB0) held at the bank.
As of March 31, 2018, the Company had $750,878 (RMB 4,716,037) of notes payable from CMB, with restricted cash in the amount
of $750,878 (RMB 4,716,037) held at the bank.
|
As
of December 31, 2018, the Company had a credit line of approximately $12.94 million in the aggregate from HUB. By putting up a
three-year deposit of $10.19 million and the restricted cash of $4.53 million deposited in the banks, the total credit line was
$27.66 million. As of December 31, 2018, the Company had approximately $25.27 million of bank notes payable and approximately
$2.39 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.
Note
15 – TAXES
Income
tax
The
Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities
are calculated using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the period that includes the enactment date. Valuation allowances are provided against deferred income tax assets for amounts
which are not considered “more likely than not” to be realized.
The
Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each
entity is domiciled.
Entity
|
|
Income
Tax Jurisdiction
|
Jo-Jo Drugstores
|
|
United States
|
Renovation
|
|
Hong Kong, PRC
|
All other entities
|
|
Mainland, PRC
|
For
the three and six months ended December 31, 2018 and 2017, the components of income tax expense consist of the following:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
47,958
|
|
|
|
38,106
|
|
|
|
104,712
|
|
|
|
76,691
|
|
|
|
|
47,958
|
|
|
|
38,106
|
|
|
|
104,712
|
|
|
|
76,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
47,958
|
|
|
|
38,106
|
|
|
|
104,712
|
|
|
|
76,691
|
|
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, 2018 and 2017:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
U.S. Statutory rates
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
Foreign income not recognized in the U.S.
|
|
|
(21.0
|
)
|
|
|
(34.0
|
)
|
|
|
(21.0
|
)
|
|
|
(34.0
|
)
|
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)
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
|
|
(2.4
|
)
|
|
|
(1.9
|
)
|
Effective tax rate
|
|
|
(2.2
|
)%
|
|
|
(2.4
|
)%
|
|
|
(2.4
|
)%
|
|
|
(1.9
|
)%
|
|
(1)
|
Represents
a non-taxable expense due to overall increase in allowance for accounts receivable and advances to suppliers.
|
|
(2)
|
The
(2.2)% and (2.4)% rate adjustments for the three months ended December 31, 2018 and 2017 and the (2.4)% and (1.9)% rate adjustments
for the nine months ended December 31, 2018 and 2017 represent expenses that primarily include stock option expenses and legal,
accounting and other expenses incurred by the Company that are not deductible for PRC income tax.
|
Jo-Jo
Drugstores is incorporated in the U.S. and incurred a net operating loss for income tax purposes for the three and nine months
ended December 31, 2018 and 2017. As of December 31, 2018, the estimated net operating loss carry forwards for U.S. income tax
purposes amounted to $1,503,000, which may be available to reduce future years’ taxable income. These carry forwards will
expire if not utilized by 2032. Management believes that the realization of the benefits arising from this loss appears to be
uncertain due to the Company’s continuing losses for U.S. income tax purposes. Accordingly, the Company has provided a 100%
valuation allowance at December 31, 2018. There was no net change in the valuation allowance for the three and nine months ended
December 31, 2018 and 2017. Management reviews this valuation allowance periodically and makes adjustments as necessary.
The
components of the Company’s net deferred tax assets are as follows:
|
|
As of
12/31/2018
|
|
|
As of
12/31/2017
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
771,675
|
|
|
|
584,427
|
|
Long-lived assets impairment
|
|
|
-
|
|
|
|
-
|
|
Depreciation and Amortization
|
|
|
139,483
|
|
|
|
147,655
|
|
Accrued expense
|
|
|
420,143
|
|
|
|
140,124
|
|
Net operating loss carryforward
|
|
|
2,859,896
|
|
|
|
1,765,468
|
|
Foreign Tax Credit Carryover
|
|
|
195,000
|
|
|
|
195,000
|
|
Total deferred tax assets (liabilities):
|
|
|
4,386,197
|
|
|
|
2,832,673
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(4,386,197
|
)
|
|
|
(2,832,673
|
)
|
Net deferred tax assets (liabilities)
|
|
|
-
|
|
|
|
-
|
|
The
Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely
than not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence,
including earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies. Assumptions used to forecast future taxable income often require significant judgment.
More weight is given to objectively verifiable evidence. In the event we determine that we would not be able to realize all or
part of our net deferred tax assets in the future, a valuation allowance will be established against deferred tax assets in the
period in which we make such determination. The need to establish a valuation allowance against deferred tax assets may cause
greater volatility in our effective tax rate.
As
of December 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, the
estimated net operating loss carry forwards for Hong Kong income tax purposes amounted to $1,905,689 and $1,772,884, which may
be available to reduce future years’ taxable income. As of December 31, 2018 and December 31, 2017, the estimated net operating
loss carry forwards for China income tax purposes amounted to $14,820,829 and $8,236,919, which may be available to reduce future
years’ taxable income. These carry forwards will expire if not utilized in next five years.
On
December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act includes a number of changes in existing
tax law impacting businesses, including the transition tax, a one-time deemed repatriation of cumulative undistributed foreign
earnings and a permanent reduction in the U.S. federal statutory rate from 35% to 21%, effective on January 1, 2018. ASC 740 requires
companies to recognize the effect of tax law changes in the period of enactment, accordingly, the effects must be recognized on
companies’ calendar year-end financial statements, even though the effective date for most provisions is January 1, 2018.
As a result, we re-measured our net U.S. deferred tax assets at the 21% future tax rate. At December 31, 2017, according to the
2017 Tax Act for estimating our foreign undistributed earnings, we estimated an aggregate deficit in “accumulated earnings
and profits,” which is how foreign undistributed earnings are determined for the one-time transition tax and for U.S. income
tax purposes. As a result, the one-time transition tax did not have a significant impact on the Company’s FY18 tax provision
and there was no undistributed accumulated earnings and profits as of September 30, 2018.
In
December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided a measurement period of
up to one year from the enactment date of the 2017 Tax Act for us to complete the accounting for the 2017 Tax Act and its related
impacts. The income tax effects of the 2017 Tax Act for which the accounting is incomplete include: the impact of the transition
tax, the revaluation of deferred tax assets and liabilities to reflect the 21% corporate tax rate, and the impact to the aforementioned
items on state income taxes. We have made reasonable provisional estimates for each of these items, however, these estimates may
be affected by other analyses related to the 2017 Tax Act, including but not limited to, any deferred adjustments related to the
filing of our fiscal 2018 federal and state income tax returns and further guidance yet to be issued.
The
Company recorded net unrecognized tax benefits of $0.0 million as of January 31, 2018. 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, the Company’s most significant
tax jurisdiction, is usually 5 years. The completion of review or the expiration of the statute of limitations for a given audit
period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material
to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations
for the given period.
Note
16 – POSTRETIREMENT BENEFITS
Regulations
in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees. The contribution
for each employee is based on a percentage of the employee’s current compensation as required by the local government. The
Company contributed $338,083 and $312,701 in employment benefits and pension for the three months ended December 31, 2018 and
2017, respectively. The Company contributed $1,039,163 and $872,435 in employment benefits and pension for the nine months ended
December 31, 2018 and 2017, respectively.
Note
17 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts
payable to related parties are summarized as follows:
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
Due to a director and CEO
(1)
:
|
|
|
726,219
|
|
|
|
850,342
|
|
Total
|
|
$
|
726,219
|
|
|
$
|
850,342
|
|
|
(1)
|
Due
to foreign exchange restrictions, the Company’s director and CEO, Mr. Lei Liu personally lent U.S. dollars to the Company
to facilitate its payments of expenses in the United States.
|
As
of December 31, 2018 and March 31, 2018, notes payable totaling $0 and $3,253,630 were secured by the personal properties of certain
of the Company’s shareholders, respectively. The lien on such shareholders’ properties has been released since July
2018.
The Company leases a retail space from
Mr. Lei Liu. The lease expires in September 2020. Rent expenses totaled $16,136 and $4,536 for the three months ended December
31, 2018 and 2017, respectively. Rent expenses totaled $25,100 and $12,959 for the nine months ended December 31, 2018 and 2017,
respectively. All amounts due and payable have been paid to Mr. Liu as of December 31, 2018.
Note 18 – Financial Liability
To encourage operating teams, 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 the deposits are refundable if the doctors
and nurses leave the clinic. In order to properly reflect Linjia Medical’s liabilities, the Company reclassifies the deposits
of $79,957 (RMB550,000) as financial liability as of December 31, 2018.
Note 19 – WARRANTS
In connection with the registered direct
offering closed on July 19, 2015, the Company issued a warrant to an investor to purchase up to 600,000 shares of common stock
at an exercise price of $3.10 per share. The warrant became exercisable on January 19, 2016 and will expire on January 18, 2021.
In connection with the offering, the Company also issued a warrant to its placement agent of this offering, pursuant to which the
agent may purchase up to 6% of the aggregate number of shares of common stock sold in the offering, i.e. 72,000 shares. Such warrant
has the same terms as the warrant issued to investor in the offering.
The
fair value of the warrants issued to purchase 672,000 shares as described above was estimated by using the binominal pricing model
with the following assumptions:
|
|
Common Stock
Warrants
|
|
|
Common Stock
Warrants
|
|
|
|
December 31,
2018
(1)
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
2.00
|
|
|
$
|
1.35
|
|
Exercise price
|
|
$
|
3.10
|
|
|
$
|
3.10
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (years)
|
|
|
2.30
|
|
|
|
2.80
|
|
Risk-free interest rate
|
|
|
2.48
|
%
|
|
|
1.98
|
%
|
Expected volatility
|
|
|
67.70
|
%
|
|
|
68.73
|
%
|
|
(1)
|
As
of December 31, 2018, the warrants had not been exercised.
|
Upon evaluation, as 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 $138,796 as of March 31, 2018. For the three and nine months ended
December 31, 2018, the Company recognized a loss of $85,116 and $116,522 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 $312,751 for the investor warrant and placement agent warrant, collectively, as of December 31, 2018.
Note
20 – STOCKHOLDER’S EQUITY
Common
stock
On
January 23, 2017, the Company closed a private offering with one institutional investor (the “Investor”) pursuant
to which the Company sold to the Investor, and the Investor purchased from the Company, an aggregate of 4,840,000 shares of the
common stock, par value $0.001 per share, of the Company, at a purchase price of $2.20 per share, for aggregate gross proceeds
to the Company of $10,648,000 (the “Private Placement”).
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 expense has been recorded as a service compensation
expense in the year ended March 31, 2018.
Stock
options
On
November 18, 2014, the Company granted a total of 967,000 shares of stock options under the Plan to a group of a total of 46 grantees
including directors, officers and employees. The exercise price of the stock option is $2.50. The option vests on November 18,
2017, provided that the grantees are still employed by the Company on such a date. The options will be exercisable for five years
from the vesting date, or November 18, 2017 until November 17, 2022. For the three months ended December 31, 2018 and 2017, $0
and $65,585 was recorded as compensation expense. For the nine months ended December 31, 2018 and 2017, $0 and $313,651 was recorded
as service compensation expense, respectively. As of December 31, 2018, all compensation costs related to stock option compensation
arrangements granted have been recognized.
Statutory
reserves
Statutory reserves represent restricted
retained earnings. Under Chinese law, the Company is required to set aside 10% of its net income as reported in its statutory accounts
into the Statutory Surplus Reserve Fund (the “Reserve Fund”) annually. 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, 2018 and 2017, the Company did not make appropriations to statutory reserves.
There
are no legal requirements in the PRC to fund the Reserve Fund by transfer of cash to any restricted accounts, and the Company
does not do so.
Note
21 – (LOSS) INCOME PER SHARE
The
Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard
requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing
such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by
dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common
stock were exercised and converted into common stock.
The
following is a reconciliation of the basic and diluted (loss) earnings per share computation:
|
|
Three months ended
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income attributable to controlling interest
|
|
$
|
(1,678,231
|
)
|
|
$
|
(1,625,829
|
)
|
|
$
|
(3,911,501
|
)
|
|
$
|
(4,213,842
|
)
|
Weighted average shares used in basic computation
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
Diluted effect of purchase options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares used in diluted computation
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
|
|
28,936,778
|
|
|
|
25,214,678
|
|
Income per share – Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributable to controlling interest
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
Loss per share – Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributable to controlling interest
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
For
the three and nine months ended December 31, 2018, 967,000 shares underlying employee stock options and 600,000 shares underlying
outstanding purchase options to an investor, and 72,000 shares underlying outstanding purchase option to an investment placement
agent were excluded from the calculation of diluted loss per share as the options were anti-dilutive.
Note
22 – SEGMENTS
The
Company operates within four main reportable segments: retail drugstores, online pharmacy, drug wholesale and herb farming. The
retail drugstores segment sells prescription and over-the-counter (“OTC”) medicines, TCM, dietary supplements, medical
devices, and sundry items to retail customers. The online pharmacy sells OTC drugs, dietary supplements, medical devices and sundry
items to customers through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s
own platform all over China. The drug wholesale segment includes supplying the Company’s own retail drugstores with prescription
and OTC medicines, TCM, dietary supplement, medical devices and sundry items (which sales have been eliminated as intercompany
transactions), and also selling them to other drug vendors and hospitals. The Company’s herb farming segment cultivates
selected herbs for sales to other drug vendors. The Company is also involved in online sales and clinic services that do not meet
the quantitative thresholds for reportable segments and are included in the retail drugstores segment. The segments’ accounting
policies are the same as those described in the summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before interest and income taxes not including nonrecurring gains and losses.
The
Company’s reportable business segments are strategic business units that offer different products and services. Each segment
is managed separately because they require different operations and markets to distinct classes of customers.
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
|
|
Loss income 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 by segment of the continuing operations for the three months ended December 31,
2017.
|
|
Retail drugstores
|
|
|
Online Pharmacy
|
|
|
Drug wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
18,288,222
|
|
|
$
|
3,395,047
|
|
|
|
5,128,973
|
|
|
|
-
|
|
|
|
26,812,242
|
|
Cost of goods
|
|
|
13,686,969
|
|
|
|
3,134,767
|
|
|
|
4,418,893
|
|
|
|
-
|
|
|
|
21,240,629
|
|
Gross profit
|
|
$
|
4,601,253
|
|
|
$
|
260,280
|
|
|
|
710,080
|
|
|
|
-
|
|
|
|
5,571,613
|
|
Selling expenses
|
|
|
3,509,018
|
|
|
|
572,397
|
|
|
|
939,556
|
|
|
|
-
|
|
|
|
5,020,971
|
|
General and administrative expenses
|
|
|
930,689
|
|
|
|
174,865
|
|
|
|
1,615,560
|
|
|
|
16,668
|
|
|
|
2,737,782
|
|
Income (Loss) from operations
|
|
$
|
161,546
|
|
|
$
|
(486,982
|
)
|
|
|
(1,845,036
|
)
|
|
|
(16,668
|
)
|
|
|
(2,187,140
|
)
|
Depreciation and amortization
|
|
$
|
(525,203
|
)
|
|
$
|
-
|
|
|
|
4,649
|
|
|
|
-
|
|
|
|
(520,554
|
)
|
Total capital expenditures
|
|
$
|
8,9495
|
|
|
$
|
-
|
|
|
|
4,711
|
|
|
|
-
|
|
|
|
94,206
|
|
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
|
|
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
|
|
The
following table presents summarized information of the continuing operation by segment for the nine months ended December 31,
2017:
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
|
|
Revenue
|
|
$
|
46,356,207
|
|
|
$
|
9,595,752
|
|
|
|
16,021,694
|
|
|
|
-
|
|
|
|
71,973,653
|
|
Cost of goods
|
|
|
34,227,630
|
|
|
|
8,644,564
|
|
|
|
13,794,588
|
|
|
|
-
|
|
|
|
56,666,782
|
|
Gross profit
|
|
$
|
12,128,577
|
|
|
$
|
951,188
|
|
|
|
2,227,106
|
|
|
|
-
|
|
|
|
15,306,871
|
|
Selling expenses
|
|
|
8,510,663
|
|
|
|
1,547,569
|
|
|
|
3,230,370
|
|
|
|
-
|
|
|
|
13,288,602
|
|
General and administrative expenses
|
|
|
4,942,902
|
|
|
|
352,770
|
|
|
|
1,996,393
|
|
|
|
26,715
|
|
|
|
7,318,780
|
|
Loss income from operations
|
|
$
|
(1,324,988
|
)
|
|
$
|
(949,151
|
)
|
|
|
(2,999,657
|
)
|
|
|
(26,715
|
)
|
|
|
(5,300,511
|
)
|
Depreciation and amortization
|
|
$
|
(854,445
|
)
|
|
$
|
-
|
|
|
|
209,023
|
|
|
|
-
|
|
|
|
(645,422
|
)
|
Total capital expenditures
|
|
$
|
295,637
|
|
|
$
|
-
|
|
|
|
10,927
|
|
|
|
-
|
|
|
|
306,564
|
|
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 is as follows:
|
|
Three months ended
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Prescription drugs
|
|
$
|
6,756,073
|
|
|
$
|
5,373,870
|
|
|
$
|
17,835,700
|
|
|
$
|
14,860,659
|
|
OTC drugs
|
|
|
9,393,148
|
|
|
|
9,168,708
|
|
|
|
24,018,263
|
|
|
|
21,593,385
|
|
Nutritional supplements
|
|
|
1,869,351
|
|
|
|
1,883,020
|
|
|
|
4,750,013
|
|
|
|
4,558,383
|
|
TCM
|
|
|
1,342,768
|
|
|
|
1,185,004
|
|
|
|
4,615,033
|
|
|
|
3,136,203
|
|
Sundry products
|
|
|
248,729
|
|
|
|
180,338
|
|
|
|
799,554
|
|
|
|
804,817
|
|
Medical devices
|
|
|
1,257,180
|
|
|
|
497,282
|
|
|
|
2,953,326
|
|
|
|
1,402,760
|
|
Total
|
|
$
|
20,867,249
|
|
|
$
|
18,288,222
|
|
|
$
|
54,971,889
|
|
|
$
|
46,356,207
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Prescription drugs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
OTC drugs
|
|
|
837,126
|
|
|
|
1,535,383
|
|
|
|
2,412,057
|
|
|
|
4,038,674
|
|
Nutritional supplements
|
|
|
220,776
|
|
|
|
514,952
|
|
|
|
575,862
|
|
|
|
1,365,834
|
|
TCM
|
|
|
28,785
|
|
|
|
8,802
|
|
|
|
54,417
|
|
|
|
18,984
|
|
Sundry products
|
|
|
573,993
|
|
|
|
224,514
|
|
|
|
2,128,282
|
|
|
|
1,065,935
|
|
Medical devices
|
|
|
832,526
|
|
|
|
1,111,396
|
|
|
|
1,467,304
|
|
|
|
3,106,325
|
|
Total
|
|
$
|
2,493,206
|
|
|
$
|
3,395,047
|
|
|
$
|
6,637,922
|
|
|
$
|
9,595,752
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Prescription drugs
|
|
$
|
3,933,441
|
|
|
$
|
2,777,566
|
|
|
$
|
11,708,683
|
|
|
$
|
9,252,199
|
|
OTC drugs
|
|
|
3,341,676
|
|
|
|
2,303,726
|
|
|
|
7,246,356
|
|
|
|
6,652,879
|
|
Nutritional supplements
|
|
|
167,069
|
|
|
|
19,123
|
|
|
|
240,666
|
|
|
|
47,660
|
|
TCM
|
|
|
77,216
|
|
|
|
20,876
|
|
|
|
156,525
|
|
|
|
21,480
|
|
Sundry products
|
|
|
5,949
|
|
|
|
-
|
|
|
|
21,479
|
|
|
|
-
|
|
Medical devices
|
|
|
30,743
|
|
|
|
7,682
|
|
|
|
114,641
|
|
|
|
47,476
|
|
Total
|
|
$
|
7,556,094
|
|
|
$
|
5,128,973
|
|
|
$
|
19,488,350
|
|
|
$
|
16,021,694
|
|
Note
23 – COMMITMENTS AND CONTINGENCIES
Operating
lease commitments
The
Company recognizes lease expenses on a straight line basis over the term of its leases in accordance with the relevant accounting
standards. The Company has entered into various tenancy agreements for its store premises and for the land leased from a local
government to farm herbs.
The
Company’s commitments for minimum rental payments under its leases for the next five years and thereafter are as follows:
Periods ending September 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2019
|
|
$
|
4,590,468
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,590,468
|
|
2020
|
|
|
3,699,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,699,758
|
|
2021
|
|
|
2,799,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,799,515
|
|
2022
|
|
|
2,013,152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,013,152
|
|
2023
|
|
|
1,342,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,342,827
|
|
Thereafter
|
|
|
1,762,033
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,762,033
|
|
Total
rent expense amounted to $1,194,247 and $1,184,452 for the three months ended December 31, 2018 and 2017, respectively. Total
rent expense amounted to $3,586,552 and $3,114,851 for the nine months ended December 31, 2018 and 2017, respectively.
Note
24 – Subsequent Events
The
Company’s management has evaluated subsequent events through the date these financial statements were issued, and there
were no material subsequent events requiring adjustments to the financial statements or disclosure.
ITEM 2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial
statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical
information, the following discussion contains certain forward-looking statements within the “safe harbor” provisions
of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations
and intentions. These statements may be identified by the use of words such as “may,” “will,” “could,”
“expect,” “anticipate,” “intend,” “believe,” “estimate,” “plan,”
“predict,” and similar terms or terminology, or the negative of such terms or other comparable terminology. Although
we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors
that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section
of our annual report on Form 10-K for the year ended March 31, 2018 and filed with the SEC on June 29, 2018. 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 available on site for consultation,
examination and treatment of common ailments at scheduled hours. As of December 31, 2018, we had 122 pharmacies in Hangzhou under
the store brand of “Jiuzhou Grand Pharmacy.” During the nine months ended December 31, 2018, we relocated eleven of
our stores in Hangzhou City.
Since
May 2010, we have also been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online.
Our online pharmacy sells through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the
Company’s own platform all over China. Our sales through our own platform are primarily generated by customers who use their
private commercial medical insurances package.
We
operate a wholesale business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those carried
by our pharmacies) primarily to trading companies throughout China. We also planted gingko trees but have not incurred sales in
the nine months ended December 31, 2018.
Critical
Accounting Policies and Estimates
In
preparing our audited consolidated financial statements in accordance with accounting principles generally accepted in the United
States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets
and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the
reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own
historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future
based on available information and reasonable assumptions, which together form our basis for making judgments about matters that
are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process,
our actual results could differ materially from those estimates.
We
believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition
or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement
of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial
statements.
When
reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties
affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions.
The critical accounting policies and related judgments and estimates used to prepare our financial statements are identified in
Note 2 to our audited consolidated financial statements accompanying in this report.
In
May 2014, the FASB issued ASU No. 2014-09, which creates Topic 606, Revenue from Contracts with Customers. The new guidance outlines
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle
of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount,
timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue recognition guidance,
including industry-specific guidance. The standard is effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the
use of either the retrospective or cumulative effect transition method. On April 1, 2018, we adopted the guidance in ASC 606 and
all the related amendments and applied the new revenue standard to all contracts using the modified retrospective method. Based
on the new standard our revenue recognition policies related to membership rewards programs will change. But the impact of the
new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. We expect
the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
We
currently recorded awarded membership points as accrued expense. The adoption of the policy will require us to deduct the membership
rewards directly from our retail revenue. In other words, we will present such amounts in net sales as opposed to our current
reduction of operation expense classification.
Results
of Operations
Comparison
of the three months ended December 31, 2018 and 2017
The
following table summarizes our results of operations for the three months ended December 31, 2018 and 2017:
|
|
Three months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
30,916,549
|
|
|
|
100.0
|
%
|
|
$
|
26,812,242
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
7,135,786
|
|
|
|
23.1
|
%
|
|
$
|
5,571,613
|
|
|
|
20.8
|
%
|
Selling expenses
|
|
$
|
6,688,577
|
|
|
|
21.6
|
%
|
|
$
|
5,020,971
|
|
|
|
18.7
|
%
|
General and administrative expenses
|
|
$
|
2,572,862
|
|
|
|
8.3
|
%
|
|
$
|
2,737,782
|
|
|
|
10.2
|
|
Loss from operations
|
|
$
|
(2,125,653
|
)
|
|
|
(6.9
|
)%
|
|
$
|
(2,187,140
|
)
|
|
|
(8.2
|
)%
|
Interest income
|
|
$
|
18,964
|
|
|
|
0.1
|
%
|
|
$
|
76,266
|
|
|
|
0.3
|
%
|
Interest expenses
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
Other income, net
|
|
$
|
32,795
|
|
|
|
0.1
|
%
|
|
$
|
301,292
|
|
|
|
1.1
|
%
|
Change in fair value of derivative liability
|
|
$
|
(85,115
|
)
|
|
|
(0.3
|
)%
|
|
$
|
221,859
|
|
|
|
0.8
|
%
|
Income tax expense
|
|
$
|
47,958
|
|
|
|
0.2
|
%
|
|
$
|
38,106
|
|
|
|
0.1
|
%
|
Net income (loss)
|
|
$
|
(2,206,967
|
)
|
|
|
(7.1
|
)%
|
|
$
|
(1,625,829
|
)
|
|
|
(6.1
|
)%
|
Revenue
Due
to the growth in our retail drugstores business and wholesale business, revenue increased by $4,104,307 or 15.3% for the three
months ended December 31, 2018, as compared to the three months ended December 31, 2017, offset by the decrease in our online
sales. The following table breaks down the revenue for our four business segments for the three months ended December 31, 2018
and 2017:
Revenue
by Segment
The
following table breaks down the revenue for our four business segments for the three months ended December 31, 2018 and 2017:
|
|
For the three months ended December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
20,867,249
|
|
|
|
67.5
|
%
|
|
$
|
18,288,222
|
|
|
|
68.2
|
%
|
|
$
|
2,579,027
|
|
|
|
14.1
|
%
|
Revenue from online sales
|
|
|
2,493,206
|
|
|
|
8.1
|
%
|
|
|
3,395,047
|
|
|
|
12.7
|
%
|
|
|
(901,841
|
)
|
|
|
(26.6
|
)%
|
Revenue from wholesale business
|
|
|
7,556,094
|
|
|
|
24.4
|
%
|
|
|
5,128,973
|
|
|
|
19.1
|
%
|
|
|
2,427,121
|
|
|
|
47.3
|
%
|
Revenue from farming business
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
30,916,549
|
|
|
|
100.0
|
%
|
|
$
|
26,812,242
|
|
|
|
100.0
|
%
|
|
$
|
4,104,307
|
|
|
|
15.3
|
%
|
Retail
drugstores sales, which accounted for approximately 67.5% of total revenue for the three months ended December 31, 2018, increased
by $2,579,027, or 14.1% compared to the three months ended December 31, 2017, to $18,288,222. Same-store sales increased by approximately
$1,976,955, or 11.3%, while new stores contributed approximately $642,527 in revenue in the three months ended December 31, 2018.
The
increase in our retail drugstore sales is primarily due to consumer-facing benefits such as emphasis on onsite medical care, chronic
disease management services, incremental DTP (Direct-to-Patient) business caused by continuous hospital medical reform, promotional
campaigns such as our fifteen year anniversary sales, 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. 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 models.
DTP
drugs are usually low profit margin new medicines not sold at hospitals. As part of the PRC’s recent 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 the biggest drugstore network in Hangzhou City, quite a few of our stores are located adjacent to local hospitals. Additionally,
we have actively contacted local vendors of certain DTP products that we were previously not selling and were able to sell these
DTP products in our stores. By opening special counters at some stores and selling more DTP products, sales in our drugstores
have increased.
Implementing
marketing campaigns suited to local communities has been an important tool in driving sales. We usually cooperated with brand-name
pharmaceutical manufacturers in our marketing campaigns. Brand-name medical products sales improve our store reputation, which
is beneficial to our long-term sales.
Furthermore,
since fiscal year 2018, we have accelerated our expansion of new stores, which is expected to generate more retail drugstore revenues.
Eighteen stores have become qualified for municipal government insurance reimbursement after about a year’s operation. Sales
reimbursed from municipal government insurance program usually account for more than 50% of our total store sales. As these stores
gained such qualifications, their sales increased quickly as compared to the previous year. Our store count increased to 122 as
of December 31, 2018, compared to 113 stores as of December 31, 2017.
Our
online pharmacy sales decreased by approximately $901,841, or 26.6% for the three months ended December 31, 2018, as compared
to the three months ended December 31, 2017. The decrease was primarily caused by a decline in our sales via various e-commerce
platforms, offset by the increase in business referred from Pharmacy Benefit Management (“PBM”) providers, as further
explained below, during this three month period. We carry our business either through certain e-commerce platforms such as Tmall
and JD.com or via our own official online pharmacy website. Such arrangements with third-party platforms have exposed our online
presence to a wider consumer base.
Our
official website sales increased by $32,363 or 6.1% period over period, primarily as we explored more PBM providers, who draw
insured from private health insurance companies to spend on health products at drugstores. In order to increase the popularity
of our products, we have made considerable efforts to identify popular products that can drive sales, while keeping a close watch
on cost. However, due to the official suspension of OTC drug sales on e-commerce platforms such as Alibaba and strong competition,
our sales via these e-commerce platforms have been curtailed. As a result, our sales via these e-commerce platforms decreased
by 32.6% period over period. We are adding more non-medical health products such as nutritional supplements into our sales menu
to counteract the decline in sale of OTC drug category.
Wholesale revenue increased
by $2,427,121 or 47.3%. 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. Additionally, we strategically
act as provincial agent for Dong’e Ejiao and sold significant amounts of Ejiao with in Zhejiang Province. 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, 2018 and 2017, we have not generated revenue from our farming business. We planted ginkgo and maidenhair trees
during the year ended June 30, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough to
be harvested. We have not yet harvested our ginkgo or maidenhair trees. Usually, the longer it grows the more valuable it becomes.
We plan to continue cultivating the trees in order to maximize their market value in the future. We anticipate that we will continue
to grow ginkgo trees and start cultivating other herbs in the future.
Gross
Profit
Gross
profit increased by $1,564,173 or 28.1% period over period primarily as a result of an increase in revenue from the retail business,
which increased significantly in the three months ended December 31, 2018. At the same time, gross margin increased from 20.8%
to 23.1% due to higher retail and online profit margins. The average gross margins for each of our four business segments are
as follows:
|
|
For the three months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Average gross margin for retail drugstores
|
|
|
28.6
|
%
|
|
|
25.2
|
%
|
Average gross margin for online sales
|
|
|
10.4
|
%
|
|
|
7.7
|
%
|
Average gross margin for wholesale business
|
|
|
12.1
|
%
|
|
|
13.8
|
%
|
Average gross margin for farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail
gross margins increased primarily because of introducing new suppliers, and regularly renegotiating prices with our suppliers.
By hiring talented sales employees, who have decades of experience in the drug sales and purchase industry, we were able to introduce
new suppliers and sign brand name product contracts to obtain more rebates. As a result, we were able to keep up with our sale
profit margin. In addition, we are able to regularly renegotiate with our vendors and press prices down to an acceptable level,
we expect to keep our profit margin at a reasonable level in the future.
Gross
margin of online pharmacy sales increased primarily due to the increase in our sales via our own official website, as well as
due to decrease in sale via third-party platforms, which are usually subject to low profit margin. We conduct our business either
through certain ecommerce platforms such as Tmall and JD.com or via our own official online pharmacy website, www.dada360.com.
The sales on our own official website usually have higher profit margins because customers referred by commercial insurance companies
are premium customers who can afford premium products with higher profit margins. As described in the above, during the three
months ended December 31, 2018, we achieved more sales from our own official websites. As a result, we incurred higher profit
margin.
Wholesale gross margin
varies period by period primarily as a result of different products we carry and sell to certain pharmaceutical vendors. In the
three months ended December 31, 2018, we have acted as the provincial agent for Dong’e Ejiao and distributed a significant
amount of Ejiao in Zhejiang Province. Ejiao is a popular product sold as a nutritional supplement in large quantities in the winter
months. Dong’e is a reputable brand of Ejiao and has low wholesale profit margin of approximately 8.7%. As we have become
its major wholesale distributor in Zhejiang Province in 2018, we purchased and sold a large quantity in October 2018. As a result,
our overall wholesale gross profit margin was significantly lowered. 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 sales agent for certain popular drugs or have sales access to large local hospitals, we may
have to maintain low profit margins in order to drive sales on our wholesale business.
Selling
and Marketing Expenses
Selling and marketing
expenses increased by $1,667,606, or 33.2%, as compared to the same period of the last fiscal year, primarily due to increases
in marketing and sales staff expenses and rental expenses related to our store expansion. We opened more than 57 new stores in
Hangzhou and ten new stores in Lin’An under Lin’An Jiuzhou. To quickly attract local customers and expand our business,
we hired additional in-store staff and arranged various promotional campaigns. The labor costs increased by approximately $1.2
million. For example, during the three months ended December 31, 2018, the total selling expenses related to Lin’An Jiuzhou
was $205,464 as compared to $84,771 in the three months ending December 31, 2017. Additionally, labor expense included in Jiuzhou
Pharmacy selling expense increased by $0.3 million. Overall, such expenses as a percentage of our revenue kept at 21.6% and 18.7%,
respectively, for the three months ended December 31, 2018 and 2017.
General
and Administrative Expenses
General
and administrative expenses decreased by $164,920, or 6.0%, as compared to the same period of last year. Such expenses as a percentage
of revenue decreased to 8.3% from 10.2% for the same period a year ago. In the three months ended December 31, 2018, our bad debt
expense decreased by $0.3 million from the same period a year ago. Excluding such an effect, the general and administrative expense
increased by approximately $139,861, which reflects our hiring of additional management talent in our headquarter.
Loss
from Operations
As
a result of the above, we had loss from operations of $2,125,653 in the quarter ended December 31, 2018, as compared to loss from
operations of $2,187,140 a year ago. Our operating margin for the three months ended December 31, 2018 and 2017 was (6.9)% and
(8.2)%, respectively.
Income
Taxes
Our
income tax expense decreased by $9,852 period over period due to a decrease in overall profit.
Net
Loss
As
a result of the foregoing, net loss is $2,206,967 in the three months ended December 31, 2018 as compared to a net loss of $1,625,829
in the three months ended December 31, 2017.
Comparison
of nine months ended December 31, 2018 and 2017
The
following table summarizes our results of operations for the nine months ended December 31, 2018 and 2017:
|
|
Nine months ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
|
Amount
|
|
|
Percentage
of total
revenue
|
|
Revenue
|
|
$
|
81,098,161
|
|
|
|
100.0
|
%
|
|
|
71,973,653
|
|
|
|
100.0
|
%
|
Gross profit
|
|
$
|
18,549,690
|
|
|
|
22.9
|
%
|
|
|
15,306,871
|
|
|
|
21.3
|
%
|
Selling expenses
|
|
$
|
16,539,078
|
|
|
|
20.4
|
%
|
|
|
13,288,602
|
|
|
|
18.5
|
%
|
General and administrative expenses
|
|
$
|
6,342,874
|
|
|
|
7.8
|
%
|
|
|
7,318,780
|
|
|
|
10.2
|
%
|
Loss from operations
|
|
$
|
(4,332,262
|
)
|
|
|
(5.3
|
)%
|
|
|
(5,300,511
|
)
|
|
|
(7.4
|
)%
|
Interest income
|
|
|
92,196
|
|
|
|
0.1
|
%
|
|
|
479,509
|
|
|
|
0.7
|
%
|
Other income, net
|
|
$
|
(12,436
|
)
|
|
|
0.0
|
%
|
|
|
263,241
|
|
|
|
0.4
|
%
|
Change in fair value of derivative liability
|
|
$
|
(173,955
|
)
|
|
|
(0.2
|
)%
|
|
|
420,610
|
|
|
|
0.6
|
%
|
Income tax expense
|
|
$
|
104,712
|
|
|
|
0.1
|
%
|
|
|
76,691
|
|
|
|
0.1
|
%
|
Net loss
|
|
$
|
(4,506,297
|
)
|
|
|
(5.6
|
)%
|
|
|
(4,213,842
|
)
|
|
|
5.9
|
%
|
Revenue
Primarily
due to the increase in our retail pharmacy business and wholesale business, our revenue increased by $9,124,508 or 12.7% for the
nine months ended December 31, 2018, as compared to the nine months ended December 31, 2017, partially offset by the increase
in our retail drugstores. The following table breaks down the revenue for our four business segments for the nine months ended
December 31, 2018 and 2017.
Quarterly
Revenue by Segment
The
following table breaks down the revenue for our four business segments for the nine months ended December 31, 2018 and 2017:
|
|
Nine months ended December 31,
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Amount
|
|
|
% of total
revenue
|
|
|
Variance by
amount
|
|
|
% of
change
|
|
Revenue from retail drugstores
|
|
$
|
54,971,889
|
|
|
|
67.8
|
%
|
|
$
|
46,356,207
|
|
|
|
64.4
|
%
|
|
$
|
8,615,682
|
|
|
|
18.6
|
%
|
Revenue from online sales
|
|
|
6,637,922
|
|
|
|
8.2
|
%
|
|
|
9,595,752
|
|
|
|
13.3
|
%
|
|
|
(2,957,830
|
)
|
|
|
(30.8
|
)%
|
Revenue from wholesale business
|
|
|
19,488,350
|
|
|
|
24.0
|
%
|
|
|
16,021,694
|
|
|
|
22.3
|
%
|
|
|
3,466,656
|
|
|
|
21.6
|
%
|
Revenue from farming business
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Total revenue
|
|
$
|
81,098,161
|
|
|
|
100.0
|
%
|
|
$
|
71,973,653
|
|
|
|
100.0
|
%
|
|
$
|
9,124,508
|
|
|
|
12.7
|
%
|
Retail
drugstores sales, which accounted for approximately 67.8% of total revenue for the nine months ended December 31, 2018, increased
by $8,615,682, or 18.6% as compared to the nine months ended December 31, 2017, to $46,356,207. Same-store sales increased by
approximately $6,947,420, or 15.6%, while new stores contributed approximately $1,409,463 in revenue in the nine months ended
December 31, 2018.
The
increase in our retail drugstore sales is primarily due to consumer-facing benefits such as emphasis on onsite medical care, chronic
disease management, incremental DTP (Direct-to-Patient) 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’s
medical reform continues, more and more drug prescriptions have flowed out of hospitals. DTP drugs are usually low profit margin
new medicines not sold at hospitals. As part of the aforementioned medical reform package, local governments require the revenue
percentages from drug sales at public hospitals to decline year by year. In order to achieve lower drug sales as a percentage of
their total revenue, the public hospitals chose to abandon sales of low profit margin DTP products first. As the largest drugstore
network in Hangzhou City, quite a few of our stores are located adjacently to local hospitals. Additionally, we have actively contacted
local vendors of certain DTP products that we did not previously sell and were able to begin selling these DTP products in our
stores. By opening special counters at some stores and selling more DTP products, sales in our drugstores increased.
Furthermore, starting
in fiscal 2018, we have accelerated our new store expansion, which we expect to generate increased retail drugstore revenues in
the future. In fact, Eighteen stores have become qualified for municipal government insurance reimbursement after about a year’s
operation. Sales reimbursed from municipal government insurance programs usually account for more than 50% of our total store sales.
As these stores gained these qualifications, their sales increased quickly as compared to the previous year. Our store count increased
to 122 as of December 31, 2018, compared to 113 stores as of December 31, 2017.
Our online pharmacy
sales decreased by approximately $2,957,830, or 30.8% for the nine months ended December 31, 2018, as compared to the nine months
ended December 31, 2017. The decrease was primarily caused by declines in our sales via various e-commerce platforms, partially
offset by the increase in business referred from Pharmacy Benefit Management (“PBM”) providers and, as further explained
below, during this nine months. We carry our business either through certain e-commerce platforms such as Tmall and JD.com or via
our own official online pharmacy website. Such arrangements with third-party platforms have exposed our online presence to a wider
consumer base.
Our
official website sales increased by $266,636 or 20.2% period over period, primarily as we explored more PBM providers, who draw
insured from private health insurance company to spend on health products at drugstores. In order to increase the popularity of
our products, we have made considerable efforts to identify popular products that can drive sales, while keeping a close watch
on cost. However, due to the official suspension of OTC drug sales on e-commerce platforms such as Alibaba and strong competition,
our sales via these e-commerce platforms have been curtailed. As a result, our sales via these e-commerce platforms decreased
by 39.0% period over period. We are adding more non-medical health products such as nutritional supplements into our sales menu
to counteract the decline in sale of OTC drug category.
Wholesale revenue increased
by $3,466,656 or 21.6%, primarily as a result of our ability to resell certain products, which our retail stores made large orders
on, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name products, we were able to bargain
for lower purchase prices than the market level on such merchandise. 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. Additionally, we strategically act as provincial
agent for Dong’e Ejiao and sold significant amount of Ejiao in September within Zhejiang Province. 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, 2018 and 2017, 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, 2018, 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 $3,242,819 or 21.2% period over period primarily as a result of an increase in gross margin of retail drugstores.
At the same time, gross margin increased from 21.3% to 22.9% 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,
|
|
|
|
2018
|
|
|
2017
|
|
Average gross margin for retail drugstores
|
|
|
28.4
|
%
|
|
|
26.2
|
%
|
Average gross margin for online sales
|
|
|
11.4
|
%
|
|
|
9.9
|
%
|
Average gross margin for wholesale business
|
|
|
11.1
|
%
|
|
|
13.9
|
%
|
Average gross margin for farming business
|
|
|
N/A
|
|
|
|
N/A
|
|
Retail gross margins
increased primarily because of introducing new suppliers, and our efforts to continually renegotiate prices with our suppliers.
By hiring talents, who have decades of experience in the drug sales and purchase industry, we were able to introduce new suppliers
and sign brand name products contract to obtain more rebates. As a result, we were able to keep up with our sale profit margin.
In addition, we are able to continuously renegotiate with our vendors and press price down to an acceptable level, we expect to
keep our profit margin at a reasonable level in the future.
Gross
margin of online pharmacy sales increased primarily due to the increase in our sales via our own official website, as well as
due to decrease in sale via third-party platforms, which are usually subject to low profit margin. We conduct our business either
through certain ecommerce platforms such as Tmall and JD.com or via our own official online pharmacy website, www.dada360.com.
The sales on our own official website usually have higher profit margins because customers referred by commercial insurance companies
are premium customers who can afford premium products with higher profit margins. As described in the above, during the nine months
ended December 31, 2018, we achieved more sales from our own official websites. As a result, we incurred higher profit margin.
Wholesale
gross margin increased primarily as a result of different products we carried and sold to certain pharmaceutical vendors. In the
nine months ended December 31, 2018, we act as the provincial agent for Dong’e Ejiao and distributed significant amount
of Ejiao in September within Zhejiang Province. Ejiao is a popular product sold as a nutritional supplement in large quantity
in winter. Dong’e is a reputable brand of Ejiao and has low wholesale profit margin of about 8.7%.As we have become its
major wholesale distributor in Zhejiang Province in 2018, we purchased and sold a large quantity in September and October 2018.
As a result, our gross profit margin lowered significantly. 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.
Selling
and Marketing Expenses
Sales
and marketing expenses increased by $3,250,476 or 24.5% period over period, primarily due to increase in marketing and sales staff
expense and rental expense related to our store expansion. We have opened 57 new stores in Hangzhou and ten new stores in Lin’An
under Lin’An Jiuzhou. To quickly attract local customers and expand our business, we hired additional in-store staff and
arranged various promotion campaigns. The labor cost increased by approximately $2.1 million. For example, during the nine months
ended December 31, 2018, the total selling expense related to Lin’An Jiuzhou was $539,298 as compared to $171,269 in the
nine months ended December 31, 2017. Additionally, labor expense included in Jiuzhou Pharmacy selling expense increased by $1.44
million. The rental expense increased by approximately $1.1 million. Overall, such expenses as a percentage of our revenue kept
at 20.4% and 18.5% in the nine months ended December 31, 2018 and 2017.
General
and Administrative Expenses
General
and administrative expenses decreased by $975,906 or 13.3% period over period. Such expenses as a percentage of revenue decreased
to 7.8% from 10.2% for the same period a year ago. In the nine months ended December 31, 2018, our bad debt expense decreased
by approximately $0.85 million from the same period a year ago.. Excluding such an effect, the general and administrative expense
only decreased by $117,904 or 1.8%.
Loss
from Operations
As
a result of the above, we had loss from operations of $4,332,262, as compared to loss from operations of $5,300,511 a year ago.
Our operating margin for the nine months ended December 31, 2018 and 2017 was (5.3)% and (7.4)%, respectively.
Income
Taxes
Our
income tax expense increased by $28,021 period over period due to overall increase in operation loss in retail profit.
Net
Loss
As
a result of the foregoing, net loss decreased by $292,455 period over period.
Accounts
receivable
Accounts
receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments
from our customers (our distributors) and maintain a provision for estimated credit losses. To prepare for potential loss in such
accounts, we made corresponding reserves.
Our
accounts receivable aging was as follows for the periods described below:
From date of invoice to customer
|
|
Retail
drugstores
|
|
|
Online
Pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
amount
|
|
1- 3 months
|
|
$
|
7,379,463
|
|
|
$
|
6,687
|
|
|
$
|
1,781,442
|
|
|
$
|
-
|
|
|
$
|
9,167,592
|
|
4- 6 months
|
|
|
582,668
|
|
|
|
319
|
|
|
|
777,673
|
|
|
|
-
|
|
|
|
1,360,660
|
|
7- 12 months
|
|
|
482,946
|
|
|
|
175,163
|
|
|
|
566,972
|
|
|
|
-
|
|
|
|
1,225,081
|
|
Over one year
|
|
|
1,686,826
|
|
|
|
4,865
|
|
|
|
2,044,694
|
|
|
|
-
|
|
|
|
3,736,385
|
|
Allowance for doubtful accounts
|
|
|
(2,016,051
|
)
|
|
|
(75,296
|
)
|
|
|
(2,761,055
|
)
|
|
|
-
|
|
|
|
(4,852,402
|
)
|
Total accounts receivable
|
|
$
|
8,115,852
|
|
|
$
|
111,738
|
|
|
$
|
2,409,726
|
|
|
$
|
-
|
|
|
$
|
10,637,316
|
|
Accounts
receivable from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health
insurance programs. In the three months ended December 31, 2018, we wrote off an approximately $36,077 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 pharmacies with good reputation and have provided online
operating and network technical support and consulting services to an online business, which intends to run an online health products
shop in Hong Kong in 2016. As a result, we recognized revenue and incurred accounts receivables. As the online business company
was not able to make profit from its online shop, it has not paid off its account on time. As a result, we made additional reserve
on these aged accounts.
Accounts
receivable from our online pharmacy business mainly consist of collectibles from third-party platforms such as Tmall and JD.com
where we sell products. Usually the third-party platforms will collect from customers ordering on their platforms and then reimburse
us in times ranging from several days to a month after orders are placed.
Accounts
receivable from our drug wholesale business and herb farming business consist of receivables from our customers such as pharmaceutical
distributors. Our drug wholesale business transitioned away from focusing on sales volume beginning in the second half of fiscal
2013, and it tightened its customer credit policy and strengthened monitoring of uncollected receivables. Furthermore, the new
management team expended significant efforts in clearing outstanding balances with certain customers and suppliers.
Subsequent
to December 31, 2018 and through January 31, 2019, we collected approximately $3.5 million in receivables relating to our drugstore
business, approximately $1.1 million in receivables relating to our online pharmacy business, approximately $1.7 million relating
to our wholesale business, and $0 relating to our herb farming business.
Advances
to suppliers
Advances
to suppliers are mainly prepayments to secure certain products or services at favorable pricing. The aging of our advances to
suppliers is as follows for the periods described below:
From date of cash prepayment to suppliers
|
|
Retail
drugstores
|
|
|
Online
Pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
amount
|
|
1- 3 months
|
|
$
|
53,507
|
|
|
$
|
-
|
|
|
$
|
1,271,629
|
|
|
$
|
-
|
|
|
$
|
1,325,136
|
|
4- 6 months
|
|
|
187,711
|
|
|
|
-
|
|
|
|
1,641,148
|
|
|
|
-
|
|
|
|
1,828,859
|
|
7- 12 months
|
|
|
171,228
|
|
|
|
-
|
|
|
|
576,121
|
|
|
|
-
|
|
|
|
747,349
|
|
Over one year
|
|
|
593,130
|
|
|
|
-
|
|
|
|
2,332,095
|
|
|
|
-
|
|
|
|
2,925,225
|
|
Allowance for doubtful accounts
|
|
|
(680,242
|
)
|
|
|
-
|
|
|
|
(2,657,317
|
)
|
|
|
-
|
|
|
|
(3,337,559
|
)
|
Total advances to suppliers
|
|
$
|
325,334
|
|
|
$
|
-
|
|
|
$
|
3,163,676
|
|
|
$
|
-
|
|
|
$
|
3,489,010
|
|
Since
the acquisition of Jiuxin Medicine, we have gradually transferred almost all logistics services of our retail drugstores to Jiuxin
Medicine. Jiuzhou Pharmacy only makes purchases on certain non-medical products. As a result, our retail chain had little advances
to suppliers as of December 31, 2018.
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 provisions for estimated credit losses based upon historical experience and
any specific supplier issues such as discontinuation of inventory supplies that we have identified. If we are having difficulty
receiving products from a vendor, we take the following steps: cease purchasing products from the vendor, ask for return of our
prepayment promptly, and if necessary, take legal action. If all of these steps are unsuccessful, management then determines whether
the prepayments should be reserved or written off. To facilitate its initial expansion, Jiuxin Medicine made significant prepayments
to certain vendors. Lack of timely supplier account reconciliation caused by several sales staff rotations delayed the monitoring
of such accounts. To accommodate potential loss in advances to suppliers, we made reserve for amounts considered to be uncollectible.
To control credit risk, we have tightened our customer credit policy and strengthened monitoring of uncollected receivables.
Liquidity
and Capital Resources
Our
cash flows for the periods indicated are as follows:
|
|
Nine months ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash provided by/used in operating activities
|
|
$
|
(10,322,880
|
)
|
|
$
|
(9,801,402
|
)
|
Net cash provided by/used in investing activities
|
|
$
|
(6,847,285
|
)
|
|
$
|
(1,756,990
|
)
|
Net cash provided by/used in financing activities
|
|
$
|
7,979,491
|
|
|
$
|
5,572,249
|
|
For
the nine months ended December 31, 2018, cash used in operating activities amounted to $(10,322,880), as compared to $(9,801,402)
a year ago. The change is primarily attributable to a decrease in cash provided by customer deposits of $2,645,660, a decrease
in cash provided by accounts payable of $4,799,578 offset by an increase of $943,694 in other payables and accrued liabilities,
an increase in inventories and biological assets of $4,774,158, and an increase in cash provided by the long term deposit of $1,364,034.
For
the nine months ended December 31, 2018, net cash used in investing activities amounted to $(6,847,285), as compared to $(1,756,990)
used in investing activities a year ago. The change is primarily attributable to purchase of Yueming shop for approximately $4,722,193
in the nine months ended December 31, 2018.
For
the nine months ended December 31, 2018, net cash provided by financing activities amounted to $7,979,491, as compared to $5,572,249
net cash used in financing activities a year ago. The increase is primarily due to proceeds from notes payable, offset by decrease
repayment of notes payable.
As of December 31, 2018, we had cash and cash equivalents and restricted cash of approximately $ 20,607,529.
Our total current assets as of December 31, 2018, were $50,876,89
5
and total current liabilities were $53,320,838, which resulted in a working capital of $(2,443,944).
In order to increase
our competitive advantages and gain increased local retail pharmacy market share, during fiscal year 2018, we opened 57 new stores
in Hangzhou. Additionally, in November 2018, we purchased Yueming shop, a large flagship shop in South Hangzhou. As a result, we
incurred significant expenses related to rent, labor hiring and training, and marketing activities. As the retail pharmaceutical
market becomes more competitive in recent years, a new store usually cannot make a profit in its first year of operation. In fact,
we incurred significant expense with limited incremental revenue in the period we opened new stores.
At
their openings, except for four stores, all of the new stores did not have 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. We have applied for and received certificates in 2 stores in January 2018 and 11 new stores in June 2018. Historically,
sales reimbursed from the government insurance agency accounts for more than half of the total revenue in a mature store. We are
actively in the process of applying for certificates for all of our new stores. As more and more new stores obtain certificates,
we expect our new store revenue will increase and eventually contribute positive operating cash flow.
In order to increase
our ability to serve our customers, we also invested in Linjia Medical, which runs nine clinics adjacent to our drugstores. By
introducing a western family doctor system and focusing on pediatrics, we expect our new clinics to integrate into local communities
and eventually contribute positive cash flows to neighborhood Jiuzhou Pharmacy.
On January 23, 2017,
we completed a private placement with a single healthcare-focused institutional investor for the purchase of an aggregate of 4,840,000
shares of our common stock at a price of $2.20 per share and gross proceeds of approximately $10,648,000. As of December 31, 2018,
we had approximately $1.52 million in our credit line available for further borrowing. We believe that the foregoing sources will
collectively meet our liquidity and capital obligations for the next twelve months. However, if we are to acquire additional businesses
or further expand our operations, we may need additional capital.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
When
we open store locations, we typically enter into lease agreements that are generally between three to ten years. Our commitments
for minimum rental payments under our leases for the next five years and thereafter are as follows:
Periods ending September 30,
|
|
Retail
drugstores
|
|
|
Online
pharmacy
|
|
|
Drug
wholesale
|
|
|
Herb
farming
|
|
|
Total
Amount
|
|
2019
|
|
$
|
4,590,468
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,590,468
|
|
2020
|
|
|
3,699,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,699,758
|
|
2021
|
|
|
2,799,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,799,515
|
|
2022
|
|
|
2,013,152
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,013,152
|
|
2023
|
|
|
1,342,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,342,827
|
|
Thereafter
|
|
|
1,762,033
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,762,033
|
|
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,
2018
|
|
|
March
31,
2018
|
|
Balance
sheet items, except for the registered and paid-up capital, as of end of period
|
|
USD1:
RMB
|
0.1454
|
|
|
USD1:
RMB
|
0.1592
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in the statement of Operations and statement of cash flows for the period ended
|
|
USD1: RMB
|
0.1494
|
|
|
USD1: RMB
|
0.1510
|
|
Inflation
We
believe that inflation has not had a material effect on our operations to date.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
|
Not
applicable.
ITEM 4.
|
CONTROLS AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of December 31,
2018, under the supervision and with the participation of our management team, including our chief executive officer and chief
financial officer, we evaluated 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 this evaluation, our chief executive
officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls
and procedures were ineffective at the reasonable assurance level. Such conclusion is based on the presence of the following material
weakness in internal control over financial reporting as described in our annual report on Form 10-K for the year ended March 31,
2018:
Accounting
and Finance Personnel Weakness
- As noted in Item 9A of our annual reports on Form 10-K for the preceding fiscal years,
management concluded that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based
reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory
review to ensure that significant internal control deficiencies can be detected or prevented.
Management’s
assessment of the control deficiency over accounting and finance personnel as of December 31, 2018 considered the same factors,
including:
|
●
|
the
number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes;
|
|
|
|
|
●
|
how adequately we
complied with U.S. GAAP on transactions; and
|
|
|
|
|
●
|
how accurately we
prepared supporting information to provide to our independent auditors on a quarterly and annual basis.
|
Based
on the above factors, management concluded that the control deficiency over accounting and finance personnel continues to be a
material weakness as of December 31, 2018, as our accounting staff continues to lack sufficient U.S. GAAP experience and requires
substantial additional training. Specifically, to address the material weakness related to insufficient accounting resources and
process necessary to comply with reporting and compliance requirements of the FASB and SEC, we have added personnel who have FASB
and SEC reporting and compliance knowledge and experience to the Company and requested advice from outside accounting consultants.
We have been continually
making progress in improving internal controls. In 2018, we have successfully completed the installation of a leading ERP system,
SAP, from Germany. SAP is a well-known management system used by many Fortune 500 companies. Per the contract with the local SAP
system provider, the total fee for SAP customized installation and training adds up to more than one million USD in this year.
By automatically connecting commodity flow data with accounting recording, the system minimizes the manual errors made by accounting
staff. Additionally, the system provides a view of overall and instant cash information by electronically linking local banking
systems with SAP. Additional benefits include automatically-generated customized monthly company performance reports, instant
inventory monitoring and reporting, and punctual customer and suppliers accounts maintenance. in later 2018, we have introduced
a SAP FICO manager and been optimizing various operation procedures to better fit with the system. We expect to continually improve
our internal control system. As such, we will continue our efforts during the fiscal year ending March 31, 2019, although there
can be no assurance that compliance will be achieved in this time frame.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act
of 1934) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION