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| CJJD > SEC Filings for CJJD > Form 10-Q on 14-Feb-2013 | All Recent SEC Filings |
14-Feb-2013
Quarterly Report
The following management's discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "may," "will," "could," "expect," "anticipate," "intend," "believe," "estimate," "plan," "predict," and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of our annual report on Form 10-K for the year ended March 31, 2012 and filed with the SEC on July 2, 2012. 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 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 Zhejiang Jiuxin Medicine Co., Ltd. ("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 over-the-counter ("OTC") drugs, nutritional supplements, traditional Chinese Medicine ("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.
During the three months ended December 31, 2012, we closed 15 pharmacies throughout Zhejiang Province that did not meet our performance expectations: 10 "Jiuzhou Grand Pharmacy" stores and five "Jiuying Grand Pharmacy" stores. In January 2013, we dissolved Zhejiang Jiuying Grand Pharmacy Co., Ltd., which operated the "Jiuying Grand Pharmacy" locations.
In Shanghai, by operating stores with different names and through different subsidiaries, we believe that this structure will expedite the process of obtaining a license to operate a pharmacy chain, thereby qualifying these stores to accept government-sponsored health insurance in Shanghai. We now have five pharmacies in Shanghai: a "Lydia Grand Pharmacy" store, a "Zhongxing Grand Pharmacy" store, a "Weifang Grand Pharmacy" store, a "Chaling Grand Pharmacy" store and a "Zhenguang Grand Pharmacy" store.
In addition to our retail business, we operate a wholesale business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those we carry in our own pharmacies) primarily to trading companies throughout China. We also cultivate certain herbs used for TCM to sell to trading companies, which we refer to in the discussion below as our farming business.
Critical Accounting Policies and Estimates
In preparing our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ materially from those estimates.
We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements.
When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. The critical accounting policies and related judgments and estimates used to prepare our financial statements are identified in Note 2 to our unaudited condensed consolidated financial statements accompanying in this report. We have not made any material changes in the methodology used in our accounting policies that are inconsistent with those discussed in our annual report on Form 10-K for the fiscal year ended March 31, 2012.
Results of Operations
Comparison of three months ended December 31, 2012 and 2011
The following table summarizes our results of operations for the three months
ended December 31, 2012 and 2011:
Three months ended December 31,
2012 2011
Percentage of Percentage of
total total
Amount revenue Amount revenue
Revenue $ 15,596,013 100.0 % $ 25,643,949 100.0 %
Gross profit $ 2,990,302 19.2 % $ 6,826,869 26.6 %
Selling expenses $ 3,179,168 20.4 % $ 2,498,892 9.7 %
General and administrative expenses $ 3,300,064 21.2 % $ 2,175,615 8.5 %
Income (loss) from operations $ (3,488,930 ) (22.4 )% $ 2,152,362 8.4 %
Other (expense) income, net $ (25,380 ) (0.2 )% $ 16,343 0.1 %
Impairment of goodwill $ - 0.0 % $ - 0.0 %
Change in fair value of purchase option
derivative liability $ (12,095 ) (0.1) % $ 19,404 0.1 %
Income tax (benefits) expense $ (39,613) (0.3 )% $ 610,910 2.4 %
Net (loss) income attributable to
controlling interest $ (3,486,521 ) (22.4 )% $ 1,573,982 6.1 %
Net (loss) attributable to
noncontrolling interest $ (271 ) (0.0) % $ (3,217 ) (0.0) %
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Revenue. We had two revenue streams for the three months ended December 31, 2012 and 2011: (i) store and online retail sales of pharmaceutical and other healthcare products, and (ii) wholesale distribution of pharmaceutical and other healthcare products, primarily to third-party pharmaceutical trading companies. Included in our wholesale revenue are wholesales of pharmaceutical and healthcare products that we purchased from third-party manufacturers or suppliers. We did not have any revenue from our farming business as there was no harvest during the winter months.
Our revenue decreased by $10,047,936 or 39.2% period over period, primarily due to decrease in both wholesale and retail businesses as compared to the same period a year ago:
(1) Wholesale, which represented approximately 28.0% of total revenue for the three months ended December 31, 2012, decreased by $3,041,477 or 61.5% to $4,368,398, from $7,409,875 primarily due to a shift in our wholesale strategy. Since starting the wholesale business in August 2011, we have been using competitive pricing to stimulate sales and ramp up sales volume. The attendant low margins from such practice hurt our profitability. Accordingly, we ceased certain low margin sales in the quarter ended December 31, 2012 and are reconsidering our volume-driven wholesale strategy.
(2) Retail sales, which accounted for approximately 72.0% of our total revenue for the three months ended December 31, 2012, decreased by $7,006,459 or 38.4% to $11,227,615 from $18,234,074, primarily as a result of stricter government policies and an increasingly competitive retail market. Our retail store count decreased to 52 as of December 31, 2012, from 60 stores a year ago. Such closings, however, had little or no impact on our operations given the small size of these stores and their operations when compared to the whole of our pharmacy business. Same-store sales decreased by approximately $7,156,174 or 41.6%, while new stores and online pharmacy collectively contributed approximately $832,878 in revenue. Our pharmacies usually perform better in the second half of our fiscal year when more national holidays such as the Chinese Spring Festival take place. Partially due to such seasonality, our retail sales changed quarter by quarter within the fiscal 2013. We do not expect same-store sales will recover quickly in the near future as the frequency of government-mandated price controls and the number of drugs subject to price controls continue to rise.
Quarterly Revenue by Segment. The following table breaks down the revenue for our three business segments for the three months ended December 31, 2012 and 2011:
Three months ended December 31,
2012 2011
% of total % of total Variance by
Amount revenue Amount revenue amount % of change
Revenue from retail
business
Revenue from
drugstores $ 10,337,237 66.5 % $ 17,639,448 68.8 % $ (7,262,211 ) (41.2 )%
Revenue from online
sales 850,378 5.5 % 594,626 2.3 % 255,752 43.0 %
Sub-total of
retail revenue 11,227,615 72.0 % 18,234,074 71.1 % (7,006,459 ) (38.4 )%
Revenue from wholesale
business 4,368,398 28.0 % 7,409,875 28.9 % (3,041,477 ) (41.0 )%
Revenue from farming
business - 0.0 % - 0.0 % - 0.0 %
Total revenue $ 15,596,013 100 % $ 25,643,949 100 % $ (10,047,936 ) (39.2 )%
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The revenue fluctuation period over period reflected the following combined factors:
(1) Drugstore revenue decreased by approximately $7.3 million or 41.2% quarter over quarter, primarily due to three reasons. First, local government has been trying to control the costs of its insurance program in the face of budgetary constraints, and is whittling down the types and number of subsidized drugs. Second, as the local government subjects more drugs to price control, we must in turn either reduce our prices for the affected drugs or stop carrying them at our pharmacies. Third, the retail drug market in Hangzhou, where our stores are still predominantly located, has become very competitive with many neighborhood drugstores. As a result, we do not expect our retail sales to recover quickly in the near future.
(2) Our online pharmacy sales increased by $255,752 or 43.0% quarter over quarter. Since cooperating with business-to-consumer online vendors such as Taobao beginning in the second half of calendar 2011, our online pharmacy has gained wider recognition and we have seen a steady growth in sales.
Gross Profit. Our gross profit decreased by $3,836,567 or 56.2% quarter over quarter due to the significant drop in sales at our retail locations. Our gross margin also decreased, from 26.6% to 19.2%, as a result of lower retail and wholesale profit margins. The average gross margin of each of our three business segments for the three months ended December 31, 2012 are as follows:
Three months ended
March 31,
2012 2011
Average gross margin for retail business 23.3 % 36.7 %
Average gross margin for wholesale business 8.6 % 1.9 %
Average gross margin for farming business N/A N/A
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Our retail gross margin decreased to 23.3% in the three months ended December 31, 2012 from 36.7% in the three months ended December 31, 2011. The Chinese government has included more and more prescription and OTC drugs in the price control list. Some of our products' prices were higher than the prices set by the Chinese government. Hence, we had to adjust these products' prices. As a result, the profit margin for these products declined. In addition, due to the economic slowdown and stricter government policies such as stricter insurance reimbursement policy and the expansion of Essential Drug List (EDL), the retail drugstore market became much more competitive. For example, drugs listed in the EDL were being sold at a price close to its cost at local community hospitals which, in turn, receive government subsidies. Correspondently, we had to either abandon sale of these drugs or sell them at minimal profit margins. Furthermore, in order to keep competitive in the competitive drug retail market, we had to cut prices of certain drugs. As a result, our overall retail gross profit margin decreased.
Our wholesale gross margin for the three months ended December 31, 2012 was 8.6% as compared to 1.9% for the three months ended December 31, 2011. We ceased certain low profit margin wholesale business in the three months ended December 31, 2012, and are reconsidering our volume-driven sales strategy. In addition, in our efforts to become a first-tier distributor for certain medicines, and thus able to purchase them at lower costs, we advanced payments to certain vendors. Such advances are refundable if we do not purchase an equal amount of inventory from these vendors later on. As a result, our overall wholesale business profit margin increased.
Selling and Marketing Expenses. Our sales and marketing expenses increased by $680,276 or 27.2% period over period primarily due to promotional activities and advertising, as well as year-end employee bonuses. We spent approximately $290,000 on promotional activities such as leaflets and product give-aways, and approximately $240,000 on related advertising in newspapers. Given the increased competition amongst employers for top performing employees, we also awarded approximately $570,000 in year-end bonuses to our employees. Coupled with smaller revenue, selling and marketing expenses as a percentage of our revenue increased to 20.4%, from 9.7% for the same period a year ago.
General and Administrative Expenses. Our general and administrative expenses increased by $1,124,449 or 51.7% period over period primarily due to additional bad debt expense of approximately $1,173,959 we accrued for advance to suppliers during the three months ended December 31, 2012. As a percentage of our revenue, general and administrative expenses increased to 21.2% from 8.5% for the same period a year ago also due to our smaller revenue.
Income (Loss) from Operations. Mainly as a result of lower profit margins and higher selling and general and administrative expenses, our income from operations decreased by $5,641,292 period over period, resulting in an operating loss of $3,488,930. Our operating margin for the three months ended December 31, 2012 and 2011 was (22.4)% and 8.4%, respectively.
Income Taxes. For the current period, our income tax expense decreased by $650,523, primarily as a result of our net loss.
Net Income (Loss). As a result of the foregoing, our net income decreased by $5,060,503 period over period, to a net loss of $3,486,792.
Comparison of nine months ended December 31, 2012 and 2011
The following table summarizes our results of operations for the nine months ended December 31, 2012 and 2011:
Nine months ended December 31,
2012 2011
Percentage of Percentage of
total total
Amount revenue Amount revenue
Revenue $ 75,108,458 100.0 % $ 69,296,755 100.0 %
Gross profit $ 11,557,276 15.4 % $ 19,954,088 28.8 %
Selling expenses $ 7,140,013 9.5 % $ 6,588,686 9.5 %
General and administrative expenses $ 7,456,956 9.9 % $ 4,570,919 6.6 %
(Loss) income from operations $ (3,039,693 ) (4.0 )% $ 8,794,483 12.7 %
Other (expense) income, net $ (75,178 ) (0.1 )% $ 222,929 0.3 %
Impairment of goodwill $ 1,473,606 (2.0) % $ - 0.0 %
Change in fair value of purchase option
derivative liability $ 13,652 0.0 % $ 116,392 0.2 %
Income tax (benefit) expense $ (93,886 ) (0.1 )% $ 2,684,463 3.9 %
Net (loss) income attributable to
controlling interest $ (4,480,083 ) (6.0) % $ 6,450,424 9.3 %
Net (loss) attributable to
noncontrolling interest $ (856 ) (0.0) % $ (1,083) (0.0) %
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Revenue. We had three revenue streams for the nine months ended December 31, 2012: (i) store and online retail sales of pharmaceutical and other healthcare products, and (ii) wholesale distribution of pharmaceutical and other healthcare products, and (iii) sales of our self-cultivated TCM herbs, primarily to third-party pharmaceutical trading companies. In contrast, retail sales and wholesale provided all of our revenue for the nine months ended December 31, 2011.
Our revenue increased by $5,811,703 or 8.4% period over period, primarily due to the expansion of our wholesale business and the addition of our farming business, offset by a decrease in our retail business:
(1) Since its start, our wholesale business expanded rapidly through competitive pricing, from approximately 16.4% of total revenue for the 2011 period to approximately 55.8% for the 2012 period. However, the low margins from such practice hurt our profitability. As a result, in the three months ended December 31, 2012, we ceased certain low margin sales and are reconsidering our wholesale strategy. Hence, we had declined sales as compared with the same period a year ago. In addition, until we are able to achieve first-tier distributor status for more than one or two vendors, we do not expect our wholesale business to grow quickly in the immediate future.
(2) During the three months ended March 31, 2012, we began distributing the TCM herbs such as Peucedanum that we have been cultivating, to third-party pharmaceutical trading companies. Although we have hired several specialists to oversee our farming business, we are mainly relying on the local village government to manage the cultivation process. For example, the local government organizes local farmers to plant, fertilize and harvest. In turn, we pay for the expenses incurred by the local farmers based on our agreements with the local government. Sales from our farming business accounted for $2,524,091 or approximately 3.4% of our total revenue for the nine months ended December 31, 2012. In calendar 2012, we planted certain new herbs and continued to cultivate grown herbs. We usually harvest and sell herbs when they become mature and market demands are high. We anticipate that we will harvest and sell herbs again in approximately six months.
(3) Our retail sales, which accounted for approximately 40.8% of total revenue for the nine months ended December 31, 2012, decreased by $27,264,887 or 47.1% to $30,680,020, primarily as a result of stricter government policies and a competitive retail market. Our retail store count decreased to 52 as of December 31, 2012, from 60 stores a year ago. Such closings, however, had little or no impact on our operations given the small size of these stores and their operations when compared to the whole of our pharmacy business. Same-store sales decreased by approximately $29,795,922 or 52.2%, while new stores and online pharmacy collectively contributed approximately $2,507,927 in revenue. We do not expect same-store sales will recover quickly in the near future as the frequency of government-mandated price controls and the number of drugs subject to price control continue to rise.
Nine-Month Revenue by Segment. The following table breaks down the revenue for our two business segments for the nine months ended December 31, 2012 and 2011:
Nine months ended December 31,
2012 2011
% of total % of total Variance by
Amount revenue Amount revenue amount % of change
Revenue from retail
business
Revenue from
drugstores $ 28,411,652 37.9 % $ 57,173,648 82.5 % $ (28,761,996 ) (50.3 )%
Revenue from online
sales 2,268,368 2.9 % 771,259 1.1 % 1,497,109 194.1 %
Sub-total of
retail revenue 30,680,020 40.8 % 57,944,907 83.6 % (27,264,887 ) (47.1 )%
Revenue from wholesale
business 41,904,347 55.8 % 11,351,848 16.4 % 30,552,499 72.9 %
Revenue from farming
business 2,524,091 3.4 % - 0.0 % 2,524,091 N/A
Total revenue $ 75,108,458 100.0 % $ 69,296,755 100.0 % $ 5,811,703 8.4 %
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The revenue fluctuation period over period reflected the following combined factors:
(1) Drugstore revenue decreased by approximately $28.8 million or 50.3% period over period for the same reasons that revenue declined during the quarter, as a result: (a) smaller pool of insurance-subsidized medicines, (b) government-mandated price control, and (c) increasing competition.
(2) The growth of our wholesale business is a reflection of the second half of fiscal 2012, and as discussed earlier, we ceased certain low margin sales in the three months ended December 31, 2012, and are reconsidering our volume-driven wholesale strategy.
(3) Our online pharmacy sales increased by $1,497,109 or 194.1% period over period, and we expect the business to grow as we gain wider consumer awareness through our continuing cooperation with business-to-consumer online vendors such as Taobao.
Gross Profit. Our gross profit decreased by $8,396,812 or 42.1% period over period from substantial decline in retail sales. Our gross margin also decreased, from 28.8% to 15.4%, as a result of lower retail and wholesale profit margins. The average gross margin of our three business segments for the nine months ended December 31, 2012 are as follows:
Nine months ended
December 31,
2012 2011
Average gross margin for retail business 25.2 % 33.9 %
Average gross margin for wholesale business 3.6 % 2.7 %
Average gross margin for farming business 90.9 % N/A
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Our retail gross margin decreased to 25.2% in the nine months ended December 31, 2012 from 33.9% in the nine months ended December 31, 2011. The Chinese government has included more and more prescription and OTC drugs in the price control list. Some of our products' prices were higher than the prices set by the Chinese government. Hence, we had to adjust these products' prices. As a result, the profit margin for these products declined. In addition, due to the economic slowdown and stricter government policies such as stricter insurance reimbursement policy and the expansion of Essential Drug List (EDL), the retail drugstore market became much more competitive. For example, drugs listed in the EDL were being sold at a price close to its cost at local community hospitals which, in turn, receive government subsidies. Correspondently, we had to either abandon sale of these drugs or sell them at minimal profit margins. Furthermore, in order to keep competitive in the competitive drug retail market, we had to cut prices of certain drugs. As a result, our overall retail gross profit margin decreased.
Our wholesale gross margin for the nine months ended December 31, 2012 was 3.6% as compared to 2.7% for the nine months ended December 31, 2011. Because we introduced very competitive prices to stimulate sales when we started our wholesale business, where we purchase from third-party manufacturers or suppliers and resell, such business has had a low profit margin. We ceased certain low profit margin wholesale business in the three months ended December . . .
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