Overview
We are a retailer
and distributor of pharmaceutical and other healthcare products typically found in retail pharmacies in the People’s Republic
of China (“PRC” or “China”). Prior to acquiring Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”)
in August 2011 (see “
Our Corporate History and Structure - HJ Group
” below), we were primarily a retail pharmacy
operator. We currently have one hundred and twenty-one (121) store locations under the store brand “Jiuzhou Grand Pharmacy”
in Hangzhou city and its adjacent town Lin’an. Additionally, we operate eight drugstores, controlled by Hangzhou Jiuzhou
Grand Pharmacy.
We currently operate
in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale business selling products similar
to those we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).
Our stores provide customers with a wide variety of pharmaceutical products, including prescription and
over-the-counter (“OTC”) drugs, nutritional supplements, TCM, personal and family care products, and medical devices,
as well as convenience products, including consumable, seasonal, and promotional items. Additionally, we have doctors licensed
in both western medicine and TCM on site for consultation, examination and treatment of common ailments at scheduled hours. Three
(3) stores have adjacent medical clinics offering urgent care (to provide treatment for minor ailments such as sprains, minor lacerations,
and dizziness that can be treated on an outpatient basis), TCM (including acupuncture, therapeutic massage, and cupping) and minor
outpatient surgical treatments (such as suturing). Our stores vary in size, but presently average close to 200 square meters per
store. We attempt to tailor each store’s product offerings, physician access, and operating hours to suit the community where
the store is located.
We operate our pharmacies
(including the medical clinics) through the following companies in China that we control through contractual arrangements(refer
to “
Contractual Arrangements with HJ Group and the Key Personnel” below in this report regarding the details of
contractual arrangements
:
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Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), which we control contractually, operates our “Jiuzhou Grand Pharmacy” stores;
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Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) (“Jiuzhou Clinic”), which we control contractually, operates one (1) of our three (3) medical clinics; and
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Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”), which we control contractually, operates our other medical clinics.
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In addition, we operate
pharmacies through Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”), which are directly held by Jiuxin
Investments Management Co. Ltd. We also operates nine stores, which are held by Jiuzhou Pharmacy. We tend to expand our clinics
network adjacent to our drugstores through Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd. (“Linjia Medical”),
which are controlled by Jiuzhou Pharmacy.
We also offer OTC drugs
and nutritional supplements for sale through a website (
www.dada360.com
) operated by Jiuzhou Pharmacy. For the fiscal year
ended March 31, 2019, retail revenue, including pharmacies, medical clinics accounted for approximately 67.3% of our total revenue,
while online pharmacy revenue accounted for 8.1% of our total revenue.
Since August 2011,
we have operated a wholesale business through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”), distributing
third-party pharmaceutical products (similar to those carried by our pharmacies) primarily to trading companies throughout China.
Jiuxin Medicine is wholly owned by Jiuzhou Pharmacy. For the fiscal year March 31, 2019, wholesale revenue accounted for approximately
24.6% of our total revenue.
We also have an herb
farming business cultivating and wholesaling herbs used for TCM. This business is conducted through Hangzhou Qianhong Agriculture
Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned subsidiary. During the fiscal year ended March 31, 2019,
we generated no revenue from our herb farming business.
Throughout this
report, we will sometimes refer to Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, Lin’An Jiuzhou, as well as the
subsidiaries of Jiuzhou Pharmacy, collectively as “HJ Group.”
Our Corporate History and Structure
We were incorporated
in Nevada on December 19, 2006, under the name “Kerrisdale Mining Corporation,” with a principal business objective
to acquire and develop mineral properties. Although we had acquired certain mining claims, we were not operational.
On July 14, 2008, we amended our Articles of Incorporation to increase our authorized capital stock from
75,000,000 shares of common stock, par value $0.001 per share, to 500,000,000 shares of common stock, par value $0.001 per share,
and authorized the issuance of 10,000,000 shares of “blank check” preferred stock, par value $0.001 per share. With
respect to the preferred shares, our Board of Directors has the right to set its designations, preferences, limitations, privileges,
qualifications, dividend, conversion, voting, and other special or relative rights.
On September 17, 2009,
we acquired control of Renovation Investment (Hong Kong) Co., Ltd., a limited liability company incorporated in Hong Kong on September
2, 2008 (“Renovation”), pursuant to a share exchange agreement.
On September 24, 2009,
we amended our Articles of Incorporation to change our name from “Kerrisdale Mining Corporation” to “China Jo-Jo
Drugstores, Inc.”
On April 9, 2010, we
implemented a 1-for-2 reverse stock split of our issued and outstanding shares of common stock and a proportional reduction of
our authorized shares of common stock, by filing a Certificate of Change pursuant to Nevada Revised Statutes 78.209 with the Nevada
Secretary of State on April 6, 2010. All share information in this report takes into account this reverse stock split.
On April 28, 2010,
we completed a registered public offering of 3,500,000 shares of our common stock at a price of $5.00 per share, resulting in gross
proceeds to us, prior to deducting underwriting discounts, commissions and offering expenses, of approximately $17,500,000.
On July 24, 2015, we
closed a registered direct offering of 1.2 million shares of common stock at $2.50 per share with gross proceeds of approximately
$3 million from our effective shelf registration statement on Form S-3.
On January 23, 2017,
we completed a private offering of 4,840,000 shares of the common stock at a price of $2.20 per share with gross proceeds of $10,648,000.
On April 15,
2019, we closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds
of $10,000,020 from our effective shelf registration statement on Form S-3. In a concurrent private placement we issued to
the investors unregistered warrants to purchase up to an aggregate of 3,000,006 shares of common stock at an exercise price
of $3.00 per share. The placement agent receives warrants to purchase up to 240,000 shares of the common stock with an
exercise price of $3.125 per share.
Renovation
Renovation was formed
by the owners of HJ Group, as defined below, as a special purpose vehicle to raise capital overseas, in accordance with the requirements
of China’s State Administration of Foreign Exchange (“SAFE”). SAFE issued the
Notice on Relevant Issues Concerning
Foreign Exchange Administration for Financing and Round-Trip Investment Undertaken by Domestic Residents Through Overseas Special-Purpose
Vehicles
(“Circular No. 75”) on October 21, 2005. To further clarify the implementation of Circular 75, on May
31, 2007, SAFE issued a supplementary official notice known as
Hui ZhongFa [2007] No. 106
(“Circular 106”).
Circular 75 and Circular 106 require the owners of any Chinese company to obtain SAFE’s approval before establishing any
offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the
owners of HJ Group submitted their applications to SAFE on July 25, 2008. On August 16, 2008, SAFE approved the applications,
permitting these Chinese nationals to establish Renovation as an offshore, special purpose vehicle which was permitted to have
foreign ownership and participate in foreign capital raising activities. After SAFE’s approval, the owners of HJ Group became
holders of one hundred percent (100%) of Renovation’s issued and outstanding capital stock on September 2, 2008. See “
Relevant PRC Regulations - SAFE Registration
” below.
Jiuxin Management
Zhejiang Jiuxin Investment
Management Co., Ltd. (“Jiuxin Management”) was organized in the PRC on October 14, 2008. Since all of its issued and
outstanding capital stock is held by Renovation, a Hong Kong company, Jiuxin Management is deemed a “wholly foreign owned
enterprise” (“WFOE”) under applicable PRC laws.
Jiutong Medical
Hangzhou Jiutong Medical Technology Co., Ltd. (“Jiutong Medical”) was organized in the PRC
on December 20, 2011. Like Jiuxin Management, Jiutong Medical is also deemed a WFOE because it is wholly owned by Renovation. In
November 2013, Jiutong Medical acquired the right to use of a piece of land, for which we intended to establish a herb processing
plant. However, as our herb business has not grown, we have not started constructing the plant as of March 31, 2019. In the future,
we may use the land for other purpose such as the construction of a warehouse.
Shouantang Technology
Shouantang Technology
was organized in the PRC on July 16, 2010. Like Jiuxin Management and Jiutong Medical, it is also deemed a WFOE because it is wholly
owned by Renovation.
In November 2010, Shouantang Technology acquired one hundred percent (100%) of Quannuo Technology and
its wholly-owned subsidiary, Hangzhou Quannuo Grand Pharmacy Co., Ltd. (“Hangzhou Quannuo”), pursuant to an equity
ownership transfer agreement. Quannuo Technology was organized in the PRC on July 7, 2009, and Hangzhou Quannuo was established
on July 8, 2010. Hangzhou Quannuo has terminated its State Administration of Industry and Commerce (“SAIC”) license
in April 2015 and currently has no operations.
In November 2015, we sold all of the equity interests of Quannuo Technology to six individuals for approximately
$17,121 (RMB107,074). Quannuo Technology previously provided technical support to our online pharmacy and incurred accumulated
losses over the last five years of its operations. After the sale, its technical support function has been transferred back to
Jiuzhou Pharmacy, which hosts our online pharmacy.
Qianhong Agriculture
Qianhong
Agriculture was organized in the PRC on August 10, 2010 for our herb farming business. We planted ginkgo, also known as
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. As of March 31, 2019, we have not
harvested or sold any herbs.
Shouantang Bio
On October 11, 2014,
the Company, through Jiuzhou Pharmacy, formed Shouantang Bio-technology Co., Ltd. (“Shouantang Bio”) by contributing
$0.16 million (RMB1 million) as its registered capital. Shouantang Bio was formed to sell nutritional supplements under its own
brand name, Shouantang.
Jiuyi Technology
On September 10, 2015, Renovation set up an entity named Hangzhou Jiuyi Medical Technology Co. Ltd, (“Jiuyi
Technology”) with registered capital of $5 million, which was originally intended to provide additional technical support
such as webpage development to our online pharmacy business. Later on, we decided to move online technical supports back to Jiuzhou
Pharmacy, so Jiuyi Technology had no significant online technical operations. Jiuyi Technology is located in Hangzhou, China.
Lin’an
Jiuzhou
On March 31, 2017, the Company, through Jiuxin Management, formed Lin’an Jiuzhou Grand Pharmacy
Co. Ltd, (“Lin’an Jiuzhou”) with registered capital of $725,570 (RMB 5 million), to expand our retail pharmacies
in Lin’an City.
Linjia Medical
On September 27, 2017,
the Company, through Jiuzhou Pharmacy, formed and held 51% of Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd.
with registered capital of $2,979,460 (RMB20 million), to expand our clinics network adjacent to our drugstores. After extensive
market research, Linjia Medical started operation of its clinics in late calendar year 2018.
Ayi Health
On March 29, 2019,
the Company, through Jiuzhou Pharmacy, formed and currently holds 51% of the equity of Zhejiang AyiGe Medical Health Management
Co., Ltd.(“Ayi Health”), which is intended to provide technical support such as IT and customer support to our health
management business in the future.
HJ Group
Jiuzhou Pharmacy is a PRC limited liability company established on September 9, 2003 by Mr. Lei Liu (55%),
Mr. Chong’an Jin (23%) and Ms. Li Qi (22%). Hangzhou Kuaileren Grand Pharmacy Co., Ltd. (“Kuaileren”), originally
a subsidiary of Jiuzhou Pharmacy, was dissolved on April 9, 2011. Prior to its dissolution, Kuaileren operated a “Kuaileren
Grand Pharmacy” store, which is now a “Jiuzhou Grand Pharmacy” store. On July 1, 2014, Mr. Chong’an Jin
transferred all of the equity interests he held in Jiuzhou Pharmacy to Mr. Lei Liu and Ms. Li Qi. As a result of this transfer,
Mr. Lei Liu held 61% and Ms. Li Qi held 39% equity interests of Jiuzhou Pharmacy. On August 21, 2017, after Mr. Lei Liu transferred
certain shares to Ms. Li Qi, Mr. Lei Liu held 56.7% and Ms. Li Qi held 43.3%. On April 25, 2018, Mr. Wei Chen, who is associated
with CareRetail Holdings Limited, agreed to invest RMB200,000 and hold 1% of Jiuzhou Pharmacy. As a result, Mr. Lei Liu held 56.13%
and Ms. Li Qi has held 42.87% equity interests of Jiuzhou Pharmacy. Mr. Lei Liu and Ms. Li Qi are from time to time referred to
in this report as Key Personnel.
Jiuzhou Pharmacy currently
has one subsidiary, Jiuxin Medicine, which was organized in the PRC on December 31, 2003. In April 2011, Jiuzhou Pharmacy entered
into an equity ownership transfer agreement with the owners of Jiuxin Medicine, and its business license was transferred to Jiuzhou
Pharmacy, although no consideration was paid. On August 25, 2011, the acquisition of Jiuxin Medicine was completed for $4.7 million
(RMB 30 million.)
Jiuzhou Clinic is a
PRC general partnership established on October 10, 2003 by Mr. Liu (39%), Mr. Jin (31%) and Ms. Qi (30%). Jiuzhou Clinic is a medical
practice currently operating adjacent to the “Jiuzhou Grand Pharmacy” store in Daguan, providing primary, urgent, minor
surgical, and traditional medical care services. Additionally, Jiuzhou Clinic’s physicians consult with and examine patients
at other “Jiuzhou Grand Pharmacy” stores.
Jiuzhou Service is
a PRC limited liability company established on November 2, 2005 by Mr. Liu (39%), Mr. Jin (31%) and Ms. Qi (30%). Jiuzhou Service
is licensed as a healthcare management company and currently manages the medical clinic operating adjacent to the “Jiuzhou
Grand Pharmacy” stores in Wenhua and Xiasha, providing services similar to those at the Daguan clinic. In November 30, 2017,
Mr. Jin transferred his shares to Mr. Liu and Ms. Qi. After the transfer, Mr. Liu owns 56.7% and Ms. Qi owns 43.3% of the Jiuzhou
Service.
We control HJ Group
through contractual arrangements. See “
Contractual Arrangements with HJ Group and the Key Personnel
” below.
Contractual Arrangements with HJ
Group and the Key Personnel
Our relationships with
HJ Group and the Key Personnel are governed by a series of contractual arrangements that they have entered into with Jiuxin Management.
PRC regulations
on foreign investment currently permit foreign companies to establish or invest in WFOEs or joint ventures that engage in
wholesale or retail sales of pharmaceuticals in China. For retail sales, however, these regulations restrict the number and
size of pharmacies that a foreign investor may own. If a chain operates more than thirty (30) stores and sells branded
pharmaceutical products from different suppliers, a foreign investor may own only up to forty nine percent (49%) of such
chain. The contractual arrangements with Jiuzhou Pharmacy render such restrictions inapplicable to us, since neither we nor
our subsidiaries own equity interests in Jiuzhou Pharmacy, while at the same time we retain control of its drugstore chain by
virtue of the contractual arrangements.
Similarly, PRC regulations place certain restrictions on foreign ownership of medical practices. Foreign
investors can only acquire ownership interests through a Sino-foreign joint venture and not through a WFOE. Since we do not have
actual equity interests in Jiuzhou Clinic or Jiuzhou Service, and instead control these entities through contractual arrangements,
such regulations do not apply to us or our structure.
Under PRC laws, Jiuxin
Management, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic are each independent business entities not exposed or subject
to the liabilities incurred by any of the other three (3) entities. The contractual arrangements constitute valid and binding obligations
of the parties to such agreements. Each of the contractual arrangements, and the rights and obligations of the parties thereto,
are enforceable and valid in accordance with the laws of the PRC. These contractual arrangements, as amended and in effect, include
the following:
Consulting Services
Agreements. Pursuant to certain exclusive consulting services agreements (the “Consulting Services Agreements”), Jiuxin
Management has the exclusive right to provide Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic with general business operation
services, including advisory and strategic planning services, as well as consulting services related to their current and future
operations (the “Services”). Additionally, Jiuxin Management owns the intellectual property rights developed or discovered
through research and development, in the course of providing the Services, or derived from the provision of the Services. Jiuzhou
Pharmacy, Jiuzhou Service and Jiuzhou Clinic must each pay a quarterly consulting services fee in RMB to Jiuxin Management that
is equal to its profits for such quarter. This agreement is in effect until and unless terminated by written notice of a party
to the agreement in the event that: (a) a party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for
liquidation or dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due; (b) Jiuxin Management
terminates its operations; or (c) circumstances arise which would materially and adversely affect the performance or the objectives
of the agreement. Jiuxin Management may also terminate the agreement with any of Jiuzhou Pharmacy, Jiuzhou Service or Jiuzhou Clinic
if one of them breaches the terms of the agreement, or without cause.
Operating
Agreements. Pursuant to certain operating agreements (the “Operating Agreements”), Jiuxin Management agrees to
guarantee the contractual performance by Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic of their agreements with any
third party. In return, the Key Personnel must appoint designees of Jiuxin Management to the boards of directors and senior
management of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic. In addition, each of Jiuzhou Pharmacy, Jiuzhou Service
and Jiuzhou Clinic agrees to pledge its accounts receivable and all of its assets to Jiuxin Management. Moreover, without the
prior consent of Jiuxin Management, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot engage in any transactions
that could materially affect their respective assets, liabilities, rights or operations, including, without limitation,
incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any
of their assets or intellectual property rights in favor of a third party, or transfer of any agreements relating to their
business operations to any third party. They must also abide by corporate policies set by Jiuxin Management with respect to
their daily operations, financial management and employment issues. The term of this agreement is from August 1, 2009 until
the maximum period of time permitted by law. Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot terminate this
agreement.
Equity Pledge Agreements.
Pursuant to certain equity pledge agreements (the “Equity Pledge Agreement”), the Key Personnel have pledged all of
their equity interests in Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic to Jiuxin Management in order to guarantee these
companies’ performance of their respective obligations under the Consulting Services Agreement. If these companies or the
Key Personnel breach their respective contractual obligations, Jiuxin Management, as pledgee, will be entitled to certain rights,
including the right to sell the pledged equity interests. The Key Personnel have also agreed that upon occurrence of any event
of default, Jiuxin Management shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead
of the Key Personnel to carry out the security provisions of this agreement, and to take any action and execute any instrument
that Jiuxin Management may deem necessary or advisable to accomplish the purposes of this agreement. The Key Personnel agree not
to dispose of the pledged equity interests or take any actions that would prejudice Jiuxin Management’s interests. This agreement
will expire two (2) years after the obligations of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic under the Consulting Services
Agreement have been fulfilled.
Option Agreements.
Pursuant to the option agreements, the Key Personnel irrevocably grant Jiuxin Management or its designee an exclusive option to
purchase, to the extent permitted under PRC law, all or part of their equity interests in Jiuzhou Pharmacy, Jiuzhou Service and
Jiuzhou Clinic for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted
by applicable PRC law. Jiuxin Management or its designee has sole discretion to decide when to exercise the option, whether in
part or in full. The term of this agreement commenced from August 1, 2009 and continues for the maximum period of time permitted
by law.
Voting
Rights Proxy Agreements. Pursuant to the voting rights proxy agreements, the Key Personnel irrevocably grant a designee of
Jiuxin Management the right to exercise the voting and other ownership rights of the Key Personnel in Jiuzhou Pharmacy,
Jiuzhou Service and Jiuzhou Clinic, including the rights to (i) attend any meeting of the Key Personnel (or participate by
written consent in lieu of such meeting) in accordance with applicable laws and each company’s incorporating documents,
(ii) sell or transfer all or any of the equity interests of the Key Personnel in these companies, and (iii) appoint and vote
for the companies’ directors. The proxy agreement may be terminated by mutual consent of the parties or upon thirty
(30) days’ written notice from Jiuxin Management.
Other than as pursuant
to the foregoing contractual arrangements, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot transfer any funds generated
from their respective operations. The contractual arrangements were originally entered into on August 1, 2009, and amended on October
27, 2009.
Our Current Corporate Structure
The following diagram
illustrates our current corporate structure as of June 10, 2019:
The table below summarizes
the status of the registered capital of our PRC subsidiaries and controlled companies as of the date of this report:
Entity
Name
|
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Entity
Type
|
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Registered
Capital
|
|
Registered
Capital Paid
|
|
Due
Date for
Unpaid Registered
Capital
|
Jiutong Medical
|
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Subsidiary
|
|
|
USD 2,600,000
|
|
USD 2,600,000
|
|
N/A
|
Jiuzhou Clinic
|
|
VIE
|
|
|
N/A
|
|
N/A
|
|
N/A
|
Jiuzhou Pharmacy
|
|
VIE
|
|
|
USD 733,500
|
|
USD 733,500
|
|
N/A
|
Jiuzhou Service
|
|
VIE
|
|
|
USD 73,350
|
|
USD 73,350
|
|
N/A
|
Jiuxin Management
|
|
Subsidiary
|
|
|
USD 14,500,000
|
|
USD 14,500,000
|
|
N/A
|
Jiuxin Medicine
|
|
VIE
|
|
|
USD 1,564,000
|
|
USD 1,564,000
|
|
N/A
|
Qianhong Agriculture
|
|
Subsidiary
|
|
|
USD 1,497,000
|
|
USD 1,497,000
|
|
N/A
|
Shouantang Technology
|
|
Subsidiary
|
|
|
USD 11,000,000
|
|
USD 11,000,000
|
|
N/A
|
Shouantang Bio
|
|
Subsidiary
|
|
|
USD 162,900
|
|
USD 162,900
|
|
N/A
|
Jiuyi Technology
|
|
Subsidiary
|
|
|
USD 5,000,000
|
|
USD 2,500,000
|
|
September 25, 2026
|
Lin’an Jiuzhou
|
|
Subsidiary
|
|
|
USD 725,570
|
|
USD 72,557
|
|
March 31, 2027
|
Jiuben Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiumu Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiuheng Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiujiu Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiuli Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiurui Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiuxiang Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Jiuyi Pharmacy
|
|
VIE
|
|
|
USD 15,920
|
|
USD 15,920
|
|
N/A
|
Linjia Medical
|
|
VIE
|
|
|
USD 2,979,460
|
|
USD 1,489,730
|
|
N/A
|
Ayi Health
|
|
VIE
|
|
|
USD1,489,730
|
|
None
|
|
N/A
|
Our Business
Pharmacies
We currently have one
hundred and twenty-one (121) pharmacies throughout Hangzhou, the provincial capital of Zhejiang and neighborhood cities. Pharmacy
sales accounted for approximately 89.2% of our retail revenue, and 67.3% of our total revenue, for the fiscal year ended March
31, 2019. We offer primarily third-party products at our pharmacies, including:
|
●
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Approximately 1,376 prescription drugs
(252 of which require a physician’s prescription and the remainder requiring customer personal information registration
only), sales of which accounted for approximately 32.5% of our retail revenue for the fiscal year ended March 31, 2019;
|
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●
|
Approximately 1,769 OTC drugs, sales of
which accounted for approximately 43.4% of our retail revenue for the fiscal year ended March 31, 2019;
|
|
●
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Approximately 613 nutritional supplements, including a variety of healthcare supplements, vitamin, mineral and dietary products, sales of which accounted for approximately 8.8% of our retail revenue for the fiscal year ended March 31, 2019
;
|
|
●
|
TCM, including drinkable herbal remedies and pre-packaged herbal mixtures for making soup, sales of which accounted for approximately 9.0% of our retail revenue for the fiscal year ended March 31, 2019;
|
|
●
|
Sundry products (i.e., personal care products such as skin care, hair care and beauty products, convenience products such as soft drinks, packaged snacks, and other consumable, cleaning agents, stationeries, and seasonal and promotional items tailored to local consumer demand for convenience and quality), sales of which accounted for approximately 1.3% of our retail revenue for the fiscal year ended March 31, 2019; and
|
|
●
|
Medical devices (i.e., family planning and birth control products, early pregnancy test products, portable electronic diagnostic apparatus, rehabilitation equipment, and surgical tools such as hemostats, needle forceps and surgical scissors), sales of which accounted for approximately 5.0% of our retail revenue for the fiscal year ended March 31,2019.
|
We favor retail locations in well-established residential communities with relatively concentrated consumer
purchasing power or are located in close proximity to local hospitals, and evaluate potential store sites to assess consumer traffic,
visibility and convenience. Depending on its size, each drugstore has between two (2) to eight (8) pharmacists on staff, all of
whom are properly licensed. We only accept prescriptions from licensed health care providers, and verify the validity, accuracy,
and completeness of all prescriptions. We also ask all prescription customers to disclose their drug allergies, current medical
conditions, and current medications. Most pharmacies also maintain a TCM counter staffed by licensed herbalists.
After opening, a location
without SHI coverage may take up to one year to achieve our projected revenue goals for that particular location. Various factors
influence individual store revenue including, but not limited to: location, nearby competition, local population demographics,
square footage, and government insurance coverage.
All of our one hundred
and twenty-one (121) of our drugstores are located in Hangzhou city and its adjacent town Lin’an.
To enhance our customers’ experience, we have licensed physicians available at several of our “Jiuzhou
Grand Pharmacy” locations for consultation, examination and treatment of common ailments at scheduled hours. In addition,
our Daguan, Wenhua and Xiasha stores have adjoining medical clinics that provide urgent care (for conditions such as sprains, minor
lacerations, and dizziness), TCM treatments (including acupuncture, therapeutic massage, moxibustion, and cupping), and minor outpatient
surgical treatments (such as suturing).
To ensure quality and
personal attention for patients, we employ only licensed doctors and certified nurses and technicians. Patient treatment at our
three (3) Jiuzhou Clinics and Jiuzhou Service, and all Linjia Clinics follow nationally established clinical practice guidelines
from China’s Ministry of Health. We currently have fifty-six (56) physicians and sixty-seven (67) clinic staff. In-store
consultations and examinations by our physicians are provided free-of-charge to ensure that customers are being prescribed and
taking the appropriate medication for their ailments, and to afford customers convenience.
We view our medical
services as more consumer-driven than other health care specialties, because consumers requiring the types of medical services
that we provide often seek treatment on their own accord. We have developed our medical services to respond to the public need
for convenient access to medical consultations and/or care and the significant savings that we can provide as compared to a more
traditional medical setting such as a hospital. Many of our patients often need immediate access to medical services, do not have
a regular physician, or may lack suitable alternatives. Patient flow is derived from the physical presence of our drugstores, not
from pre-existing doctor-patient relationships or referrals from other healthcare providers.
We generate limited revenue directly from our clinics. However, our clinic brings patients into our stores,
where they then purchase medical products.
Online Sales
Since May 2010, we
have been retailing OTC drugs and nutritional supplements on the Internet at
www.dada360.com
. Before November 2015, our
subsidiary Quannuo Technology operated and maintained the website pursuant to the Internet Pharmaceutical Transaction Service Qualification
Certificate issued by the State Food and Drug Administration (the “SFDA”) of Zhejiang Province, which allows us to
engage in online retail pharmaceutical sales throughout China. As we sold all our equity interests in Quannuo Technology in November
2015, we have transferred our online pharmacy operation function to Jiuzhou Pharmacy. We have established payment methods with
banks and online intermediaries such as Alipay, and are cooperating with business-to-consumer online vendors such as Taobao. By
using Taobao’s platform in addition to our own website as mentioned above, we can be exposed to a wider range of customers.
Online sales accounted
for approximately 10.8% of our retail revenue, and 8.1% of our total revenue, for the fiscal year ended March 31, 2019. Online
sales accounted for approximately 16.4% of our retail revenue, and 12.6% of our total revenue, for the fiscal year ended March
31, 2018.
Wholesale
Since acquiring Jiuxin
Medicine in August 2011, we have been distributing third-party products primarily to drug distributors throughout China, including:
|
●
|
Approximately 1,154 prescription drugs, the sales of which accounted for approximately 63.4% of our wholesale revenue for the fiscal year ended March 31, 2019 as compared to approximately 343 prescription drugs, the sales of which accounted for approximately 56.0% of our wholesale revenue for the fiscal year ended March 31, 2018;
|
|
●
|
Approximately 1,282 OTC drugs, the sales of which accounted for approximately 33.9% of our wholesale revenue for the fiscal year ended March 31, 2019 as compared to approximately 253 OTC drugs, the sales of which accounted for approximately 42.6% of our wholesale revenue for the fiscal year ended March 31, 2018;
|
|
●
|
Approximately 307 nutritional supplements, the sales of which accounted for approximately 1.1% of our wholesale revenue for the fiscal year ended March 31, 2018 as compared to approximately 31 nutritional supplements, the sales of which accounted for approximately 0.8% of our wholesale revenue for the fiscal year ended March 31, 2018;
|
|
●
|
TCM products, the sales of which accounted for approximately 1.0% of our wholesale revenue for the fiscal year ended March 31, 2019, as compared to TCM products, the sales of which accounted for approximately 0.3% of our wholesale revenue for the fiscal year ended March 31, 2018;
|
|
●
|
Sundry products, the sales of which accounted for approximately 0.1% of our wholesale revenue for the fiscal year ended March 31, 2019 as compared to Sundry products, the sales of which accounted for approximately 0.2% of our wholesale revenue for the fiscal year ended March 31, 2018; and
|
|
●
|
Medical devices, the sales of which accounted for approximately 0.5% and 0.0%, of our wholesale revenue for the fiscal year ended March 31, 2019 and 2018, respectively.
|
Wholesale revenue increased
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 merchandise, we were able to negotiate for lower purchase
prices than the market level on such merchandise. As a result, certain vendors who were unable to obtain better prices than ours,
will turn to us for such merchandise, leading the wholesale volume to grow. On the other side, we have been trying to act as a
local agent for well-known health products in Zhejiang Province. For example, we signed a strategic cooperation agreement with
Dong’a Gelatin (DEEJ) and act as its local sale agent in Zhejiang Province. Until we can establish a new customer base and
secure the status to serve as provincial or national exclusive sale agent for certain popular drugs, we do not expect our wholesale
business to increase significantly in the immediate future.
Herb Farming
From 2010 to the third quarter of fiscal 2013, we had been cultivating and harvested ten (10) types of
herbs, such as fructusrubi (used in TCM to promote blood circulation), white atractylodes rhizome (used in TCM to treat physical
and mental fatigue), atractylodesmacrocephala (used in TCM to control sweating), ginkgo seeds (used in TCM to treat asthma), and
ginkgo trees used for TCM on approximately forty eight (48) acres of leased land in Lin’an, approximately thirty (30) miles
from Hangzhou.
We planted ginkgo 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 to
harvest. Typically, the longer the plant grows, the more valuable it becomes. We plan to continue cultivating the trees in order
to maximize their market value in the future. We may continue growing trees and cultivating other herbs in the future.
Herb farming revenue
accounted for no revenue for the fiscal year ended March 31, 2019.
Our Customers
Retail Customers
For the fiscal year ended March 31, 2019, our pharmacies collectively served an average of 13,645 customers
per day. We periodically conduct qualitative customer surveys to help us build a stronger understanding of our market position
and our customers’ purchasing habits.
Pharmacy customers
pay by cash, debit or credit cards, mobile devices or medical insurance cards under Hangzhou and Zhejiang’s medical insurance
programs. During the fiscal year ended March 31, 2019, approximately 10% of our pharmacy revenue came from cash sales, 57% from
Hangzhou’s medical insurance cards (where most of our pharmacies are located), and 33% from debit and credit cards, Zhejiang’s
medical insurance cards, Alipay and other charge cards.
We maintain strict
cash control procedures at our pharmacies. Our integrated information management system records the details of each sale, which
we control from our headquarters. Depending on each location’s sales activities, cash may be deposited daily or several times
per week in designated bank accounts.
For sales made to eligible
participants in the national medical insurance program, we generally obtain payments from the relevant government social security
bureaus on a monthly basis. See “
Relevant PRC Regulations - Reimbursement under the National Medical Insurance Program.
”
According to relevant regulations, a drugstore usually needs to operate for at least one (1) year before it can apply to be licensed
to accept Hangzhou’s medical insurance cards. As of the date of this report, eighty-nine (89) of our one hundred and twenty-one
(121) “Jiuzhou Grand Pharmacy” stores are licensed to accept medical insurance cards. Those of our stores that accept
medical insurance cards are designated as such by clear signage on their storefront windows.
Online Sales Customers
Our online
customers consist primarily of consumers between the ages of 20 and 40. While our website is accessible throughout China,
approximately thirty percent (30%) of our online sales during the fiscal year ended March 31, 2019, were from Zhejiang and
neighboring Jiangsu and Shanghai.
Wholesale Customers
Our wholesale customers
are primarily third-party trading companies that purchase from us to resell to pharmacies throughout China. We also supply some
hospitals and pharmacies, although they collectively make up less than 10.0% of our wholesale customers currently.
Herb Farming Customers
Our farming customers
primarily include local herb vendors. For the fiscal year ended March, 31, 2019, we have not harvested or sold any herbs.
Marketing and Promotion
Our marketing and promotion efforts are focused on our retail segment, specifically, our pharmacies, and
our strategy is to build brand recognition, increase customer flow, build strong customer loyalty, maximize repetitive customer
visits, and develop incremental revenue opportunities.
Our marketing department
designs chain-wide marketing efforts while each store designs local promotions based on local demographics and market conditions.
We also launch single store promotional campaigns and community activities in connection with the opening of new stores. Our store
managers and staff are also encouraged to propose their own advertising and promotional plans, including holiday promotions, posters
and billboards. In addition, we offer special discounts and gift promotions for selected merchandise periodically in conjunction
with our suppliers’ marketing programs. We also provide ancillary services such as providing free blood pressure readings
in our stores.
Many of our promotional
programs are designed to encourage manufacturers to invest resources to market their brands within our stores. We charge manufacturers
promotional fees in exchange for the right to promote and display their products in our stores during promotional periods. We also
allow manufacturers and distributors to station salespeople in our stores to promote their products, for which we receive a fee.
Since manufacturers provide purchasing incentives and information to help customers make informed purchase decisions, we believe
that manufacturer-led promotions improve our customers’ shopping experience. We work to maintain strong inventory positions
for merchandise featured in our promotions, as we believe this increases the effectiveness of our spending on promotional activities.
We regularly run advertisements
in selected newspapers to promote our brands and the products carried in our stores. Under our agreements with certain newspapers,
we run one-page weekly and monthly advertisements, as applicable, and the newspapers publish healthcare-related feature articles
relating to our advertised products on or around the dates of our advertisements. We also promote our brands and products using
billboards and radio and television commercials. Depending on our agreement with a particular manufacturer, advertising expenses
are borne either by us, the manufacturer of the products being advertised, or are shared as a joint expense. Our advertisements
are designed to promote our brands, our corporate image and the prices of products available for sale in our stores.
As part of our marketing
campaign, we offer rewards cards to customers, which provide certain exclusive discounts. After a customer signs up for the rewards
card, we communicate via the customer’s preferred method: e-mail, traditional mail or text messages. For the fiscal year
ended March 31, 2019, approximately 63.9% of our customers used their rewards cards to make purchases. We intend to further extend
this program to enhance the customer experience and for customer retention. For every 10 Yuan spent at our stores, we award 1 membership
point. Every 20 points can be exchanged for a 1 Yuan coupon, redeemable towards merchandise purchased at our stores. The reward
points never expire, but cannot be applied towards products reimbursed by the local SIC agent. As a result, we recorded unused
membership points as accrued expense.
Our clinic staff also
regularly offers free seminars and outreach programs covering various health issues that are topical to the communities where our
stores are located. Such events are designed not only to raise public health awareness, but to reach potential customers for our
drugstores.
To promote our online business, we are cooperating with Taobao, the largest online vendor in China, to
help raise awareness among potential customers. Taobao lists our products on its platform, which then directs consumers back to
our website to make their purchases.
Logistics
Before March 31, 2018, we used Jiuxin Medicine’s resources to support our logistics needs in Hangzhou.
Beginning March 31, 2018, we outsourced our logistics service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd (“Astro
Boy Logistic”). As a result, Jiuxin Medicine’s warehouse lease has been terminated. Astro Boy Logistic provides us
with approximately 14,000 square meters facility located approximately eighteen (18) miles from our headquarters, which served
as our central distribution center. Astro Boy Logistics’ staff and vehicles make regular deliveries to our pharmacies and
wholesale customers. Jiuxin Medicine, however, continues to negotiate with various suppliers and make orders.
We employ third-party
logistics companies for deliveries to wholesale customers outside Hangzhou. We believe that reliable logistics providers are readily
available and can be replaced without any material interruptions to our business.
Suppliers
We currently source retail products from approximately 120 suppliers, including trading companies and
direct manufacturers. We source wholesale products from approximately 380 suppliers, including many of those that provide our retail
products. For the fiscal year ended March 31, 2019, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for more than twenty-two
percent (22.0%) and twenty-two percent (22.7%) of our total purchases and total purchase deposits. The suppliers are neither related
to nor affiliated with us. For the fiscal year ended March 31, 2018, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for
more than nine
teen percent (19.0%) and thirteen percent
(13.1%) of our total purchases and total purchase deposits. The suppliers are neither related to nor affiliated with us.
We believe that competitive
sources are readily available for substantially all of the products we require for our retail and wholesale businesses. As such,
we believe that we can change suppliers without any material interruption to our business. To date, we have not experienced any
significant difficulty in sourcing our suppliers.
Quality Control
We strongly emphasize quality control, which starts with procurement. In addition to their market acceptance
and costs, we select products based on Good Manufacturing Practice and Good Supply Practice (“GSP”) compliance status
of their suppliers. We also assess product quality based on the manufacturer’s facilities and capabilities, including technology,
packaging and logistics. We conduct random quality inspections of each batch of products we procure, and replace any supplier who
fails to pass such inspections.
We also enforce strict
quality control measures at our distribution center. All products are screened upon their arrival, and those with evidence of defects
or damages are immediately rejected. Products that pass the screening process are recorded and stored strictly according to each
manufacturer’s temperature and other requirements. Products (for both our pharmacies and wholesale customers) are verified
against the appropriate delivery orders prior to leaving the facility. We use vehicles with cold-temperature storage to make deliveries
as necessary.
All of our pharmacy
employees participate in a mandatory thirty-six (36) hour training program regarding quality control annually, and we regularly
dispatch quality inspectors to our stores to monitor the service quality of our staff.
Competition
The drugstore industry
in China is intensely competitive, rapidly evolving and highly fragmented. We compete on the basis of store location, merchandise
selection, prices and brand recognition. Many of our competitors include large, national drugstore chains that may have more financial
resources, stronger brand strength, and management expertise than us, including China Nepstar Chain Drugstore Ltd., LBX Pharmacy,
and TianTianHao Grand Pharmacy. Other competitors include local and independent drugstores and government-operated pharmacies,
as well as discount stores, convenience stores, and supermarkets with respect to sundry and other non-medicinal products that we
carry.
The wholesale pharmaceutical
distribution industry in China is likewise competitive and highly fragmented. We compete with regional distributors, such as Zhengchen
Pharmaceutical Co., Ltd. and Hangzhou Xiaoran Pharmaceutical Co., Ltd., as well as national operators such as Fengwoda Pharmaceutical
Co., Ltd. and Jiuzhoutong Pharmaceutical Co., Ltd. These competitors have substantially greater logistics capacities and more financial
resources, as well as more industry-relevant experience, than us.
The online pharmacy is an emerging business in China. We are competing with other online vendors that
may be supported by major drugstore chains or initiated by smaller local drugstore chains. In order to compete effectively, we
are cooperating with Taobao, the largest online vendor in China. We also invest significant resources in selecting products we
believe are most suitable for online sales, such as those we have the exclusive right to sell. We have invested significant resources
identifying popular products that we believe can drive sales, while simultaneously controlling costs. In fiscal 2019, we have continued
working with large insurance companies in China such as the People’s Insurance Company (Group) of China Limited, which sells
online products to their enrolled insurance customers. Commercial health insurance has expanded rapidly in recent years in China,
especially after the government began restricting its Social Health Insurance (“SHI”) budget. We expect the close cooperation
with commercial insurance companies and active strategy on e-commerce platforms will drive up our online sales.
China’s herb
market is highly specialized. We have not incurred any herb sales in fiscal 2019.
Intellectual Property
We currently have the
following trademarks registered with the Trademark Office of the SAIC:
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●
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“Jiuzhou Tongxin” is a
Classes 5 and 35 trademark (for pharmaceuticals and advertisement) issued on February 14, 2011 and March 7, 2013
respectively, registered under Jiuzhou Pharmacy, which we plan to use to brand certain products that we may sell in our
stores;
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●
|
“Jiuzhou” is a Classes 5, 35 and 44 trademark (for medical services) issued in April and May 2012, registered under Jiuzhou Pharmacy, which we plan to use to brand our medical services;
|
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●
|
“Shouantang” a Classes 5, 10, 30, 35 and 44 trademark (for pharmaceuticals, construction, food, advertisement and medical services) issued on October 2011, and a Classes 3
、
42
、
6
、
19
、
20
、
24
、
31
、
26
、
32 and 29 (for oil, diary and others) trademark issued in August and October 2015, registered under Jiuzhou Pharmacy, which we are using to brand certain products that we sell in our stores; and
|
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“Jinyuliangyan” is a Class 29 trademark (for food and oil) issued in June 2011, registered under Jiuzhou Pharmacy, which we are using to brand certain products that we sell in our stores; and
|
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●
|
“Jiuying” is a Classes 5, 35 and 44 trademark (for healthcare and nutritional supplement) issued in December 2012 and February 2013, registered under Jiuzhou Service, which we are using to brand our service and products that we sell in our clinics.
|
We own and operate
the following websites:
www.dada360.com
(for online sales),
www.jiuzhou-drugstore.com
(our corporate website used
in China), and www.jiuzhou360.com (our English-language corporate website). We also own two (2) inactive domain names. We do not
own any patents, nor do we have any pending patent applications, and we are not a beneficiary of any licenses, franchises, concessions
or royalty agreements.
All of our employees
are required to enter into written employment agreements with us, pursuant to which they are subject to confidentiality obligations.
Employees
As of March 31, 2019, we had 1,079 employees combined in our retail and wholesale operations,
consisting of 1,019 full-time and 60 part-time employees. The number of employees for each area of operations, and such employees
as a percentage of our total workforce, are as follows:
|
|
As of
March 31, 2019
|
|
|
|
Employees
|
|
|
Percentage
|
|
Non-pharmacist store staff
|
|
|
518
|
|
|
|
48.0
|
%
|
Pharmacists
|
|
|
292
|
|
|
|
27.1
|
%
|
Management - non-pharmacists
|
|
|
69
|
|
|
|
6.4
|
%
|
Physicians
|
|
|
56
|
|
|
|
5.2
|
%
|
Non-physician clinic staff
|
|
|
67
|
|
|
|
6.2
|
%
|
Wholesale - non-warehouse
|
|
|
36
|
|
|
|
3.3
|
%
|
Wholesale - warehouse
|
|
|
0
|
|
|
|
0.0
|
%
|
Online pharmacy - technicians
|
|
|
8
|
|
|
|
0.7
|
%
|
Online pharmacy - non-technicians
|
|
|
33
|
|
|
|
3.1
|
%
|
Total
|
|
|
1,079
|
|
|
|
100.00
|
%
|
We strongly emphasize
the quality of our employees at all levels, including in-store pharmacists and store staff who directly interact with our customers.
We provide extensive training for newly recruited employees in the first three (3) months of their employment. The training is
designed to encompass a number of areas, such as knowledge of our products and effective customer service. In addition, we regularly
carry out training programs on medicinal information, nutritional information, and selling skills for our store staff and in-store
pharmacists. We believe these programs have played an important role in strengthening the capabilities of our employees.
Various drug manufacturers
also pay us to have their representatives in our drugstores, and accordingly, we train them under our store policies and procedures.
Relevant PRC Regulations
SAFE Registration
In October 2005, SAFE
issued Circular 75. Circular 75 regulates foreign exchange matters in relation to the use of a special purpose vehicle by PRC residents
to seek offshore equity financing and conduct “round trip investment” in China. The Key Personnel, who are PRC residents,
are in compliance with Circular 75 and its implementing circulars.
Dividend Distribution
Under current applicable
laws and regulations, each of our consolidated PRC entities, including WFOEs and domestic companies, may pay dividends only out
of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each
of our consolidated PRC entities is required to deposit at least ten percent (10%) of its after-tax profit based on PRC accounting
standards each year into its statutory surplus reserve fund until the accumulative amount of such reserve reaches fifty percent
(50%) of its registered capital. These reserves are not distributable as cash dividends. As of March 31, 2019 the accumulated balance
of our statutory reserve funds reserves amounted to $1.31 million, and the accumulated losses of our consolidated PRC entities
amounted to $15.04 million.
Taxation
The current PRC Enterprise
Income Tax Law (the “EIT Law”), and the implementation regulations for the EIT Law issued by China’s State Council,
became effective as of January 1, 2008. Under the EIT Law, enterprises are classified as either resident or non-resident enterprises.
An enterprise established outside of China with its “de facto management bodies” located within China is considered
a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise
income tax purposes. The implementing rules of the EIT Law defines a “de facto management body” as a managing body
that in practice exercises “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our
managing body as being located within China. Due to the relatively short history of the EIT Law and lack of applicable legal precedents,
the PRC tax authorities determine the PRC tax resident treatment of entities organized under the laws of foreign jurisdictions
on a case-by-case basis.
If the PRC tax authorities
determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of PRC tax consequences could follow.
First, we may be subject to enterprise income tax at a rate of twenty five percent (25%) on our respective worldwide taxable income,
as well as PRC enterprise income tax reporting obligations. Second, although the EIT Law provides that “dividends, bonuses
and other equity investment proceeds between qualified resident enterprises” is exempted income, and the implementing rules
of the EIT Law refer to “dividends, bonuses and other equity investment proceeds between qualified resident enterprises”
as the investment proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, it is
still unclear whether the dividends we receive from Jiuxin Management would be classified as “dividends between qualified
resident enterprises” and therefore qualify for tax exemption.
If we are treated as
a non-resident enterprise under the EIT Law, any dividends that we receive from Jiuxin Management (assuming such dividends are
deemed to be sourced from within the PRC) (i) may be subject to a five percent (5%) PRC withholding tax, provided that we own more
than twenty five percent (25%) of the registered capital of Jiuxin Management incessantly within twelve (12) months immediately
prior to obtaining such dividends from Jiuxin Management, and if the
Arrangement between the Mainland of China and the Hong
Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income
(the “Arrangement”) is applicable, or (ii) if the Arrangement does not apply (i.e. the PRC tax authorities
may deem us to be a conduit not entitled to treaty benefits), may be subject to a ten percent (10%) PRC withholding tax. Similarly,
if we are treated as a non-resident enterprise, and Renovation is treated as a resident enterprise, then any dividends that we
receive from Renovation (assuming such dividends were considered sourced within the PRC) may be subject to a ten percent (10%)
PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, that we could pay to
our shareholders.
Finally, the new “resident
enterprise” classification could result in a situation in which a ten percent (10%) PRC tax is imposed on dividends we pay
to our investors that are non-resident enterprises so long as such non-resident enterprise investors do not have an establishment
or place of business in China or, despite the existence of such establishment of place of business in China, the relevant income
is not effectively connected with such establishment or place of business in China, to the extent that such dividends have their
sources within the PRC. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a ten percent
(10%) PRC income tax if such gain is regarded as income derived from sources within China. In such event, we may be required to
withhold a ten percent (10%) PRC tax on any dividends paid to our investors that are non-resident enterprises. Our investors that
are non-resident enterprises also may be responsible for paying PRC tax at a rate of ten percent (10%) on any gain realized from
the sale or transfer of our common shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax
with respect to such gain.
Moreover, the State
Administration of Taxation issued the
Notice on Strengthening the Administration of Enterprise Income Tax on Share Transfer
Income of Non-Resident Enterprises No. 698
(“Circular 698”) on December 10, 2009, which reinforces taxation on
transfer of non-listed shares by non-resident enterprises through overseas holding vehicles. Circular 698 applies retroactively
and was deemed to be effective as of January 2008. Pursuant to Circular 698, where (i) a foreign investor who indirectly holds
equity interest in a PRC resident enterprise through an offshore holding company indirectly transfers equity interests in a PRC
resident enterprise by selling the shares of the offshore holding company, and (ii) the offshore holding company is located in
a jurisdiction where the effective tax rate is lower than twelve and a half percent (12.5%) or where the offshore income of its
residents is not taxable, the foreign investor is required to provide the tax authority in charge of that PRC resident enterprise
with certain relevant information within thirty (30) days of the transfer. The tax authorities in charge will evaluate the offshore
transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization
and there is no reasonable commercial purpose other than avoidance of PRC enterprise income tax, the tax authorities will have
the power to conduct a substance-over-form re-assessment of the nature of the equity transfer. A reasonable commercial purpose
may be established when the overall offshore structure is set up to comply with the requirements of supervising authorities of
international capital markets. If the State Administration of Taxation’s challenge of a transfer is successful, they will
deny the existence of the offshore holding company that is used for tax planning purposes. Since Circular 698 has a brief history,
there is uncertainty as to its application.
General PRC Government Approval
As a wholesale distributor
and retailer of pharmaceutical products, we are subject to regulation and oversight by different levels of the food and drug administration
in China, in particular, the SFDA. The
Drug Administration Law of the PRC
, as amended, provides the basic legal framework
for the administration of the production and sale of pharmaceutical products in China and governs the manufacturing, distributing,
packaging, pricing, and advertising of pharmaceutical products in China. The corresponding implementation regulations set out detailed
rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that
are applicable to business operators, retailers, and foreign-invested companies.
Distribution of Pharmaceutical Products
A distributor of pharmaceutical
products must obtain a distribution permit from the relevant provincial or designated municipal- or county-level SFDA. The grant
of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control
systems, personnel, and equipment. The distribution permit is valid for five (5) years, and the holder must apply for renewal of
the permit within six (6) months prior to its expiration. In addition, a pharmaceutical product distributor needs to obtain a business
license from the relevant administration for industry and commerce prior to commencing its business. All of our consolidated entities
that engage in the retail pharmaceutical business have obtained necessary pharmaceutical distribution permits, and we do not expect
to face any difficulties in renewing these permits and/or certifications.
In addition, under
the
Supervision and Administration Rules on Pharmaceutical Product Distribution
, promulgated by the SFDA on January 31,
2007, and effective May 1, 2007, a pharmaceutical product distributor is responsible for its procurement and sales activities and
is liable for the actions of its employees or agents in connection with their conduct of distribution on behalf of the distributor.
A retail distributor of pharmaceutical products is not allowed to sell prescription pharmaceutical products or Tier A OTC pharmaceutical
products listed in the national or provincial medical insurance catalogs without the presence of a certified in-store pharmacist.
See “
Reimbursement under the National Medical Insurance Program
.”
Restrictions on Foreign Ownership
of Wholesale or Retail Pharmaceutical Business in China
PRC regulations on
foreign investment currently permit foreign companies to establish or invest in WFOEs or joint ventures that engage in wholesale
or retail sales of pharmaceuticals in China. For retail sales, these regulations restrict the number and size of pharmacies that
a foreign investor may establish. If a foreign investor owns more than thirty (30) stores that sell a variety of branded pharmaceutical
products sourced from different suppliers, the foreign investor’s ownership interests in the stores are limited to forty
nine percent (49%).
In lieu of equity ownership,
our WFOE, Jiuxin Management, has entered into contractual arrangements with Jiuzhou Pharmacy and the Key Personnel.
Good Supply Practice Standards
GSP standards regulate
wholesale and retail pharmaceutical product distributors to ensure the quality of distribution of pharmaceutical products in China.
All wholesale and retail pharmaceutical product distributors are required to apply for GSP certification within thirty (30) days
after obtaining drug distribution permits. The current applicable GSP standards require pharmaceutical product distributors
to implement strict controls on the distribution of medicine products, including standards regarding staff qualifications, distribution
premises, warehouses, inspection equipment and facilities, management, and quality control. Specifically, the warehouse must be
able to store the pharmaceutical products at various required temperatures and humidity, and handle transport, warehouse entries,
delivery, and billing by computerized logistics management systems. The GSP certificate is usually valid for five (5) years. Currently,
Jiuzhou Pharmacy, and Jiuxin Medicine are all GSP certified.
Prescription Administration
Under the
Rules
on Administration of Prescriptions
promulgated by the SFDA, effective May 1, 2007, doctors are required to include the chemical
ingredients of the medicine they prescribe in their prescription and are not allowed to include brand names in their prescription.
This regulation is designed to provide consumers with choices among different pharmaceutical products that contain the same chemical
ingredients.
Advertisement of Pharmaceutical Products
Under the
Advertising
Law of PRC
, the contents of an advertisement must be true, lawful, without falsehood, and must neither deceive nor mislead
consumers. Accordingly, advertisement must be examined by the competent authority prior to its publication or broadcast through
any form of media. In addition, advertisement of pharmaceutical products may only be based on a drug’s approved indication
of use statement, and may not contain any assurance of a product’s efficiency, treatment efficiency, curative rate, or any
other information prohibited by law. Advertisement for certain drugs should include an admonishment to seek a doctor’s advice
before purchasing and application. Advertising is prohibited for certain drugs such as anesthetics and psychotropic drugs.
To further prevent
misleading advertising of pharmaceutical products, the SAIC and the SFDA jointly promulgated the
Standards for Examination and
Publication of Advertisements of Pharmaceutical Products
and
Measures for Examination of Advertisement of Pharmaceutical
Products
in March 2007. Under these regulations, an approval must be obtained from the provincial level of food and drug administration
before a pharmaceutical product may be advertised. In addition, once approved, an advertisement’s content may not be altered
without further approval. Such approval, once obtained, is valid for one (1) year.
Product Liability and Consumers Protection
Product liability claims
may arise if the products sold have any harmful effect on consumers. The injured party may make a claim for damages or compensation.
The
General Principles of the Civil Law of the PRC
, which became effective in January 1987, state that manufacturers and
sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries.
The
Product Quality
Law of the PRC
was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’
rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation
of earnings from such sales, revocation of business licenses, imposition of fines, and, in severe circumstances, may be subject
to criminal liability.
The
Administrative
Measures for Drug Recalls
was issued by the SFDA in December 2007, and covers two (2) types of drug recalls, namely voluntary
recalls and compulsory recalls. Under such regulation, wholesalers are obliged to assist drug manufacturers with any drug recall.
In addition, a wholesaler must immediately cease to sell any drug that the wholesaler learns has any safety issues, and must immediately
notify the manufacturer or its supplier as well as report the matter to the SFDA.
The
Law of the PRC
on the Protection of the Rights and Interests of Consumers
was promulgated on October 31, 1993 and became effective on January
1, 1994 to protect consumers’ rights when they purchase or use goods or services. All business operators must comply with
this law when they manufacture or sell goods and/or provide services to customers. In extreme situations, pharmaceutical product
manufacturers and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of
customers or other third parties.
The
Tort Law of
the PRC
was promulgated on December 26, 2009 and went into effect on July 1, 2010. The Tort Law provides that manufacturers
and distributors who produce or sell defective products shall be responsible for the damage caused by the defective products.
Reimbursement under the National
Medical Insurance Program
Eligible
participants in the national medical insurance program, consisting primarily of urban residents, are entitled to purchase
medicine when presenting their medical insurance cards in an authorized pharmacy, provided that the medicine they purchase
has been included in the national or provincial medical insurance catalogs. Depending on relevant local regulations,
authorized pharmacies can either (i) sell medicine on credit and obtain reimbursement from relevant government social
security bureaus on a monthly basis, or (ii) receive payments from the participants at the time of their purchases, and the
participants in turn obtain reimbursement from relevant government social security bureaus.
Medications included
in the national and provincial medical insurance catalogs are divided into two (2) tiers. Purchases of Tier A pharmaceutical products
are generally fully reimbursable, except that certain Tier A pharmaceutical products are only reimbursable to the extent the medications
are used specifically for the purposes stated in the medical insurance catalogs. Purchasers of Tier B pharmaceutical products,
which are generally more expensive than those in Tier A, are required to make a certain percentage of co-payments, with the remaining
amount being reimbursable. The percentage of reimbursement for Tier B OTC products varies in different regions in the PRC. Factors
that affect the inclusion of medicine in the medical insurance catalogs include whether the medicine is consumed in large volumes
and commonly prescribed for clinical use in China and whether it is considered to be important in meeting the basic healthcare
needs of the general public.
China’s
Ministry of Labor and Social Security, together with other government authorities, has the power to determine which medicines
are included in the national medical insurance catalog every two (2) years, under which of the two (2) tiers the included
medicine falls, and whether an included medicine should be removed from the catalog.
Sales of Nutritional Supplements
and other Food Products
A distributor of nutritional
supplements and other food products must obtain a food circulation permit from its local Administration of Industry and Commerce.
The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality
control systems, personnel, and equipment. The food circulation permit is valid for three (3) years, and the holder must apply
for renewal of the certificate within thirty (30) days prior to its expiration. Currently, Jiuxin Medicine, Jiuzhou Pharmacy, and
our drugstores all hold a valid Food Circulation Permit, except for our Lin’an store and Ren’airu store, which do not
sell food products and therefore is not required to hold such a permit. We are in the process of renewing the permits for two (2)
stores that has expired in April 2016, and believe that there will little to no difficulty in renewing such permits.
Medical Practice
Healthcare providers
in China are required to comply with many laws and regulations at the national and local government levels. The laws and regulations
applicable to our medical practice include the following:
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We must register with and maintain an operating license from the local public health authority for each clinic that we operate, each of which is subject to annual review by the public health authority;
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The
Licensed Physician Act
requires that we only hire PRC licensed physicians;
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All waste material from our clinics must be properly collected, sterilized, deposited, transported and disposed of, and we are required to keep records of the origin, type and amount of all waste materials that we generate for at least three (3) years;
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We must have at least three (3) physicians, five (5) nurses and one (1) technician on staff at each clinic; and
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We must establish and follow protocols to prevent medical malpractice, which require us to: (i) insure that patients are adequately informed before they consent to medical operations or procedures; (ii) maintain complete medical records which are available for review by the patient, physicians and the courts; (iii) voluntarily report any event of malpractice to a local government agency; and (iv) support and justify the medical services we provide in any administrative investigation or litigation. If we fail to comply with applicable laws and regulations, we could suffer penalties, including the loss of our license to operate.
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Interim Regulations on Administration
of Sino-Foreign Joint Venture and Cooperative Medical Institutions
As per China’s
commitments to the World Trade Organization, “Foreign service suppliers are permitted to establish joint venture hospitals
or clinics with local Chinese partners with quantitative limitations in line with China’s needs. Foreign majority ownership
is permitted.” In accordance with the
Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative
Medical Institutions
issued jointly by the Ministry of Health (“MOH”) and the Ministry of Commerce (“MOFCOM”)
in 2000, the Chinese party of Sino-foreign joint ventures and cooperative medical institutions shall hold no less than thirty percent
(30%) of shares and legal rights or interest, which also mean foreign investors are allowed to hold a maximum stake of seventy
percent (70%). Such regulations also specify that the establishment of Sino-foreign joint venture and cooperative medical institutions
should be approved respectively by MOH and MOFCOM. In other words, foreigners are allowed to run hospitals or clinics in the form
of equity or co-operative joint ventures with an equity interest of up to seventy percent (70%) lasting up to twenty (20) years.
Internet Pharmaceutical Sales
China’s central
government regulates Internet access, the distribution of online information and the conduct of online commerce through strict
business licensing requirements and other government regulations. Companies which sell pharmaceutical products to consumers through
the Internet are required to obtain: (1) a drug distribution permit; (2) an Internet pharmaceutical information provider qualification
certificate, renewable every five (5) years; (3) an Internet pharmaceutical transaction service qualification certificate, renewable
every five (5) years; (4) a value-added telecommunication operation permit; and (5) registration with the Administration of Information
Industry. Internet pharmacies are not allowed to distribute prescription drugs. The websites that sell pharmaceutical products
must ensure transaction security and enable the consumers to consult with licensed pharmacists. Also, an Internet-based business
in China is required to obtain and maintain certain assets relevant to its business, such as delivery and storage facilities. Jiuzhou
Pharmacy obtained all above-mentioned certificates and registrations and launched
www.dada360.com
in May 2010 and renewed
the certificates in 2015. Quannuo Technology has been operating the website and providing software and technical supports since
November 2010. Since December 2015, such online pharmacy operation function has been transferred to Jiuzhou Pharmacy after the
sale of Quannuo Technology in November 2015. During the year ended March 31,2019, the Company also sold pharmaceutical and other
products via certain third-party platforms such as Tmall and JD.com.
TCM Manufacturing
The SFDA has adopted
a non-mandatory licensing process for TCM manufacturers according to Good Agricultural Practice (“GAP”) for Chinese
Crude Drugs. Manufacturers who meet the government-set requirements will be granted a GAP certificate. Since we do not process
the herbs that we harvest and the GAP certification is not mandatory, we have not applied for such certification, and currently
have no plan of doing so.
Environmental Matters
Our drugstore and wholesale
operations do not involve any activities subject to specific PRC environmental regulations. Our medical clinics are in compliance
with applicable regulations regarding the administration of medical wastes, including collections, temperate storage, and packaging
and labeling of medical wastes. Pursuant to such regulations, we contract with DadiWeikang Medical Wastes Disposal Center to dispose
of all medical wastes generated by our clinics.
Principal Executive Office
Our principal executive
office is located at 6
th
Floor, Hai Wai Hai Tongxin Mansion, Gong Shu District, Hangzhou City, Zhejiang Province, China.
Our main telephone number is +86-571-8807-7078, and fax number is +86-571-8807-7108.
You should carefully
consider the risks described below together with all of the other information included in this report before making an investment
decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts
are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially
from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business,
financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Risks Relating to Our Business in General
Future acquisitions are expected
to be a part of our growth strategy, and could expose us to significant business risks.
We have grown our
business, in part, through the acquisition of stores over the years. One of our strategies going forward is to continue our growth
by acquiring additional drugstores. However, we cannot provide assurance that we will be able to identify and secure suitable
acquisition opportunities. Our ability to consummate and integrate effectively any future acquisitions on terms that are favorable
to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary,
our ability to obtain any necessary financing for larger acquisitions on terms that are satisfactory to us. Moreover, if an acquisition
target is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or we may not
be able to enter into arrangements on commercially reasonable terms. The negotiation and completion of potential acquisitions,
whether or not ultimately consummated, could also significantly divert management’s time and resources and may potentially
disrupt our existing business. Furthermore, we cannot provide any assurance that the expected synergies from future acquisitions
will actually materialize. Additionally, future acquisitions could result in the incurrence of additional indebtedness, costs,
and contingent liabilities, causing us to significantly increase our interest expense, leverage and debt service requirements
if we incur additional debt to pay for an acquisition or investment, issue common stock that would dilute our current shareholders’
percentage ownership, or incur write-offs and restructuring and other related expenses. Future acquisitions may also expose us
to potential risks, including risks associated with:
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the integration of new operations, services and personnel;
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unforeseen or hidden liabilities;
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the diversion of financial or other resources from our existing businesses;
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difficulties in entering markets or lines of business in which we have no or limited direct prior experience;
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our inability to generate sufficient revenue to recover costs and expenses of the acquisitions; and
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potential loss of, or harm to, relationships with employees or customers.
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Any of the above could
significantly disrupt our ability to manage our business and materially and adversely affect our business, financial condition
and results of operations.
We face significant competition,
and if we do not compete successfully against existing and new competitors, our revenue and profitability could be materially and
adversely affected.
Both the drugstore,
online pharmacy and wholesale pharmaceutical distribution industries in China are highly competitive, and we expect competition
to intensify in the future. Our primary drugstore competitors include other drugstore chains and independent drugstores. Increasingly,
we also face competition from discount stores, convenience stores and supermarkets as we expand our offering of non-drug convenience
products and services. We compete for customers and revenue primarily on the basis of store location, merchandise selection, price,
services offered, and our brand name. Our online pharmacy competitors include other online pharmaceutical vendors. As more large
traditional drugstore chain companies entered into the online sales, we face competition ranging from prices to service. Our primary
wholesale competitors include regional and national players. In addition, we may be subject to additional competition from new
entrants to both industries in China. We could also face increased competition from foreign companies if the Chinese government
removes the restrictions on the entry of foreign companies into these industries.
Some of our larger
competitors may enjoy competitive advantages, such as:
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greater financial and other resources;
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larger variety of products;
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more extensive and advanced supply chain management systems;
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greater pricing flexibility;
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larger economies of scale and purchasing power;
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more extensive advertising and marketing efforts;
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greater knowledge of local market conditions;
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stronger brand recognition; and
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larger sales and distribution networks.
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As a result of the aforementioned advantages, we
may be unable to offer products similar to, or more desirable than, those offered by our competitors, market our products as
effectively as our competitors, or otherwise respond successfully to competitive pressures. As competition increases in the
markets in which we operate, a significant increase in general pricing pressures could occur, which could require us to
reevaluate our pricing structures to remain competitive. Our competitors may be able to offer larger discounts on competing
products, and we may not be able to profitably match those discounts. Furthermore, our competitors may offer products that
are more attractive to our customers or that render our products uncompetitive. In addition, the timing of the
introduction of competing products into the market could affect the market acceptance and market share of our products. Our
failure to successfully compete could materially and adversely affect our business, financial condition, results of
operation, and prospects.
Changes in economic conditions and
consumer confidence in China may influence the drugstore industry, consumer preferences and spending patterns.
Our business and revenue
growth primarily depend on the size of the pharmaceutical market in China. As a result, our revenue and profitability may be negatively
affected by changes in national, regional or local economic conditions and consumer confidence in China. In particular, as we focus
on our expansion of pharmacies in metropolitan markets, where living standards and consumer purchasing power are relatively high,
we are especially susceptible to changes in economic conditions, consumer confidence and customer preferences of the urban Chinese
population. External factors beyond our control that affect consumer confidence include unemployment rates, levels of personal
disposable income, national, regional or local economic conditions, and acts of war or terrorism. Changes in economic conditions
and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. A decrease in overall
consumer spending as a result of changes in economic conditions could adversely affect our front-end and pharmacy sales and negatively
impact our profitability. In addition, acts of war or terrorism may cause damage to our facilities, disrupt the supply of the products
and services we offer in our stores, or adversely impact consumer demand. Any of these factors could have a material adverse effect
on our business, financial condition and results of operations.
We may not be able to timely identify
or otherwise effectively respond to changing customer preferences, and we may fail to optimize our product offering and inventory
position.
The pharmaceutical
industry in China is rapidly evolving and is subject to rapidly changing customer preferences that are difficult to predict. Our
success depends on our ability to anticipate and identify customer preferences, and adapt our product selection to meet these preferences.
In particular, we must optimize our product selection and inventory positions based on sales trends. We cannot provide assurance
that our product selection, especially our selection of nutritional supplements and food products, will accurately reflect customer
preferences at any given time. If we fail to accurately anticipate either the market for our products or customers’ purchasing
habits or fail to respond to customers’ changing preferences promptly and effectively, we may not be able to adapt our product
selection to customer preferences or make appropriate adjustments to our inventory positions, which could significantly reduce
our revenue and have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability
to establish effective advertising, marketing and promotional programs.
Our success depends
on our ability to establish effective advertising, marketing and promotional programs, including pricing strategies implemented
in response to competitive pressures and/or to drive demand for our products. Our advertisements are designed to promote our brand,
our corporate image and the prices of products available for sale in our stores. Our pricing strategies and value propositions
must be appropriate for our target customers. If we are not able to maintain and increase the awareness of our pharmacy’s
brand and the products and services we provide, we may not be able to attract and retain customers and our reputation may also
suffer. We expect to incur substantial expenses in our marketing and promotional efforts to both attract and retain customers.
However, our marketing and promotional activities may be less successful than we anticipate, and may not be effective at building
our brand awareness and customer base. In addition, the government may impose restrictions on how marketing and promotional activities
can be conducted. We cannot provide assurance that our current and proposed budget for marketing activities will be adequate to
support our future growth. Failure to successfully execute our advertising, marketing and promotional programs may result in material
decreases in our revenue and profitability.
Our ability to grow our business
may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current
leases.
Our ability to grow our business may be constrained if suitable new store locations cannot be identified
with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations
for our stores. Local land use regulations and other regulations applicable to the kinds of stores we seek to construct may impact
our ability to find suitable locations and influence the cost of constructing our stores. The expiration of leases at existing
store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close
or relocate stores. Furthermore, changing local demographics at existing store locations could materially and adversely affect
revenue and profitability levels at those stores, and overall our business, financial condition, results of operation, and prospects.
We have significant cash deposits
with our suppliers and landlords in order to obtain and maintain our inventory and maintain and establish store locations, which
we may not be able to recover in the event of bankruptcy by our suppliers or landlords or other events beyond our control.
Our ability to obtain
products and maintain inventory at, and to establish and maintain leases for, our pharmacies, is dependent upon our ability to
post and maintain significant cash deposits with our suppliers and landlords. Many vendors in China are unwilling to ship merchandise
on credit and instead require cash deposits, and landlords may require security deposits consisting of the equivalent of twelve
(12) months of rent . As of March 31, 2019, we had approximately $2.5 million deposited with suppliers and approximately $3.4
million deposited with landlords for our pharmacies. If we are unable or unwilling to establish such advances and deposits, our
ability to generate sales and expand our business could be adversely affected. In general, we expect the amounts required for
advances and deposits to increase as we undertake our expansion plans, complete store openings and expand our business through
acquisitions or otherwise. We do not generally receive interest on the deposits made to suppliers or landlords, and such deposits
are subject to the risk of loss as a result of the creditworthiness or bankruptcy of the party who holds our funds, as well as
the risk from any illegal acts associated with the third party, such as conversion, fraud, theft or dishonesty. If these circumstances
were to arise, we could 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 our vendors or landlords.
If we are unable to optimize management
of our procurement and distribution activities, we may be unable to meet customer demand while increasing the burden on managing
our supply chain.
Since May 2011, we have been using Jiuxin Medicine’s facility as our distribution center for both
our retail and wholesale businesses. Starting from March 31, 2018, we outsourced our logistic service to Astro Boy Cloud Pan (Hangzhou)
Storage and Logistic Co. Ltd (“Astro Boy Logistic”). As a result, Jiuxin Medicine’s warehouse lease has been
terminated. Astro Boy Logistic provides us with a facility with approximately 14,000 square meters located approximately eighteen
(18) miles from our headquarters, which served as our central distribution center. Astro Boy Logistic’s staff and vehicles
make regular deliveries to our pharmacies and wholesale customers. Our ability to meet customer demand may be significantly limited
if we do not successfully and efficiently conduct our distribution activities, or if Astro Boy Logistic’s facility is destroyed
or shut down for any reason, including as the result of natural disasters. Any disruption in the operation of our distribution
activities could result in higher costs or longer lead times associated with distributing our products. Since it is difficult to
predict accurate sales volume in our industry, we may be unable to optimize our distribution activities, which may result in excess
or insufficient inventory, warehousing, fulfillment or distribution capacity. Furthermore, failure to effectively control product
damage during the distribution process could decrease our operating margins and reduce our profitability.
All product procurement is handled through our corporate headquarters. Such centralization is intended
to reduce the cost of goods sold as a result of volume purchase benefits. However, we may be less successful than anticipated in
achieving these volume purchase benefits. In addition, such centralization is expected to increase the complexity of tracking inventory
and could place additional burdens on the management of our supply chain. If we cannot successfully reduce our costs through centralizing
procurement, our profitability and prospects could be materially and adversely affected.
Failure to maintain optimal inventory
levels could increase our inventory holding costs or cause us to lose sales, either of which could have a material adverse effect
on our business, financial condition and results of operations.
We need to maintain
sufficient inventory levels to operate both of our retail and wholesale businesses successfully as well as meet customer expectations.
However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of
rapid changes in product life cycles, changing consumer preferences, uncertainty of the success of product launches, seasonality,
and manufacturer backorders and other vendor-related problems. We cannot provide assurance that we can accurately predict these
trends and events and avoid over-stocking or under-stocking products. In addition, demand for products could change significantly
between the time product inventory is ordered and the time it is available for sale.
When we begin selling
a new product, it is particularly difficult to accurately forecast product demand. The purchase of certain types of inventory
may require significant lead-time. As we carry a broad selection of products and maintain significant inventory levels for a substantial
portion of our merchandise, we may be unable to sell such inventory in sufficient quantities or during the relevant selling seasons.
Carrying excess inventory could increase our inventory holding costs, and failure to have inventory in stock when a customer orders
or purchases it could cause us to lose that order or that customer, either of which could have a material adverse effect on our
business, financial condition and results of operations.
We rely on computer software and
hardware systems in managing our operations, the capacity of which may restrict our growth and the failure of which could adversely
affect our business, financial condition and results of operations.
We are dependent upon
our integrated information management system to monitor daily operations of our retail and wholesale businesses, and to maintain
accurate and up-to-date operating and financial data for the compilation of management information. In addition, we rely on our
computer hardware and network for the storage, delivery and transmission of the data of our retail and wholesale systems. If our
computer software and hardware systems fail to meet the increasing needs of our expanding operations, our ability to grow may
be constrained. Furthermore, any system failure which causes interruptions to the input, retrieval and transmission
of data or causes lags in service time could disrupt our normal operations. Although we believe that our computer software and
hardware systems are up to date and that our disaster recovery plan is adequate in handling potential failures, we cannot provide
assurance that we can effectively carry out this disaster recovery plan and that we will be able to restore our operation within
a sufficiently short time frame to avoid our business being disrupted. Furthermore, our systems are subject to damage or interruption
from power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, natural disasters,
catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If any of our computer
software and/or hardware systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial
costs to repair or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability
to perform critical functions. Due to the limited coverage of business interruption insurance policies offered in China, we do
not carry business interruption insurance and, as a result, any business disruption or natural disaster could severely disrupt
our business and operations and, in turn, significantly decrease our revenue and profitability.
We depend substantially on the continuing
efforts of the Key Personnel, and our business and prospects may be severely disrupted if we lose their services.
Our future success
is dependent on the continued services of the Key Personnel but we do not maintain key-man insurance. If we lose the services
of any one of the Key Personnel, we may not be able to locate suitable or qualified replacements, which could severely disrupt
our business and prospects. Each of the Key Personnel has entered into confidentiality and non-competition agreements with us.
However, if any disputes arise between us and the Key Personnel, we cannot provide assurance, in light of uncertainties associated
with the PRC legal system, that any of these agreements can be enforced in China, the jurisdiction in which the Key Personnel
reside and hold some of their assets. See ”
Risks Related to Doing Business in China - You may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
“
We depend on the continued service
of, and on the ability to attract, motivate and retain a sufficient number of qualified and skilled personnel for our business.
The implementation
of our business strategy and our future success also depend in large part on our continued ability to attract and retain highly
qualified and skilled personnel. We cannot provide assurance that we will be able to attract, hire and retain sufficient numbers
of skilled personnel necessary to continue to develop and grow our business. We face competition for personnel from both retail
and wholesale pharmaceutical distribution operators. This competition could require us to offer higher compensation and other benefits
in order to attract and retain qualified individuals, which could materially and adversely affect our financial condition and results
of operations. On the other hand, we may be unable to attract or retain the personnel required to achieve our business objectives,
and that failure could severely disrupt our business and prospects. The process of hiring suitably qualified personnel is often
lengthy. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our
business strategy.
Our retail and wholesale operations
require a number of permits and licenses in order to carry on their business.
We are required to
obtain certain permits and licenses from various PRC governmental authorities, including a Drug Distribution Permit and a GSP certification.
We are also required to obtain food hygiene certificates for the distribution of nutritional supplements and food products. We
cannot provide any assurance that we can maintain all required licenses, permits and certifications to carry on our business at
all times, and from time to time we may have not been in the past, or may not be in the future, in compliance with all such required
licenses, permits and certifications. Moreover, these licenses, permits and certifications are subject to periodic renewal and/or
reassessment by the relevant PRC governmental authorities and the standards of such renewal or reassessment may change from time
to time. We intend to apply for renewal of these licenses, permits and certifications when required by applicable laws and regulations.
Any failure by us to obtain and maintain all licenses, permits and certifications necessary to carry on our business at any time
could have a material adverse effect on our business, financial condition and results of operations. In addition, any inability
to renew any of these licenses, permits and certifications could severely disrupt our business, and prevent us from continuing
to carry on our business. Any changes in the standards used by governmental authorities in considering whether to renew or reassess
our business licenses, permits and certifications, as well as any enactment of new regulations that may restrict the conduct of
our business, may also decrease our revenue and/or increase our costs, materially reducing our profitability and prospects. Furthermore,
if the interpretation or implementation of existing laws and regulations changes or if new regulations come into effect requiring
us to obtain any additional licenses, permits or certifications that were previously not required to operate our existing businesses,
we cannot provide assurance that we can successfully obtain such licenses, permits or certifications.
We may need additional capital, and
the sale of equity securities could result in dilution to our stockholders, while debts may require us to make covenants restricting
how we operate.
We believe that
the aggregate amount of our current cash, anticipated cash flow from operations, available borrowings under our existing bank
facilities, and personal loans from our principal shareholders should be sufficient to meet our anticipated cash needs for
the near future. We may, however, require additional cash resources due to changed business conditions or other future
developments. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or
debt securities or obtain credit facilities. The sale of additional equity securities could result in the dilution of
our existing stockholders. We cannot guarantee that we will be able to obtain any additional financing on terms that are
acceptable to us, or at all. Even if we are able to obtain any requisite financing, the incurrence of additional indebtedness
would result in increased debt service obligations, and could result in further operating and financing covenants that would
restrict our freedom to operate our business, such as conditions that:
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limit our ability to pay dividends or require us to seek consent for the payment of dividends;
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increase our vulnerability to general adverse economic and industry conditions;
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require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and
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limit our flexibility in planning for, or reacting to, changes in our business and our industry.
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Risks Relating to Our Pharmacy Operations
Our brand names, trade secrets and
other intellectual property are valuable assets. If we are unable to protect them from infringement, our business and prospects
may be harmed.
We consider our pharmacy
brand names to be valuable assets. We may be unable to prevent third parties from using such brand names without authorization,
which may adversely affect our business and reputation, including the perceived quality and reliability of our products and services.
We have five (5) registered trademarks. We also own three (3) domain names that we actively use in our business.
We rely on trade secrets to protect our know-how and other proprietary information, including pricing,
purchasing, promotional strategies, customer lists and/or suppliers lists. As a result, our employees are required to sign employment
agreements that contain confidentiality provisions as a condition of their employment with us. However, trade secrets are difficult
to protect. While we believe we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or
advisors may unintentionally or willfully disclose our information to competitors. In addition, confidentiality agreements executed
by the aforementioned individuals may not be enforceable or provide meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure.
If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets,
such efforts could be expensive and time-consuming, and the outcome unpredictable. Additionally, if our competitors independently
develop information that is equivalent to our trade secrets or other proprietary information, we have little recourse to enforce
our rights, and our business and prospects could be harmed.
Litigation may be necessary
in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights
of others. However, since the validity, enforceability and scope of protection of intellectual property rights in the PRC are uncertain
and still evolving, we may not be successful in prosecuting these cases. In addition, any litigation, proceeding or other efforts
to protect our intellectual property rights could result in substantial costs and diversion of our resources, and could seriously
harm our business and operating results. Furthermore, the degree of future protection of our proprietary rights is uncertain and
may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we are unable to protect our trade
names, trade secrets and other propriety information from infringement, our business, financial condition and results of operations
may be materially and adversely affected.
We may be exposed to intellectual
property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse
effect on our financial condition and results of operations.
Our success depends,
in large part, on our ability to use our proprietary information and know-how without infringing third party intellectual property
rights. As litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property
infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors,
many of whom have substantial resources, may have or may obtain intellectual property protection that will prevent, limit or interfere
with our ability to conduct our business in China. Moreover, the defense of intellectual property suits, including trademark infringement
suits and related legal and administrative proceedings, can be both costly and time consuming and may significantly divert the
efforts and resources of our management personnel. Furthermore, an adverse determination in any such litigation or proceeding to
which we may become a party could cause us to:
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pay damage awards;
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seek licenses from third parties;
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pay ongoing royalties;
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redesign our product offerings; or
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be restricted by injunctions,
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Each of which could
effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or
limiting their purchase from our stores, which could have a material adverse effect on our financial condition and results of operations.
The continued penetration of counterfeit
products into the pharmaceutical market in China may damage our reputation and have a material adverse effect on our business,
financial condition, results of operations and prospects.
Counterfeit products have
continued to make their way into the Chinese pharmaceutical market. Counterfeit products are generally sold at lower prices compared
to their authentic counterparts due to their low production costs, and in some cases may be very similar in appearance to their
authentic counterparts. Counterfeit pharmaceuticals may or may not have the same chemical content as their authentic counterparts,
and are typically manufactured without proper licenses or approvals as well as fraudulently mislabeled with respect to their content
and/or manufacturer. Although China’s central government has been increasingly active in combating counterfeit pharmaceutical
and other products, China does not yet have effective regulatory control or an enforcement system over counterfeit pharmaceutical
products. Although we have implemented a series of quality control procedures in our procurement process, we cannot provide assurance
that we may not be inadvertently selling counterfeit pharmaceutical products. Any unintentional sale of counterfeit products may
subject us to negative publicity, fines and/or other administrative penalties, or may even result in litigation against us. Moreover,
the increased distribution of counterfeit products and other products in recent years may reinforce the negative image of drug
distributors among consumers in China. The continued proliferation of counterfeit products in China could have a material adverse
effect on our business financial condition, and results of operation.
As a distributor of pharmaceutical
and other healthcare products, we are exposed to inherent risks relating to product liability and personal injury claims.
Distributors of pharmaceutical
and other healthcare products are exposed to risks inherent in the packaging and distribution of such products. Such risks include
unintentional distribution of counterfeit, mislabeled or contaminated drugs, and, with respect to our pharmacies, improper filling
of prescriptions, labeling of prescriptions and adequacy of warnings. Errors in the packaging or dispensing of pharmaceuticals
could lead to serious injury or death. Furthermore, the applicable PRC laws, rules and regulations require our in-store pharmacists
to offer counseling to our customers, without additional charge, about medication, dosage, delivery systems, common side effects,
and other information the in-store pharmacists deem significant. Our in-store pharmacists sometimes also have a duty to warn customers
regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects, and we may
be liable for claims arising from any advice given by our in-store pharmacists. Product liability or personal injury claims may
be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide, and we may be required
to pay for substantial monetary damages for any successful product liability or personal injury claim against us. We may, however,
in product liability claims, have the right under applicable PRC laws, rules and regulations to recover from the relevant manufacturer
any compensation we paid to our customers in connection with such claim. Even if we successfully defend ourselves against this
type of claim, we could be required to spend significant management, financial and other resources in the process, which could
disrupt our business. Our reputation and our brand names may also suffer as a result of any product liability or personal injury
claims against us. Like many other similar companies in China, we do not carry product liability insurance. A product recall or
damage to our reputation in the event of a product liability or personal injury claim or judgment against us could have a material
adverse effect on our business, financial condition and results of operations.
We may be subject to fines and penalties
if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under China’s National Medical
Insurance Program.
Eligible participants
in China’s national medical insurance program, mainly consisting of urban residents in China, are entitled to buy medicines
using their medical insurance cards from an authorized pharmacy, provided that the medicines they purchase have been included in
the national or provincial medical insurance catalogs. The pharmacy, in turn, obtains reimbursement from the relevant government
social security bureaus. Moreover, the applicable PRC laws, rules and regulations prohibit pharmacies from selling goods other
than pre-approved medicines when purchases are made with medical insurance cards. We have established procedures to prohibit our
drugstores from selling unauthorized goods to customers who make purchases with medical insurance cards. However, we cannot provide
assurance that those procedures will be strictly followed by all of our employees in all of our stores.
Risks Relating to Our Medical Services
If we do not attract and retain qualified
physicians and other medical personnel, our ability to provide medical services would be adversely affected.
The success of our medical services will, in part, be dependent upon the number and quality of doctors,
nurses and other medical support personnel that we employ and our ability to maintain good relationships with them. Our medical
staff may terminate their employment with us at any time. If we are unable to successfully maintain good relationships with them,
our ability to provide medical services may be adversely affected.
The provision of medical services
is heavily regulated in the PRC and failure to comply with those regulations could result in penalties, loss of licensure, additional
compliance costs or other adverse consequences.
Healthcare providers in China, as in most other populous countries, are required to comply with many laws
and regulations at the national and local government levels. These laws and regulations relate to: licensing; the conduct of operations;
the ownership of facilities; the addition of facilities and services; advertising; confidentiality, maintenance and security issues
associated with medical records; billing for services; and prices for services. If we fail to comply with applicable laws and regulations,
we could suffer penalties, including the loss of our licenses to operate. In addition, further healthcare legislative reform is
likely, and could materially and adversely affect our business and results of operations in the event that we do not comply or
if the cost of compliance is prohibitive. The above list of certain regulated areas is not exhaustive, and it is not possible to
anticipate the exact nature of future healthcare legislative reform in China. Depending on the priorities set by the Chinese Ministry
of Health, the political climate at any given time, the continued development of the Chinese healthcare system and many other factors,
future legislative reforms may be highly comprehensive, including stringent infection control policies, improved rural healthcare
facilities, increased regulation of the distribution of pharmaceuticals, and numerous other policy matters. Consequently, the implications
of these future reforms could result in penalties, loss of licensure, additional compliance costs or other adverse consequences
we cannot foresee at the present time.
As a provider of medical services,
we are exposed to inherent risks relating to malpractice claims.
As a provider of medical services, any misdiagnosis or improper treatment may result in negative publicity
regarding us or our services, which would harm our reputation. If we are found liable for malpractice, we may be required to pay
substantial monetary damages. Furthermore, even if we successfully defend ourselves against a malpractice claim, we could be required
to spend significant management, financial and other resources in the process, which could disrupt our business, and our reputation
and brand name may also suffer. Since malpractice claims are not common in China, we do not carry malpractice insurance. As a result,
any imposition of malpractice liability could materially harm our business, financial condition and results of operations.
We face competition that could adversely
affect our results of operations.
Our clinics compete
with a large number and variety of healthcare facilities in their respective markets. There are numerous government-run and private
hospitals and clinics available to the general populace. There can be no assurance that these or other clinics, hospitals or other
facilities will not commence or expand such operations, which would increase their competitive position. Furthermore, there can
be no assurance that a healthcare organization that having greater resources in the provision or management of healthcare services
will not decide to engage in operations similar to those being conducted by us in Hangzhou.
Risks Related to Our Herb Farming
Our herb farming business is subject
to the volatility of prices for raw TCM herbs.
We currently planted gingko trees in our leased farm land. However, in the future, we may continue to
cultivate and sell certain herbs in bulk to third-party vendors, based on local market prices primarily determined by TCM manufacturers
and trading companies. Such market prices have increased significantly in recent years in response to changes in the supply of
and demand for raw herbs, market uncertainty and a variety of additional factors that are beyond our control, including inflation,
changes in weather, disease outbreaks, domestic government regulation, market speculation and overall economic conditions. There
can be no assurance that market prices, which historically have fluctuated widely, will continue to increase or remain stable,
and any future declines in prices may negatively impact the viability of our herb farming business.
Unforeseen and severe weather can
reduce cultivation activities and lead to a decrease in anticipated harvest.
Seasonal climate change
and weather variations such as levels of rainfall and temperature may, among other things, affect the quality, overall supply and
availability of raw herbs. Sustained adverse weather conditions in Zhejiang Province in general and in Lin’an in particular
where our herbs are planted, such as rain, extreme cold or snow, could disrupt or curtail cultivation activities. This in turn
could reduce our anticipated harvest yields, delay the timing of our anticipated harvest and distribution, and negatively affect
the quality of our harvest. In addition, natural disasters such as fires, earthquakes, snowstorms, floods or droughts, or natural
conditions such as crop disease, pests or soil erosion, may also negatively impact our cultivation and harvest.
In addition, the actual
climatic conditions of Zhejiang Province and of Lin’an in particular may not conform to historical patterns and may be affected
by variations in weather patterns, including any potential impact of climate change. The effects of climate change may produce
more unpredictable weather events that may adversely affect our ability to cultivate and harvest successfully.
The occurrence of any
of these may materially harm our herb farming business.
We have limited control over the
availability and the quality of the local farmers with whom we cooperate because we do not employ them directly.
We rely on local farmers
to farm and harvest our herbs, but do not employ them directly. Instead, they are recruited and employed by the local villagers’
committees with whom we negotiate. We have limited control over the availability and the quality of this labor force. A shortage
of suitable laborers may adversely affect our harvest yields.
Risks Related to Our Online Sales
We rely on computer software and
hardware systems in managing our online sales, the capacity of which may restrict our growth and the failure of which could adversely
affect our business, financial condition and results of operations.
We are dependent upon
our electronic commerce system to carry out our online sales. Any system failure which causes interruptions to the input, retrieval
and transmission of data, or increases in service time could disrupt our normal operations. Although we believe we have a disaster
recovery plan that can handle the failure of our computer software and hardware systems, we cannot provide assurance that we can
effectively carry out this disaster recovery plan and that we will be able to restore our operation within a sufficiently short
time frame to avoid disruption to our business. Any failure in our computer software and/or hardware systems could have a material
adverse effect on our business, financial condition and results of operations. In addition, if the capacity of our computer software
and hardware systems fails to meet the increasing needs of our operations, our ability to grow may be constrained.
Our online business decreased in
the fiscal year ended March 31, 2019 and we cannot assure our efforts for alternative vendors will result in the increase in revenues
from online pharmacy in the coming years.
Our online pharmacy sales decreased by approximately $3,348,471, or 27.6% for the year ended March 31,
2019, as compared to the year ended March 31, 2018. The decrease was primarily caused by the decline in business via e-commerce
platforms. In order to increase the popularity of our products, we have made considerable efforts to identify popular products
that can drive sales, while keeping a close watch on cost. However, due to the suspension of OTC drug sales on e-commerce platforms
such as Alibaba in the second quarter of fiscal year 2017 by the China Food and Drug Administration (“CFDA”), our sales
via these e-commerce platforms have been curtailed. As a result, our sales via these e-commerce platforms decreased by 33.4% period
over period. We are adding more non-medical health products such as nutritional supplements into our sales menu to counteract the
decline in sale of OTC drug category. For instance, we are opening a
dendrobium candidum
flagship store at Tmall with a
popular local brand. The brand has a large customer base in Hangzhou. However, there is no assurance our efforts will lead in the
increase in our online sales.
If our online business fails to obtain
and maintain the requisite assets, licenses, qualified personnel and approvals required under the complex regulatory environment
for Internet-based businesses in China, the business prospects for such business may be materially and adversely affected.
Internet-based businesses
in China are highly regulated by China’s central government, and numerous regulatory authorities are empowered to issue and
implement regulations governing various aspects of these businesses. Our online business is operated by our PRC subsidiary, Jiuzhou
Pharmacy, which is required to obtain and maintain certain assets relevant to its business, such as computers and other electrical
equipment, as well as applicable licenses or approvals from different regulatory authorities. These assets and licenses are essential
to the operation of an e-commerce business and are generally subject to annual review by the relevant governmental authorities.
Furthermore, we may be required to obtain additional licenses. If we fail to obtain or maintain any of the required assets, licenses
or approvals, our Internet business may be deemed illegal and it may be subject to various penalties, such as confiscation of illegal
income, fines, and/or the discontinuation or restriction of its operations. Any such disruption may materially and adversely affect
the prospects of our online business.
Risks Related to Our Corporate Structure
Chinese regulations limit foreign
ownership of any pharmacy operator with thirty (30) or more stores, and limit foreign ownership of medical clinics to Sino-foreign
joint venture. The entities that operate our pharmacies and clinics are controlled by us through contractual arrangements. The
validity of such contractual arrangements is uncertain. If the Chinese government determines that these contractual arrangements
do not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected.
In addition, changes in the relevant Chinese laws and regulations may materially and adversely affect our business.
Current PRC regulations
limit foreign ownership of a pharmacy operator to forty nine percent (49%) if such operator owns interests in thirty (30) or more
drugstores in China that sell a variety of branded pharmaceutical products sourced from different suppliers. Since we do not own
any equity interests in Jiuzhou Pharmacy (or its subsidiary Jiuxin Medicine), but instead control it through contractual arrangements,
we do not believe that the regulations limiting foreign ownership apply to us even if Jiuzhou Pharmacy or Jiuxin Medicine expands
beyond thirty (30) stores. In fact, Jiuzhou Pharmacy has expended to one hundred and twenty-one (121) stores as of March 31, 2019.
Similarly, PRC regulations
restrict foreign ownership of medical practices in China to Sino-foreign joint ventures. Since we do not have any actual equity
interest in Jiuzhou Clinic or Jiuzhou Service, but control these entities through contractual arrangements, we do not believe that
such PRC regulations are applicable to us or our structure.
There are, however,
uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the
laws, rules and regulations governing the validity and enforcement of our contractual arrangements. Although the structures for
operating our business in China (including our corporate structure and contractual arrangements with Jiuzhou Pharmacy, Jiuzhou
Clinic, Jiuzhou Service and the Key Personnel) comply with all applicable PRC laws, rules and regulations, and do not violate,
breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot provide assurance that a
regulatory authority will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations.
If any such authority determines that our contractual arrangements are in violation of applicable PRC laws, rules or regulations,
our contractual arrangements may become invalid or unenforceable, and we may not be able to consolidate the operations of HJ Group
with our results of operations. In addition, new PRC laws, rules and regulations may be introduced from time to time to impose
additional requirements that may be applicable to our contractual arrangements. For example, pursuant to the PRC Property Rights
Law that became effective on October 1, 2007 (the “Property Law”), the pledge of any equity interests of a PRC private
entity shall become effective once it is duly registered with the local branches of the SAIC. Following the promulgation of the
Property Law, the SAIC further issued the
Administrative Measures for Registrations of Share Pledge
on September 1, 2008,
which provided detailed procedural guidance for the local SAIC offices to handle the registrations of pledged shares. The Equity
Pledge Agreement that forms a part of the contractual arrangements creates a legally binding obligation on the parties upon the
execution date; however, the pledge established under such agreement does not become effective until due registration with the
local SAIC office. On May 18, 2010, registration of the pledged equity interests in Jiuzhou Pharmacy was completed.
The Chinese government
has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses,
and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by the relevant governmental
bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing
or new Chinese laws or regulations on our businesses. We cannot provide assurance that our current ownership and operating structure
will not be found in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions,
including fines, and could be required to restructure our operations or cease the provision of certain services. Any of these or
similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our
business operations, which could materially and adversely affect our business, financial condition and results of operations.
If we are determined
to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required
governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations,
including:
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revoking the business and operating licenses of the HJ Group entities;
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discontinuing or restricting the operations of the HJ Group entities;
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imposing conditions or requirements with which we or the HJ Group entities may not be able to comply;
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requiring us or the HJ Group entities to restructure the relevant ownership structure or operations; and/or
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imposing fines.
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The imposition of any
of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition,
results of operations and prospects.
We may be adversely affected by complexity,
uncertainties and changes in Chinese regulation of drugstores and the practice of medicine.
The Chinese government
regulates drugstores and the practice of medicine, including foreign ownership and requirements for licenses and permits. These
laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty.
As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation
of applicable laws and regulations.
The interpretation
and application of existing Chinese laws, regulations and policies and possible new laws, regulations or policies have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities
of, pharmaceutical businesses in China, including our business. We currently only have contractual control over the HJ Group entities,
and do not own them due to the restrictions on foreign ownership of such companies. However, changes to laws in the PRC may force
us to restructure our ownership structure or our operations, which would severely disrupt our ability to conduct business and have
a material adverse effect on our financial condition, results of operations and prospects.
Uncertainties relating
to the regulation of drugstores and medical practice in China also extend to evolving licensing practices, which means that permits,
licenses or operations at our company may be subject to challenge. This may disrupt our business or subject us to sanctions, requirements
to increase capital, or other conditions or enforcement. In turn, this could compromise enforceability of related contractual arrangements,
or have other harmful effects on us.
Our contractual arrangements with
HJ Group and the Key Personnel may not be as effective in providing control over these entities as direct ownership.
We have no equity ownership
interest in HJ Group, and rely on contractual arrangements to control and operate the HJ Group companies and their businesses.
These contractual arrangements may not be as effective in providing control over these companies as direct ownership. For example,
any one of them could fail to take actions required for our business despite its contractual obligation to do so. Under such circumstances,
we may have to rely on legal remedies under Chinese law, which may not be effective in providing us any relief. In addition, we
cannot provide assurance that the Key Personnel will act in our best interests.
Since we rely on contractual arrangements
to control HJ Group and for substantially all of our revenue, the termination of such agreements will severely and detrimentally
affect our continuing business viability under our current corporate structure.
Since we do not own
equity interests of HJ Group, the termination of our contractual arrangements with them would sever our ability to continue receiving
payments from them under our current holding company structure. We cannot provide assurance that there will not be any event or
reason that may cause the contractual arrangements to terminate. In the event that the contractual arrangements terminate, we will
lose our control over them and their business operations and, as a result, over our primary sources of revenue. This may have a
severe and detrimental effect on our continuing business viability under our current corporate structure, which in turn may affect
the value of your investment. Should this occur, we may seek to acquire control of HJ Group through other means, although we cannot
guarantee that we will do so, nor can we guarantee that we will be successful if we do.
We rely principally on dividends
paid by our consolidated operating entities to fund any cash and financing requirements we may have, and any limitation on the
ability of our consolidated PRC entities to pay dividends to us could have a material adverse effect on our ability to conduct
our business.
We are a holding company
and rely principally on dividends paid by our consolidated PRC operating entities for cash requirements, including the funds required
to service any debt we may incur, which are passed on to us through Jiuxin Management. If any of the consolidated operating entities
incurs debt in its own name in the future, the instruments governing the debt may restrict dividends or other distributions on
our equity interest to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual
arrangements in a manner that would materially and adversely affect our ability to pay dividends and other distributions on our
equity interest.
Furthermore, applicable
PRC laws, rules and regulations permit payment of dividends by our consolidated PRC entities only out of their retained earnings,
if any, determined in accordance with PRC accounting standards. Under PRC laws, rules and regulations, our consolidated PRC entities
are required to set aside at least ten percent (10%) of their after-tax profit each year, based on PRC accounting standards, into
their statutory surplus reserve funds until the accumulative amount of such reserves reaches fifty percent (50%) of their respective
registered capital. As a result, our consolidated PRC entities are restricted in their ability to transfer a portion of their net
income to us whether in the form of dividends, loans or advances. As of March 31, 2019, our restricted reserves totaled $1,309,109(RMB
9,460,695). Our restricted reserves are not distributable as cash dividends. Any limitation on the ability of our consolidated
operating entities to pay dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
Certain management members of HJ
Group have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.
Mr. Lei Liu, our Chief Executive Officer and Chairman of our Board of Directors, is also the executive
director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic, and the supervising director of Jiuzhou Service. In addition,
Mr. Liu has also lent us money out of his personal funds to help facilitate our payments of expenses in the U.S., as well as to
purchase a land use right. Ms. Li Qi, our Corporate Secretary and a member of our Board of Directors, is the general manager of
each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and a general partner of Jiuzhou Clinic. Conflicts of interests between
their respective duties to our company and HJ Group may arise. As our directors and executive officers, they have a duty of loyalty
and care to us under U.S. and Hong Kong law when there are any potential conflicts of interests between our company and HJ Group.
We cannot provide assurance, however, that when any conflicts of interest arise, both of them will act completely in our interests
or that conflicts of interests will be resolved in our favor. For example, they may determine that it is in HJ Group’s interests
to sever the contractual arrangements with Jiuxin Management, irrespective of the effect such action may have on us. In addition,
either one of them could violate his or her legal duties by diverting business opportunities from us to others, thereby affecting
the amount of payment that HJ Group is obligated to remit to us under the Consulting Services Agreement.
In the event that you
believe that your rights have been infringed under securities laws or otherwise as a result of any one of the circumstances described
above, it may be difficult or impossible for you to bring an action against HJ Group, or our officers or directors who are members
of the management, all of whom reside within China. Even if you are successful in bringing an action, the laws of China may render
you unable to enforce a judgment against the assets of HJ Group and its management, all of which are located in China.
Risks Related to Doing Business in China
We rely on contractual arrangements
with our VIE for our operations, which may not be as effective in providing control over these entities as direct ownership.
Our operations and
financial results are dependent on our VIEs, Jiuzhou Pharmacy (including its subsidiaries and controlled entities), Jiuzhou Clinic
and Jiuzhou Service, in which we have no equity ownership interest and must rely on contractual arrangements to control and operate
the businesses of our VIEs. These contractual arrangements are not as effective in providing control over the VIEs as direct ownership.
For example, the VIEs may be unwilling or unable to perform its contractual obligations under our commercial agreements. Consequently,
we would not be able to conduct our operations in the manner currently planned. In addition, the VIEs may seek to renew its agreements
on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial
ability to control the VIEs, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal
remedies under PRC law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements
expire or enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating
expenses may significantly increase.
In January 2015, China’s Ministry of Commerce released draft legislation that could change how the
government regulates corporate structures, especially for VIEs controlled by foreign investments. Instead of looking at “ownership”,
the draft law focused on the entities or individuals hold control of a VIE. If a VIE is deemed to be controlled by foreign investors,
it may be barred from operating in restricted sectors or the prohibited sectors listed on a “negative list”, where
only companies controlled by Chinese nationals could operate, even if structured as VIEs. As of the report date, no formal legislation
has been implemented.
In the event that the
draft law is implemented in any form, and that the Company’s business was characterized as one of the “restricted”
or “prohibited” sectors, the VIEs the Company currently maintains contractual arrangements with may be barred from
operation which will materially adversely affect our business.
Changes in the policies of the PRC
government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such
business.
Policies of the PRC
government can have significant effects on economic conditions in China. Our interests may be adversely affected by changes in
policies by the PRC government, including:
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changes in laws, regulations or their interpretation;
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confiscatory taxation;
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restrictions on currency conversion, imports or sources of supplies and export tariff; and
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expropriation or nationalization of private enterprises.
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Although the PRC government
has been pursuing economic reform policies for more than two (2) decades, we cannot assure you that the government will continue
to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership,
social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.
Uncertainties with respect to the
Chinese legal system could adversely affect us.
We conduct our business
through our subsidiaries and controlled companies in the PRC. Our operations in China are governed by Chinese laws and regulations.
We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable
to WFOE. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited
precedential value.
Since 1979, Chinese
legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because
of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of our resources and our management’s attention.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in
China against us or our management based on United States or other foreign laws.
We are a holding company
and conduct our business through our subsidiaries and controlled companies in the PRC. In addition, all of our operating assets
are located in, and all of our other senior executive officers reside within, China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon those of our senior executive officers and directors
that do not reside in the United States, including with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the United States or
many other countries providing for the reciprocal recognition and enforcement of judgment of courts. As a result, our public shareholders
may face substantially more difficulty in protecting their interests through actions against our management or directors than would
shareholders of a corporation with assets and management located in the United States.
We
may need to obtain additional governmental approvals to open new drugstores. Our inability to obtain such approvals will have a
material adverse effect on our business and growth.
According to the
Measures
on the Administration of Foreign Investment in the Commercial Sector
(the “Measures”) promulgated by China’s
Ministry of Commerce (the “MOC”), which became effective on June 1, 2004, a company that is directly owned by a foreign
invested enterprise needs to obtain relevant governmental approvals before it opens new retail stores. However, there are no specific
laws, rules or regulations with respect to whether such approvals are necessary for a company that is contractually controlled
by a foreign invested enterprise. In addition, the Measures state that the MOC will promulgate a detailed implementation regulation
to govern foreign invested enterprises engaging in drug sale. However, such implementation regulation has not yet been promulgated.
Therefore, we cannot provide assurance that the MOC will not require such approvals to be obtained, or as to when any regulation
of such requirements may be implemented. If additional governmental approvals are deemed to be necessary and we are unable to
obtain such approvals on a timely basis or at all, our business, financial condition, results of operations and prospects, as
well as the trading price of our common stock, will be materially and adversely affected.
The
advent of recent healthcare reform directives from China’s central government may increase both competition and our cost
of doing business.
Under the auspices
of the Healthy China 2020 program (the “Program”), published by China’s National Development and Reform Commission
in October 2008, the central government has set in motion a series of policies in fairly rapid succession aimed to improve China’s
healthcare system. Such policies include (1) discouraging hospitals from both prescribing and dispensing medication, (2) the unveiling
in April 2009 of formal healthcare reform guidelines aimed at improving the availability of and subsidies for “essential”
drugs, and (3) the announcement in August 2009 of China’s National Essential Drugs List (“NEDL”), initially listing
approximately three hundred (300) medicines to be sold at government-controlled prices. While an underlying goal of these policies
is to make drugs more accessible to China’s poorer population, these policies also serve to create opportunities that in
turn will intensify business competition in the Chinese retail drugstore industry, as well as competition for skilled labor and
retail spaces. Additionally, we expect the NEDL to result in a rise in the number of government-subsidized community healthcare
service centers, which in turn may erode the convenience and price advantage that our drugstores traditionally enjoy against hospitals.
The
PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase
our production costs.
In June 2007, the National
People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January
1, 2008 (the “LC Law”). The LC Law formalized workers’ rights concerning overtime hours, pensions, layoffs, employment
contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, the LC Law
provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on
the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract
in most cases, including the case of the expiration of a fixed-term employment contract. Further, the LC Law requires an employer
to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer
for ten (10) consecutive years or more or has had two (2) consecutive fixed-term contracts with the same employer. An “employment
contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can
still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of implementing rules
for the LC Law and the precedents for the enforcement of such a law, the standards and procedures set forth under the LC Law in
relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that
such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.”
Finally, under the LC Law, downsizing of either more than twenty (20) people or more than ten percent (10%) of the workforce may
occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy
Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material
change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract,
thereby making the performance of such employment contract impossible. To date, there has been very little guidance and precedent
as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of
our employees working for us exclusively within the PRC are covered by the LC Law and thus, our ability to adjust the size of our
operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future
periods of decline in business activity generally or adverse economic periods specific to our business, the LC Law can be expected
to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect
to foreign exchange transactions.
Fluctuations in the
value of the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the
U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. We receive substantially
all of our revenues in RMB. Under our current structure, our income is primarily derived from payments from the three (3) HJ Group
companies. Shortages in the availability of foreign currency may restrict the ability of our subsidiaries and our PRC affiliated
entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency
denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior
approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses, such as the repayment
of bank loans denominated in foreign currencies. The Chinese government may also, at its discretion, restrict access in the future
to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
From 1995 until July
2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately
Renminbi 8.3 per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of
the Renminbi versus the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5%
against the U.S. dollar over the following three years. As a consequence, the Renminbi has fluctuated sharply since July 2008 against
other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last
and when and how it may change again. There remains significant international pressure on the PRC government to adopt a substantial
liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi
against the U.S. dollar. Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For
example, to the extent that we need to convert U.S. dollars we receive from securities offering into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from
the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%,
represented the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its
exports, will need a stimulus that can only come from further cuts in the exchange rate.
Fluctuations in the value of RMB
may have a material adverse effect on your investment.
The value of RMB against
the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.
Our revenues, costs, and financial assets are mostly denominated in RMB, while our reporting currency is the U.S. dollar. Accordingly,
this may result in gains or losses from currency translation on our financial statements. We rely entirely on fees paid to us by
our affiliated entities in China. Therefore, any significant fluctuation in the value of RMB may materially and adversely affect
our cash flows, revenues, earnings, financial position, and the value of, and any dividends payable on, our stock in U.S. dollars.
For example, an appreciation of RMB against the U.S. dollar would, to the extent that we need to convert U.S. dollars into RMB
for such purposes, make any new RMB denominated investments or expenditures more costly to us. An appreciation of RMB against the
U.S. dollar would result in foreign currency translation gains for financial reporting purposes when we translate our RMB denominated
financial assets into U.S. dollars, as the U.S. dollar is our reporting currency.
In addition,
appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported
in U.S. dollars without giving effect to any underlying change in our business or results of operations. The income statements
of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S.
dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in
reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens
against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating
expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert
the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency
exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation
gain or loss, which is recorded as a component of other comprehensive income. Very limited hedging transactions are available in
China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we
may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and
we may not be able to successfully hedge our exposure at all.
Jiuzhou Pharmacy, Jiuzhou Clinic
and Jiuzhou Service are subject to restrictions on making payments to us.
We rely substantially
on our contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service for our revenue. The Chinese government
also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience
difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if these
companies incur debt on their own in the future, the instruments governing the debt may restrict their ability to make payments.
If we are unable to receive all of the revenues from our operations through these contractual arrangements, we may be unable to
pay dividends on our common shares.
Dividends we receive from our subsidiaries
located in the PRC may be subject to PRC withholding tax.
The EIT Law provides
that a maximum income tax rate of twenty percent (20%) is applicable to dividends payable to non-PRC investors that are “non-resident
enterprises,” to the extent such dividends are derived from sources within the PRC. However, the State Council has reduced
such rate to ten percent (10%) through the implementation regulations. We are a Nevada holding company and substantially all of
our income is derived from our subsidiaries and controlled companies located in the PRC. Therefore, dividends paid to us from China
may be subject to the ten percent (10%) income tax if we are considered a “non-resident enterprise” under the EIT Law.
If we are required to pay income tax for any dividends we receive from our PRC subsidiaries under the EIT Law and its implementation
regulations, it may have a material and adverse effect on our net income and materially reduce the amount of dividends, if any,
we may pay to our shareholders.
We face risks related to disease epidemics
and other outbreaks.
Our business could be adversely affected by the effects of disease outbreaks. Any prolonged recurrence
of any adverse public health developments in China may have a material adverse effect on our business operations. For instance,
health or other government regulations adopted in response may require temporary closure of our stores or offices. Such closures
would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written
preventive measures or contingency plans to combat any future epidemic outbreak.
Failure to comply with the U.S. Foreign
Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are required to
comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage
over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in the PRC. If our competitors
engage in these practices, they may receive preferential treatment in the PRC, giving them an advantage in securing business, which
would put us at a disadvantage. We cannot provide assurance that our employees or other agents will not engage in such conduct
for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could
suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and
results of operations.
If relations between the United States
and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
At various times in recent years, the United States and China have had significant disagreements over
political and economic issues. Controversies may arise in the future between the two countries. Any political or trade controversies
between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.
Our auditor, like other independent
registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting
Oversight Board, and consequently investors may be deprived of the benefits of such inspection.
Our auditor, the independent registered public accounting firm that issued the audit reports included
elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered
with the Public Company Accounting Oversight Board (United States) (the “PCAOB”), is required by the laws of the United
States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and applicable professional
standards. Our auditor is located in China and the PCAOB is currently unable to conduct inspections on auditors in China without
the approval of the PRC authorities. Therefore, our auditor, like other independent registered public accounting firms operating
in China, is currently not inspected by the PCAOB.
In May 2013, the PCAOB
announced that it has entered into a Memorandum of Understanding (“MOU”) on Enforcement Cooperation with the China
Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance (the “MOF”). The MOU establishes
a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both
countries’ respective jurisdictions. More specifically, it provides a mechanism for the parties to request and receive from
each other assistance in obtaining documents and information in furtherance of their investigative duties. In addition to developing
enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China
of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other
firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality
control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The
inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more
difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures, and to the extent
that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures,
investors may be deprived of such benefits.
The slowing economic growth in China
may assert a negative impact on our operation and financial results.
According to several
articles published by the Wall Street Journal, CNN, and BBC News in January 2016, after experiencing rapid growth for more than
a decade, China’s economy has been hit by shrinking foreign and domestic demand, weak investment, factory overcapacity and
oversupply in the property market, and has experienced a painful slowdown in the last two years. In 2016, China’s economy
grew by 6.7%, compared with 6.9% a year earlier, marking its slowest growth in a quarter of a century. As the government tried
to shift the growth engine away from manufacturing and debt-fueled investment toward the services sector and consumer spending,
the outlook of the Chinese economy is uncertain.
In the next two to
three years, China’s growth performance could deteriorate because of the overhang of its real estate bubble, massive manufacturing
overcapacity, and the lack of new growth engines. The International Monetary Fund expected China’s economy to grow by 6.4%
in 2018-2020. If China’s economy slows down further, it may negatively affect our business operation and financial results.
Risks Related to an Investment in Our
Securities
To date, we have not paid any cash
dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate
paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend
to retain all earnings for our operations.
NASDAQ may delist our common stock
from trading on the NASDAQ Capital Market for failing to maintain a minimum bid price of $1.00, which could limit investors’
ability to effect transactions in our common stock and subject us to additional trading restrictions.
On May 9, 2013, we
received a letter from The NASDAQ Stock Market LLC (“NASDAQ”), notifying us of our failure to maintain a minimum closing
bid price of $1.00 over the then preceding thirty (30) consecutive trading days for its common stock, as required by NASDAQ Listing
Rule 5550(a)(2) (the “Bid Price Rule”). The letter stated that the company had until November 5, 2013, to demonstrate
compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum of ten (10) consecutive trading days. In
the meantime, we were included in a list of non-compliant companies posted on NASDAQ’s website commencing on May 16, 2013.
On November 6, 2013,
NASDAQ granted us an additional 180-day period, or until May 5, 2014, to remain listed on the NASDAQ Capital Market and to regain
compliance with the Bid Price Rule. Under NASDAQ Listing Rules, we were granted this extension because we met the continued listing
requirement for market value of publicly held shares and all other applicable NASDAQ listing requirements, except the bid price
requirement.
On January 16, 2014,
we received a letter from NASDAQ notifying us that we had regained compliance with the Bid Price Rule, as the closing bid price
of our common stock had been at or above $1.00 per share for at least 10 consecutive trading days. However, we cannot provide assurance
that we will remain compliant with the Bid Price Rule in the future. If NASDAQ delists our common stock from trading on its exchange,
we could face significant material adverse consequences including:
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a limited availability of market quotations for our common stock;
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a limited amount of news and analyst coverage for our company; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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Although publicly traded, the trading
market in our common stock may be substantially less liquid than the average stock quoted on the NASDAQ Capital Market, and such
low trading volume may adversely affect the price of our common stock.
Although our common
stock has been listed on the NASDAQ Capital Market since April 22, 2010, the historical trading volume of our common stock has
generally been low. Limited trading volume will subject our shares of common stock to greater price volatility and may make it
difficult for you to sell your shares of common stock at a price that is attractive to you.
The market price for our stock may
be volatile, and such volatility may subject us to securities litigation.
The market price for
our stock may be volatile and, when compared to seasoned issuers, subject to wide fluctuations in response to various factors,
many of which are beyond our control, including the following:
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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conditions in the retail pharmacy markets;
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changes in the economic performance or market valuations of other retail pharmacy operators;
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition or departure of key personnel;
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fluctuations of exchange rates between RMB and the U.S. dollar;
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intellectual property litigation; and
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general economic or political conditions in China.
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As an illustration
of such volatility, the closing price of our common stock during the fifty two (52) weeks preceding the date of this report ranged
from a low of $1.17 to a high of $2.73. In addition, the securities market has from time to time experienced significant price
and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may
also materially and adversely affect the market price of our stock.
In the past, plaintiffs
have often initiated securities class action litigation against a company following periods of volatility in the market price of
its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management’s attention and resources.
Techniques employed by manipulative
short sellers in Chinese small-cap stocks may drive down the market price of our common stock.
Short selling is the
practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying
identical securities back at a later date to return to the lender. The short seller hopes to profit from the difference in the
sale price of the borrowed securities and the purchase price of the replacement shares. As it is therefore in the short seller’s
best interests for the price of the stock to decline, there have been incidents of short sellers publishing, or arranging to publish
negative opinions in order to create negative market momentum. While traditionally these disclosed shorts have been limited in
their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological
advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed
shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic
the type of investment analysis performed by large Wall Street firms and independent research analysts. These short attacks have,
in the past, resulted in the selling of shares in the market, on occasion on a large scale and broad base. Issuers with business
operations based in the PRC, that have limited trading volumes and that are susceptible to higher volatility levels than U.S. domestic
large-cap stocks can be particularly vulnerable to such short attacks.
These short seller
publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not
subject to the certification requirements imposed by the SEC in Regulation Analyst Certification and, accordingly, the opinions
they express may be based on distortion of the actual facts or, in some cases, fabrication of the facts. In light of the limited
risks involved in publishing such information, and the enormous profit that can be made from running just one successful short
attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will
continue to issue such reports.
While we intend to
strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of
freedom of speech, applicable state law (often called Anti-SLAPP statutes), or issues of commercial confidentiality, in the manner
in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate
that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements –
should we be targeted for such an attack and the rumors not dismissed by market participants, our stock will likely suffer from
a temporary, or possibly long term, decline in market price.
Our officers and directors own a
substantial portion of our outstanding common stock, which will enable them to influence many significant corporate actions and
in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.
As of June 28, 2019,
our directors and executive officers collectively controlled approximately 9,244,482 or 28.6% of our outstanding shares of stock
entitled to vote on all corporate actions. These stockholders, acting together, could have a substantial impact on matters requiring
the vote of the shareholders, including the election of our directors and most of our corporate actions. This control could delay,
defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would
benefit us and our shareholders. This control could adversely affect the voting and other rights of our other shareholders and
could depress the market price of our common stock.
The elimination of monetary liability
against our directors, officers and employees under Nevada law and the existence of indemnification rights for our directors, officers
and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our bylaws contain
specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, and we
are prepared to give such indemnification to our directors and officers to the extent provided by Nevada law. We may also have
contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations
could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors
and officers, which we may be unable to recoup. These provisions and any costs resulting therefrom may also discourage our company
from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the
filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful,
might otherwise benefit our company and shareholders.
Legislative actions, potential new
accounting pronouncements and higher insurance costs may impact our future financial position and results of operations.
Over the last decade
or so, there have been many regulatory changes, including the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”)
and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. There may potentially be new accounting pronouncements
or regulatory rulings or changes that will have an impact on our future financial position and results of operations. In addition,
insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase
our premiums for insurance policies. These and other potential changes could materially increase the expenses we report under generally
accepted accounting principles, and adversely affect our operating results.
If we fail to maintain an effective
system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
We are subject to reporting
obligations under U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act, as amended, adopted rules
requiring every public company to include a management report on such company’s internal controls over financial reporting
in its annual report, which contains management’s assessment of the effectiveness of our internal controls over financial
reporting. We reported certain material weaknesses involving control activities, specifically internal control weaknesses relating
to finance personnel, in light of the continuing lack of sufficient experience by our accounting staff in U.S. GAAP-based reporting
and SEC rules and regulations. Such material weaknesses were noted for the past five (5) fiscal years, based on factors including:
(i) the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes; (ii)
the significance of the audit adjustments and their impact on the overall financial statements; (iii) how appropriately we complied
with U.S. GAAP on transactions; and (iv) how accurately we prepared supporting information to provide to our independent auditors
on a quarterly and annual basis. As such, we did not maintain effective controls and did not implement adequate and proper supervisory
review to ensure that significant internal control deficiencies could be detected and/or prevented.
Although we believe
that we have made significant efforts to address the foregoing weaknesses, we believe that our efforts to date have not yet been
sufficient to fully remediate such weaknesses. We will continue our efforts during the current fiscal year, although there can
be no assurance that compliance will be achieved in this time frame.
Our reporting obligations
as a public company will place a significant strain on our management, operational and financial resources and systems for the
foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce
reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective
internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial
statements, which in turn could harm our business and negatively impact the trading price of our common stock. Furthermore, we
anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply
with Section 404 and other requirements of the Sarbanes-Oxley Act.