Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CJJD > SEC Filings for CJJD > Form 10-K on 2-Jul-2012All Recent SEC Filings

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

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


2-Jul-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial condition for fiscal years ended March 31, 2012 and 2011 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the "Risk Factors," "Cautionary Notice Regarding Forward-Looking Statements" and "Description of Business" sections and elsewhere in this report. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," "predict" and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this report. 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 US$ 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 US$ at various pertinent dates and for pertinent periods.

Overview

We are a retailer and wholesale distributor of pharmaceutical and other healthcare products typically found in a retail pharmacy in the People's Republic of China ("PRC" or "China"). Prior to acquiring Jiuxin Medicine in August 2011 we were primarily a retail pharmacy operator. Our drugstores provide customers with a wide variety of medicinal products, including prescription and OTC drugs, nutritional supplements, TCM products, personal care products, family care products, medical devices, as well as convenience products including consumable, seasonal and promotional items. In addition to these products, we have licensed doctors of both western medicine and TCM onsite for consultation, examination and treatment of common ailments at scheduled hours. Since May 2010, our retail business also includes an online drugstore that sells non-prescription OTC drugs and nutritional supplements.

In addition to our retail business, we operate a wholesale business distributing TCM herbs that we have been cultivating, and, through Jiuxin Medicine, third-party pharmaceutical products (similar to those we carry in our own pharmacies) primarily to trading companies throughout China.


Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States, 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 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 these accounting policies during the past eighteen months.

Revenue recognition

Revenue from sales of prescription medicine at the drugstores is recognized when the prescription is filled and the customer picks up and pays for the prescription.

Revenue from sales of other merchandise at the drugstores is recognized at the point of sale, which is when the customer pays for and receives the merchandise.

Revenue from medical services (which is nominal) is recognized after the service has been rendered to the customer.

Revenue from sales of merchandise to non-retail customers is recognized when the following conditions are met: 1) persuasive evidence of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); 2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms; 3) the sales price is fixed or determinable; and 4) collectability is probable. Historically, sales returns have been immaterial.

Our revenue is net of value added tax ("VAT") collected on behalf of tax authorities in respect of the sale of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the balance sheet until it is paid to the tax authorities.

Vendor allowances

We account for vendor allowances according to the accounting standard, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, and by Reseller to Sales Incentives Offered to Consumers by Manufacturers. Vendor allowances reduce the carrying value of inventories and subsequently transferred to cost of goods sold when the inventories are sold, unless those allowances are specifically identified as reimbursements for advertising, promotion and other services, in which case they are recognized as a reduction of the related advertising and promotion costs.

Slotting allowances are a major portion of total allowances. With slotting allowances, vendors reimburse us for the cost of placing new products on our shelves. We have no obligation or commitment to keep any such products on our shelves for a minimum period.

A small portion of vendor allowance also includes advertising and promotion allowances for the promotion of vendors' products in our stores. The promotion may be any combination of a temporary price reduction or a feature in print ads.


Depreciation and Amortization

We depreciate our equipment assets using the straight-line method over the estimated useful lives of the assets. We make estimates of the useful lives of the equipment (including the salvage values), in order to determine the amount of depreciation expense to be recorded during any reporting period. We amortize leasehold improvements of our retail drugstores and other business premises over the shorter of five years or lease term. A majority of our leases have a five-year term. We estimate the useful lives of our other property and equipment at the time we acquire the assets based on our historical experience with similar assets as well as anticipated technological and other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, we may shorten the useful lives assigned to these assets as appropriate, which will result in the recognition of increased depreciation and amortization expense in future periods. There was no change to the estimated useful lives and salvage values during the years ended March 31, 2012 and 2011.

Impairment of Long-Lived Assets

We evaluate our long lived tangible and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability is measured by comparing the asset's net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. No significant indication of impairment noted as of March 31, 2012.

Inventories

We state our inventory at the lower of cost or market. Cost is determined using the "first in first out" method. Market is the lower of replacement cost or net realizable value. We carry out physical inventory counts on a monthly basis at each store and distribution location to ensure that the amounts reflected in the consolidated financial statements at each reporting period are properly stated and valued. We record write-downs to inventory for shrinkage losses and damaged merchandise that are identified during the inventory counts. The inventory write downs for the years ended March 31, 2012 and 2011 have been immaterial.

Results of Operations

The following table summarizes our results of operations for the fiscal years ended March 31, 2012 and 2011.

                                                                Years Ended March 31,
                                                        2012                             2011
                                                             Percentage                       Percentage
                                                              of total                         of total
                                               Amount          revenue          Amount          revenue
Revenues                                   $ 94,352,885           100.0 %   $ 69,969,479           100.0 %
Gross Profit                               $ 27,562,801            29.2 %   $ 21,142,094            30.2 %
Selling Expenses                           $  8,498,240             9.0 %   $  4,838,745             6.9 %
General and Administrative Expenses        $  8,582,389             9.1 %   $  4,723,943             6.8 %
Income from Operations                     $ 10,482,172            11.1 %   $ 11,579,406            16.5 %
Other Income (Expense)                     $    187,865             0.2 %   $    127,172             0.2 %
Changes in Fair Value of Purchase Option
Derivative Liability                       $    118,807             0.1 %   $    249,225             0.4 %
Income Tax Expenses                        $  2,648,365             2.8 %   $  3,523,345             5.0 %
Net Income                                 $  8,140,479             8.6 %   $  8,432,458            12.1 %

Revenue. We had two revenue streams for the fiscal year ended March 31, 2012:
(i) store and online retail sales of pharmaceutical and other healthcare products, and (ii) wholesale distribution of pharmaceutical and other healthcare products, as well as our self-cultivated TCM herbs, primarily to third-party pharmaceutical trading companies. Included in our wholesale revenue are: (i) wholesales of pharmaceutical and healthcare products that we purchased from third-party manufacturers or suppliers, (ii) wholesales of our cultivated TCM herbs, (iii) direct group sales or sales to non-distributors. Although the overall gross profit of our wholesale business is comparatively lower than that of our retail business, the volume of our wholesale business is significant.

Our total revenue for fiscal 2012 increased by $24,383,406, or 34.8%, from the prior fiscal year's revenue. Such increase was primarily due to the following reasons:


(1) During fiscal 2012, we opened several new "Jiuzhou Grand Pharmacy" drugstores and also started to expand our online drug sales. Our retail store count increased to 61 as of March 31, 2012, from 53 stores a year ago. The increased number of stores brought new opportunities to sell our products and services to retail customers. Retail sales accounted for about 70% of our total revenue for the year ended March 31, 2012. Same-store sales decreased by approximately $7.0 million or 10.1%, while our new stores contributed approximately $3.1 million to our revenue. We expect same-store sales will continue to decline as the frequency of government-mandated price controls and the number of drugs subject to price controls continue to rise and, to a lesser extent, with the shift of our group sales to our wholesale business.

(2) We started our wholesale business after acquiring Jiuxin Medicine in August 2011, through which we have been distributing third-party pharmaceutical and healthcare products to pharmaceutical trading companies and other group customers. In the fourth quarter of fiscal 2012, we also began distributing the TCM herbs that we have been cultivating, also to third-party pharmaceutical trading companies. Our wholesale business increased rapidly during fiscal 2012 because we introduced very competitive pricing to customers to stimulate sales. Sales from the wholesale business accounted for about 30% of our total revenue for the fiscal year ended March 31, 2012.

Annual Revenue by Segment

The following table sets for the breakdown of our revenue for our two business
lines for the years ended March 31, 2012 and 2011:


                         For the year ended March 31, 2012     For the year ended March 31, 2011
                                              % of total                            % of total        Variance by
                            Amount              revenue           Amount              revenue           amount          % of change
Revenue from retail
business
   Revenue from
drugstores               $  64,981,643                  69 %   $  66,477,736                  95 %   $  (1,496,093 )              (2 )%
   Revenue from liquor
sales                                -                   -         3,491,743                   5 %      (3,491,743 )            (100 )%
   Revenue from online
sales                        1,092,705                   1 %               -                   0 %       1,092,705               100 %
     Sub-total of
retail revenue              66,074,348                  70 %      69,969,479                 100 %      (3,895,131 )              (6 )%

Revenue from wholesale
business                                                                   -
   Revenue from Jiuxin
Medicine                    24,060,963                  26 %               -                   0 %      24,060,963               100 %
   Revenue
from harvested TCM
herbs                        4,217,574                   4 %               -                   0 %       4,217,574               100 %
     Sub-total of
wholesale revenue           28,278,537                  30 %               -                   0 %      28,278,537               100 %
Total revenue            $  94,352,885                 100 %   $  69,969,479                 100 %   $  24,383,406                35 %

The revenue fluctuation between fiscal years ended March 31, 2012 and 2011 reflected the following combined factors:

(1) Revenue from "Jiuzhou Grand Pharmacy" stores decreased by approximately $3.9 million or 6% year over year, mainly due to two reasons. Since the second quarter of 2011, the Hangzhou government has been gradually restricting retail drugstores within the city from organizing large-scale marketing promotions on the streets to give further rebate or discount to customers making purchases with government-sponsored medical insurance card. Our promotional activities were curtailed accordingly, which impacted our retail sales revenue, especially from sales of certain prescription drugs covered by the medical insurance card. In addition, the government subjected more drugs to price control in October 2011, which caused us to reduce prices for some of the affected drugs and stop carrying others at our pharmacies, which especially impacted our revenue for the three months ended March 31, 2012.

(2) The decrease in retail revenue was also affected by the relocation of three retail stores due to building demolishment ordered by the local government. As a result of the time lost to relocating to and readying the new store locations, sales from these three stores were down for the fiscal year ended March 31, 2012.

(3) Another factor for the decreased retail revenue is the shift of group sales from Jiuzhou Pharmacy's retail business to Jiuxin Medicine's wholesales business. We originally recorded group sales under Jiuzhou Pharmacy's retail system in the prior year. But starting in August 2011, such sales have been recorded under Jiuxin Medicine's wholesale system because we believe group sales are essentially wholesale in nature. Accordingly, $15.5 million in group sales that would have otherwise been recorded under Jiuzhou Pharmacy have now been recorded under Jiuxin Medicine, including $8.9 million during the fourth quarter of fiscal 2012. Such internal re-allocation of sales revenue between our retail and wholesale businesses affected the comparison of our retail sales for fiscal 2012 versus fiscal 2011, but has no impact on our consolidated financial statements.


(4) The decrease in retail sales was also affected by our decision to stop selling Chinese white liquor during fiscal 2012. We had $3.4 million in liquor revenue in the last two quarters of fiscal 2011, but report no liquor revenue for the entire fiscal 2012.

(5) For fiscal 2012, we reported online sales of approximately $1.09 million under Quannuo Technology, primarily from selling OTC drugs and nutritional supplement products to individual customers. Online sales are opening a new opportunity to expand our business. Our online sales are included and reported under our retail business line.

(6) The acquisition of Jiuxin Medicine in August 2011 has enabled us to sell pharmaceutical and other healthcare products to wholesale and group customers throughout China, primarily third-party trading companies. As a drug wholesaler, Jiuxin Medicine strives to increase its volume to better gain leverage when negotiating prices with suppliers. In order to expand our wholesale business in a competitive environment, we have had to lower our selling price at times, but were in turn able to fulfill several large sales orders. In addition, we have put much effort in developing our wholesale customer base and adjusting our wholesale product offerings. As a result, and coupled with the shifting of $15.5 million in group sales from our Jiuzhou Pharmacy's retail business to Jiuxin Medicine's wholesale business discussed above (including $8.9 million during the last quarter of fiscal 2012), our wholesale revenue increased rapidly in a relatively short span of time, and accounted for approximately 30% of our total revenue for fiscal 2012.

(7) For the year ended March 31, 2012, we also reported $4.2 million in revenue from a new line of wholesale business - selling our self-cultivated TCM herbs. We began harvesting the plants at the end 2011, and selling them in bulk to third-party wholesalers during the fourth quarter of 2012.

Revenue by Segment and Quarter

The following table sets for the breakdown of our revenue for our two business
lines for the years ended March 31, 2012 and 2011:

                                                  Year ended March 31,            Variance by         % of
                                                  2012             2011             amount           change
Revenue from retail business
   First quarter ended June 30, 2011            21,427,859        15,207,428         6,220,431              41 %
   Second quarter ended September 30, 2011      18,799,919        15,678,170         3,121,749              20 %
   Third quarter ended December 31,2011         18,123,907        18,042,309            81,598               0 %
   Fourth quarter ended March 31, 2012           7,722,663        21,041,572       (13,318,909 )           (63 )%
Total revenue from retail business              66,074,348        69,969,479        (3,895,131 )            (6 )%

Revenue from wholesale business
   First quarter ended June 30, 2011                     -                 -                 -             N/A
   Second quarter ended September 30, 2011       3,425,028                 -         3,425,028             N/A
   Third quarter ended December 31,2011          7,520,042                 -         7,520,042             N/A
   Fourth quarter ended March 31, 2012          17,333,467                 -        17,333,467             N/A
Total revenue from wholesale business           28,278,537                 -                               N/A
Total revenue                                 $ 94,352,885     $  69,969,479     $  24,383,406              35 %

The primary reason for the 6% decline in our retail revenue from fiscal 2011 to fiscal 2012 is the almost 63%, or $13,318,909, drop in retail revenue for the three months ended March 31, 2012 as compared to the same period last fiscal year. Such decline is primarily attributed to the government subjecting additional drugs to price control in October 2011, which affected some of our selling prices. In response, we reduced our prices in some instances and ceased carrying products in other instances. The significance of this decline has offset all previous quarterly increases during fiscal 2012. During the three months ended March 31, 2012, we also fully shifted our entire group sales previously recorded in our retail business to our wholesale business. In addition, our three store relocations during the fourth quarter of fiscal 2012 resulted in a $1.5 million period-over-period decline in sales. Another reason for the decline of our fourth quarter retail sales on a year-to-year basis was the termination of our white liquor sales in fiscal 2012, which contributed $3.4 million for the fourth quarter of fiscal 2011. Despite the significant decline of our retail sales, however, we were able to make up lost grounds with our entry into, and expansion of, the wholesale business. As a result, our overall revenue for the year ended March 31, 2012 increased from the prior year, and we believe we are in position to continue to grow our wholesale business to hedge against any further decline to our retail business, especially if Jiuxin Medicine can become qualified to supply to hospital-affiliated pharmacies. We intend, however, to remain competitive with our retail business, and plan to open more upscale, service-oriented pharmacies to further differentiate ourselves from our competitors.

Revenue from Wholesale Business

The primary increase in our wholesale business was a result of our fourth quarter revenue of $17.3 million that constituted 61% of our wholesale business for the year. This increase was a result of the sales of our self-cultivated TCM herbs of approximately $4.2 million, and $8.9 million of group sales that are now being handled through our wholesale business. Part of our shift to wholesale business is in anticipation of capturing opportunities that may be created by upcoming medical reforms aimed at hospitals. Coupled with new constraints on retail pharmacies (such as the Hangzhou government's restriction on promotional activities), we hope to transform ourselves into a combined retail and wholesale operation in order to give us more operating flexibility and reduce our reliance on one primary revenue source.

The significant decline in our retail business as discussed earlier has also reinforced our decision to shift some of our operating focus to our wholesales business, from which we may see bigger future growth potentials, especially if Jiuxin Medicine can become qualified to supply to hospital-affiliated pharmacies. In order to do so, Jiuxin Medicine must rapidly scale the volume of its business. Accordingly, despite the good start of our wholesale business in fiscal 2012, our focus in the near term will be to continue building Jiuxin Medicine's wholesale business volume.


Gross Profit. Our gross profit increased by $6,420,707 or 30.4% from a year ago mainly due to increase in sales. Our gross margin of 29.2% is a slight decrease from 30.2% a year ago mainly due to lower profit margin from Jiuxin Medicine's wholesale activities. As our wholesale business continues to grow, we anticipate that our overall gross profit margin may continue to decline.

The gross margin of our retail business was, on average, approximately 33.0% and 30.2% during the years ended March 31, 2012 and 2011, respectively. The gross margin, on average, of our wholesale business was 20.4% and 0%, respectively. Our retail gross margin during the fourth quarter was 31% as a result of the price controls placed on certain products by the government. Our ability to maintain our margin will depend on the future regulations that the government places on retail pharmacies.

The gross margin of our wholesale business improved during the fourth quarter as a result of several factors including the $4.2 million of TCM sales as a result of cultivating our herbs and the previously mentioned group transfer of group sales to from our retail pharmacies to our wholesale business. The margin for our harvested TCM sold during the fourth quarter of fiscal year 2012 was approximately 89% while group sales typically reflect the margins we have in our retail business.

Sales and Marketing Expenses. Our sales and marketing expenses increased by $3,659,495 or 75.6% from a year ago as a result of increased rent, labor amortization costs, and promotion activities for our online pharmacy and wholesale business. Sales and marketing expenses as a percentage of our revenue increased to 9.0%, from 6.9% a year ago. We expect that our sales and marketing expenses will increase as we continue to expand our store network, online pharmacy and wholesale business.

General and Administrative Expenses. Our general and administrative expenses increased by $3,858,446 or 81.7% from a year ago. General and administrative expenses as a percentage of our revenue increased to 9.1% from 6.8% for the year ended March 31, 2011. The increase in absolute dollars as well as a percentage of revenue related to professional fees incurred as a U.S. publicly traded company, increased salaries, and administration cost related to new business such as Jiuxin Medicine. As we continue to open drugstores, further develop our infrastructure, and incur expenses related to being a U.S. 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 increase in both sales and marketing . . .

  Add CJJD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CJJD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.