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CJJD > SEC Filings for CJJD > Form 10-Q on 14-Feb-2012All Recent SEC Filings

Show all filings for CHINA JO-JO DRUGSTORES, INC.

Form 10-Q for CHINA JO-JO DRUGSTORES, INC.


14-Feb-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following management's discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "may", "will", "could", "expect", "anticipate", "intend", "believe", "estimate", "plan", "predict", and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of our annual report on Form 10-K for the year ended March 31, 2011 and filed with the SEC on June 29, 2011. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.

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

Overview

We are primarily an operator of retail pharmacies based in Zhejiang Province, China. Our drugstores provide customers with a wide variety of medicinal products, including prescription and OTC drugs, nutritional supplements, traditional Chinese medicine ("TCM"), personal care products, family care products, medical devices, as well as convenience products including consumable, seasonal and promotional items. We briefly offered baijiu, or Chinese white liquor, at some of our pharmacies from December 2010 to February 2011, but did not sell any during the nine months ended December 31, 2011. Each store typically carries approximately 2,500 to 7,000 different products, and presently average approximately 300 square meters. As of December 31, 2011, all stores except for one were operated by Jiuzhou Pharmacy, which we control through contractual arrangements, as well as its subsidiary, Shanghai Lydia Grand Pharmacy Co., Ltd. ("Shanghai Lydia"), and a company under its control.

In addition to these products, we have licensed doctors of both western medicine and TCM staffed at three medical clinics and at our pharmacies for consultation, examination and treatment of common ailments at scheduled hours. The medical clinics are operated by Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd., both of which we also control through contractual arrangements.

In addition to pharmacies and medical clinics, we plan to distribute herbal plants being cultivated on leased land at our pharmacies and to third parties. In August 2010, we established Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. ("Jiuxin Qianhong") as a wholly-owned subsidiary to operate this cultivation project. Currently, more than ten herbal plants, including fructus rubi, white atractylodes rhizome and atractylodes macrocephala, are being cultivated on approximately 48 acres. As herbs usually take one to several years to become mature, we have harvested limited quantities of herbs to date for distribution to third-party vendors.

Since May 2010, we have been operating an online drugstore (www.dada360.com) that sells non-prescription drugs (including over-the-counter drugs and nutritional supplements). In July 2010, we established Zhejiang Shouantang Pharmaceutical Technology Co., Ltd. ("Shouantang Technology") as a wholly-owned subsidiary and acquired Zhejiang Quannuo Internet Technology Co., Ltd. ("Quannuo Technology") in November 2010 to operate the website and provide software and technical support. As part of our acquisition of Quannuo Technology, we also acquired its wholly-owned subsidiary, Hangzhou Quannuo Grand Pharmacy Co., Ltd. ("Hangzhou Quannuo"), and the "Quannuo Grand Pharmacy" store. Other than activities relating to investing and financing the working capital of Quannuo Technology and coordinating short-term inter-company loans, Shouantang Technology has had no separate operations of its own as of December 31, 2011. In June 2011, we established Tonglu Lydia Agriculture Development Co., Ltd. ("Tonglu Lydia") as a wholly-owned subsidiary of Shouantang Technology to undertake herbal cultivation similar to that by Jiuxin Qianhong. As of the date of this report, however, Tonglu Lydia has had no operation as it has not been able to locate and lease suitable land for cultivation.

Jiuzhou Pharmacy's subsidiary Hangzhou Kuaileren Grand Pharmacy Co., Ltd. ("Kuaileren") was formally dissolved on April 9, 2011 and its assets have been transferred to Jiuzhou Pharmacy. Prior to its dissolution, Kuaileren operated a "Kuaileren Grand Pharmacy" store, which store now operates as a "Jiuzhou Grand Pharmacy" store.

On April 15, 2011, Jiuzhou Pharmacy entered into an equity ownership transfer agreement with the owners of Zhejiang Jiuxin Medicine Co., Ltd. ("Jiuxin Medicine") to acquire their equity interests in Jiuxin Medicine for RMB 50 million. On April 15, 2011, the business license of Jiuxin Medicine was transferred to Jiuzhou Pharmacy. On August 25, 2011, Jiuzhou Pharmacy completed its acquisition of Jiuxin Medicine for RMB 30 million, and Jiuxin Medicine became a whole-owned subsidiary of Jiuzhou Pharmacy. Jiuxin Medicine is a wholesale drug distributor and is licensed to distribute prescription and non-prescription pharmaceutical products throughout China. In addition to its wholesale business, Jiuxin Medicine services our logistics needs and its facility serves as our primary distribution center.

On July 29, 2011, Shanghai Lydia obtained control of Shanghai Bieyanghong Zhongxing Grand Pharmacy Co. Ltd. ("Bieyanghong Zhongxing") pursuant to an agreement entered into on the same date to acquire 99% of its equity interests from two of its owners. Bieyanghong Zhongxing, which has changed its name to Shanghai Lydia Zhongxing Grand Pharmacy Co., Ltd., operates one pharmacy in Shanghai.

On December 20, 2011, Renovation established Hangzhou Jiutong Medical Technology Co., Ltd. ("Jiutong Medical") as a wholly-owned subsidiary to process herbal plants, mainly cultivated by Jiuxin Qianhong, into TCM.


Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ materially from those estimates.

We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements.

When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements. We have not made any material changes in the methodology used in our accounting policies which are consistent with those discussed in our annual report on Form 10-K for the year ended March 31, 2011.

The critical accounting policies and related judgments and estimates are identified in Note 2 to our unaudited consolidated financial statements accompanying in this report

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") issued Accounting Standard Update ("ASU") No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 created a uniform framework for applying fair value measurement principles for companies around the world and clarified existing guidance in US GAAP. ASU 2011-04 is effective for the first reporting annual period beginning after December 15, 2011 and shall be applied prospectively. We do not expect the adoption of this ASU to have any material effect on our consolidated financial statements.

In June 2011, the FASB issued Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (ASU No. 2011-05), which updates the Codification to require the presentation of the components of net income, the components of other comprehensive income (OCI) and total comprehensive income in either a single continuous statement of comprehensive income or in two separate, but consecutive statements of net income and comprehensive income. These updates do not affect the items reported in OCI or the guidance for reclassifying such items to net income. These updates to the Codification are effective for interim and annual periods beginning after December 15, 2011. We do not expect the implementation of this guidance to have a material impact on our consolidated financial statements.

In September 2011, the FASB issued Intangibles - Goodwill and Other (Topic 350)
- Testing Goodwill for Impairment (ASU No. 2011-08), which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The implementation of the ASU is not expected to have a material impact on our consolidated financial statements.


Results of Operations

Three months ended December 31, 2011 as compared to the three months ended
December 31, 2010

The following table summarizes our results of operations for the three months
ended December 31, 2011 and 2010:

                                                           Three Months Ended
                                                              December 31
                                                  2011                            2010
                                                        Percentage                      Percentage
                                                         of total                        of total
                                       Amount ($)        revenue        Amount ($)       revenue
Revenue                               $ 25,643,949           100.0 %   $ 18,042,309          100.0 %
Gross profit                          $  6,826,869            26.6 %   $  5,329,128           29.5 %
Selling expenses                      $  2,498,892             9.7 %   $  1,337,055            7.4 %
General and administrative expenses   $  2,175,615             8.5 %   $  1,227,520            6.8 %
Income from operations                $  2,152,362             8.4 %   $  2,764,553           15.3 %
Other income (expense), net           $     16,343             0.1 %   $    112,736            0.6 %
Change in fair value of purchase                                       $    119,595
option derivative liability           $     19,404             0.1 %                           0.7 %
Income tax expense                    $    610,910             2.4 %   $    759,431            4.2 %
Net income attributable to                                             $  2,237,453
controlling interest                  $  1,573,982             6.1 %                          12.4 %
Net loss attributable to                                               $          -
noncontrolling interest               $     (3,217 )           0.0 %                           0.0 %

Revenue. Our revenue increased by $7,601,640 or 42.1 % to $25,643,949 for the three months ended December 31, 2011, from $18,042,309 for the three months ended December 31, 2010, primarily as a result of wholesale revenue from Jiuxin Medicine and sales from new stores opened since December 31, 2010, offset by same-store sales decrease. "Same-store sales" refers to sales in stores that have been operating for one or more years. Same-store sales decreased by $1,872,098, or 10.5%, period over period mainly as a result of shifting certain non-retail sales from Jiuzhou Pharmacy to Jiuxin Medicine. We operated a total of 60 stores as of December 31, 2011, including 2 new stores added during the quarter, as compared to 49 stores as of December 31, 2010. We anticipate that our overall revenue will continue to increase as we open additional stores and our maturing stores are able to accept government insurance.

Gross Profit. Our gross profit increased by $1,497,741 or 28.1 % to $6,826,869 for the three months ended December 31, 2011, from $5,329,128 for the three months ended December 31, 2010. Our gross margin, however, decreased period over period from 29.5% to 26.6 % as a result of lower gross profit margin from Jiuxin Medicine's wholesale activities.

Selling Expenses. Our selling expenses increased by $1,161,837 or 86.9% to $2,498,892 for the three months ended December 31, 2011, from $1,337,055 for the three months ended December 31, 2010. The increase is primarily a result of operating 60 store locations as compared to 49 stores that we operated as of December 31, 2010. Selling expenses as a percentage of our revenue increased from 7.4% to 9.7% period over period. We expect that our selling expenses will continue to increase as we continue to expand our retail store network and wholesale activities, and as our online pharmacy continues to mature.

General and Administrative Expenses. Our general and administrative expenses increased by $948,095 or 77.2% to $2,175,615 for the three months ended December 31, 2011, from $1,227,520 for the three months ended December 31, 2010. General and administrative expenses as a percentage of our revenue increased from 6.8% to 8.5% period over period. The increase is mainly attributable to the establishment of new subsidiaries in the last calendar year and expenses of being a public company. As we continue to open drugstores, further develop our infrastructure, expand our business and incur expenses related to being a public company, we anticipate that our general and administrative expenses will increase in absolute dollars as well as a percentage of total revenue.

Income from Operations. As a result of increased selling expenses and general and administration expenses, our income from operations decreased by $612,191 or 22.1% to $2,152,362 for the three months ended December 31, 2011 from $2,764,553 for the three months ended December 31, 2010. Our operating margin for the three months ended December 31, 2011 and 2010 was 8.4% and 15.3%, respectively.

Income Tax Expense. Our income tax expense decreased to $610,910 for the three months ended December 31, 2011, from $759,431 for the three months ended December 31, 2010, as a result of decreased operational income from our pharmacies, offset by increased effective tax rate. Our effective tax rate increased from 25.3% to 27.9% period over period as a result of certain expenses that we incurred in the United States as a public company that are not deductible for tax purposes in China.

Net Income Attributable to Controlling Interest. As a result of the foregoing, our net income attributable to controlling interest decreased by $663,471 or 29.7% to $1,573,982 for the three months ended December 31, 2011, from $2,237,453 for the three months ended December 31, 2010.


Nine months ended December 31, 2011 as compared to the nine months ended December 31, 2010

The following table summarizes our results of operations for the nine months ended December 31, 2011 and 2010.

                                                           Nine Months Ended
                                                              December 31
                                                  2011                          2010
                                                       Percentage                    Percentage
                                                        of total                      of total
                                         Amount ($)     revenue          Amount       revenue
Revenue                                 $ 69,296,755        100.0 %   $ 48,972,907        100.0 %
Gross profit                            $ 19,954,088         28.8 %   $ 14,351,136         29.3 %
Selling expenses                        $  6,588,686          9.5 %   $  3,339,928          6.8 %
General and administrative expenses     $  4,570,919          6.6 %   $  2,758,654          5.6 %
Income from operations                  $  8,794,483         12.7 %   $  8,252,554         16.9 %
Other income (expense), net             $    222,929          0.3 %   $     60,985          0.1 %
Change in fair value of purchase option                               $     91,546
derivative liability                    $    116,392          0.2 %                         0.2 %
Income tax expense                      $  2,684,463          3.9 %   $  2,387,719          4.9 %
Net income attributable to controlling                                $  6,017,366
interest                                $  6,450,424          9.3 %                        12.3 %
Net loss attributable to noncontrolling                               $          -
interest                                $      1,083          0.0 %                             %

Revenue. Our revenue increased by $20,368,848 or 41.6% to $69,296,755 for the nine months ended December 31, 2011, from $48,927,907 for the nine months ended December 31, 2010, primarily as a result of same-store sales growth, sales from new stores opened since December 31, 2010, and wholesale revenue from Jiuxin Medicine. Same-store sales increased by $4,504,788, or 9.2 %, period over period, mainly from sales of pharmaceutical products covered by government-sponsored medical insurance programs. Revenue also increased from operating additional new store locations, from 49 stores as of December 31, 2010 to 60 stores as of December 31, 2011, including 7 new stores added and 1 store acquired during the nine months ended December 31, 2011. We anticipate that our overall revenue will continue to increase as we open additional stores and our maturing stores are able to accept government insurance.

Gross Profit. Our gross profit increased by $5,602,952 or 39.0% to $19,954,088 for the nine months ended December 31, 2011, from $14,351,136 for the nine months ended December 31, 2010. Our gross margin decreased period over period from 29.3% to 28.8% as a result of the lower profit margin from Jiuxin Medicine's wholesale activities.

Selling Expenses. Our selling expenses increased by $3,248,758 or 97.3% to $6,588,686 for the nine months ended December 31, 2011, from $3,339,928 for the nine months ended December 31, 2010. The increase is primarily a result of operating 60 store locations as compared to 49 stores that we operated as of September 30, 2010. Selling expenses as a percentage of our revenue increased from 6.8% to 9.5% period over period. We expect that our selling expenses will continue to increase as we continue to expand our retail store network and wholesale activities, and as our online pharmacy continues to mature.

General and Administrative Expenses. Our general and administrative expenses increased by $1,812,265 or 65.7% to $4,570,919 for the nine months ended December 31, 2011, from $2,758,654 for the nine months ended December 31, 2010. General and administrative expenses as a percentage of our revenue increased from 5.6% to 6.6% period over period. The increase is mainly attributable to the establishment of new subsidiaries in the last calendar year and expenses of being a public company. As we continue to open drugstores, further develop our infrastructure, expand our business and incur expenses related to being a public company, we anticipate that our general and administrative expenses will increase in absolute dollars as well as a percentage of total revenues.

Income from Operations. As a result of sales increase, partially offset by increased selling expenses and general and administration expenses, our income from operations increased by $541,929 or 6.6% to $8,794,483 for the nine months ended December 31, 2011, from $8,252,554 for the nine months ended December 31, 2010. Our operating margin for the nine months ended December 31, 2011 and 2010 was 12.7% and 16.9%, respectively.

Income Tax Expense. Our income tax expense increased to $2,684,463 for the nine months ended December 31, 2011, from $2,387,719 for the nine months ended December 31, 2010, as a result of increased operational income from our pharmacies and increased effective tax rate. Our effective tax rate increased from 28.4% to 29.4% period over period as a result of certain expenses that we incurred in the United States as a public company that are not deductible for tax purposes in China.

Net Income Attributable to Controlling Interest. As a result of the foregoing, our net income attributable to controlling interest increased by $433,058 or 7.2% to $6,450,424 for the nine months ended December 31, 2011, from $6,017,366 for the nine months ended December 31, 2010.

Liquidity

In summary, our cash flows for the periods indicated are as follows:

                                                                      Nine months ended
                                                                         December 31
                                                                    2011              2010

Net cash provided by (used in) operating activities            $   17,677,975     $ (7,085,181)
Net cash used in investing activities                          $ (15,025,013)     $ (2,689,937)
Net cash (used in) provided by financing activities            $  (4,948,749)     $  15,495,423

For the nine months ended December 31, 2011, we generated cash from operating activities of $17,677,975, as compared to cash used in operating activities of $7,085,181 for the nine months ended December 31, 2010. The increase is primarily attributable to a decrease in inventory of $2,754,684, a partial liquidation of our advances to suppliers of $13,724,368, a return of other current asset including a vendor security deposit of $6,137,143, and an increase of accounts payable of $3,618,265 as compared to the same period in 2010, offset by an increase in accounts receivable of $2,790,460.


We used $15,025,013 in investing activities during the nine months ended December 31, 2011, as compared to cash used in investing activities of $2,689,937 during the nine months ended December 31, 2010. The $12,335,076 increase in cash used in investing activities was mainly a result of net payment for business acquisitions of $2,704,121, and an increase in the purchases of property and equipment of $9,630,955.

Cash used in financing activities was $4,948,749 for the nine months ended December 31, 2011, primarily from the pay down of notes payable to vendors of $4,452,229. Cash from financing activities for the nine months ended December 31, 2010 was $15,495,423, largely from the equity financing completed in April 2010 which raised approximately $15.7 million in net proceeds, after deducting underwriter discount, commission, and offering expenses.

As of December 31, 2011, we had cash of approximately $4,339,666. Our total current assets as of December 31, 2011 were $38,734,926 and our total current liabilities were $16,335,731, which resulted in a net working capital of $22,399,195 as of December 31, 2011.

Capital Resources

In April 2010, we completed a public offering of 3.5 million shares of our common stock at a price of $5.00 per share resulting in gross proceeds of $17.5 million and net proceeds of $15.7 million after deducting commissions and all other expenses.

On August 25, 2011, we completed our acquisition of Jiuxin Medicine for approximately $4,638,000 (RMB 30,000,000) that was deducted from our prepayment to the sellers of $5,070,880 (RMB 32,800,000). The balance of $432,880 of our prepayment was refunded to us by the sellers on November 9, 2011.

On September 8, 2011, we contributed RMB 8,000,000 to complete the registered capital requirement for Quannuo Technology.

On December 20, 2011, we contributed $2,000,000 for the registered capital requirement of Jiutong Medical , with a balance of $3,000,000 due by December 20, 2013.

We believe that with our current working capital, we will be able to meet these obligations and maintain our operations for at least twelve months. However, if we are to acquire additional businesses or further expand our operations, we may need additional capital.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

When we open store locations, we typically enter into lease agreements that are
generally between three to ten years. Our commitments for minimum rental
payments under our leases for the next five years and thereafter are as follows:

Periods ending December 31,         Amount
2012                           $ 4,088,300
2013                             3,797,808
2014                             3,332,830
2015                             2,910,703
2016                             1,894,343
Thereafter                       4,080,701

Logistics Services Commitments

All of our logistics requirements were previously outsourced to Zhejiang Yingte Logistics Co., Ltd. ("Yingte Logistics"). In April 2011, we terminated our agreement with Yingte Logistics, and now use the facility of Jiuxin Medicine, which we acquired in August 25, 2011, as our distribution center. Jiuxin . . .

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