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 1-Jul-2013All Recent SEC Filings

Show all filings for CHINA JO-JO DRUGSTORES, INC. | Request a Trial to NEW EDGAR Online Pro

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


1-Jul-2013

Annual Report


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

The following discussion and analysis of our results of operations and financial condition for fiscal years ended March 31, 2013 and 2012 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 United States Dollars ("$" or "USD") 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 USD at various pertinent dates and for pertinent periods.


Overview

We currently operate in three business segments in China: (i) retail pharmacies (which we include our clinics and online sales), (2) wholesale of similar products that we carry in our pharmacies, and (3) farming and selling herbs used for TCM.

Our drugstores offer a wide variety of third-party 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. We also have licensed doctors of both western medicine and TCM onsite for consultation, examination and treatment of common ailments at scheduled hours. We currently have 51 pharmacies in Hangzhou and Shanghai under two store brand names. During the year ended March 31, 2013, we closed 17 pharmacies that did not meet our performance expectations, including 11 "Jiuzhou Grand Pharmacy" stores, five "Jiuying Grand Pharmacy" stores and the only "Quannuo Grand Pharmacy" store. Since May 2010, we have also been selling certain OTC drugs and nutritional supplements online.

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 farm certain herbs used in TCM that we currently sell to a local vendor.

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. The critical accounting policies and related judgments and estimates used to prepare our financial statements are identified in Note 2 to our consolidated financial statements accompanying in this report. We have not made any material changes in the methodology used in our accounting policies


Results of Operations

Comparison of years ended March 31, 2013 and 2012

The following table summarizes our results of operations for the years ended March 31, 2013 and 2012:

                                                                 Years Ended March 31,
                                                         2013                              2012
                                                               Percentage                        Percentage
                                                                of total                          of total
                                                Amount           revenue          Amount           revenue
Revenues                                   $  89,495,546           100.0 %    $ 94,352,885           100.0 %
Gross Profit                               $  14,634,993            16.4 %    $ 27,562,801            29.2 %
Selling Expenses                           $  12,216,984            13.7 %    $  8,498,240             9.0 %
General and Administrative Expenses        $  15,000,364            16.8 %    $  8,582,389             9.1 %
Goodwill Impairment Loss                   $   1,473,606             1.6 %    $          -               -
(Loss) Income from Operations              $ (14,055,961 )         (15.7 )%   $ 10,482,172            11.1 %
Other Income (Expense)                     $      56,428             0.1 %    $    187,865             0.2 %
Changes in Fair Value of Purchase Option
Derivative Liability                       $      18,810             0.0 %    $    118,807             0.1 %
Income Tax Expenses                        $     353,802             0.4 %    $  2,648,365             2.8 %
Net (loss) income attributable to
controlling interest                       $ (14,334,525 )         (16.0 )%   $  8,141,626             8.6 %
Net (loss) attributable to
noncontrolling interest                             (794 )          (0.0 )%         (1,147 )          (0.0 )%

Revenue.

Revenue decreased by $4,857,339 or 5.1% year over year, primarily due to a decrease in our retail business, despite the fast expansion of our wholesale business and the addition of our herb farming business:

(1) Retail sales, which accounted for approximately 45.5% of total revenue for the year ended March 31, 2013, decreased by $25,348,268 or 38.4% to $40,726,080, due to price control on many popular prescription drugs and an increasingly competitive retail market. Our retail margin also fell from 33.0% to 24.4%. Same-store sales decreased by approximately $22,489,343 or 36.2%, while new stores and online sales collectively contributed approximately $3,165,271 in revenue. Our store count decreased to 51 as of March 31, 2013, from 61 a year ago. 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 thereto continue to increase.

(2) Since inception, our wholesale business expanded rapidly through competitive pricing and represented 51.7% of total revenue for the year ended March 31, 2013, up from 26.0% a year ago. However, our wholesale margin is significantly lower than our other operating segments, and fell from 7.4% to 5.2%. Since our third fiscal quarter, we have ceased certain low margin sales and are focusing on profitability rather than sales volume, and our wholesale margin rose to over 10% in the fourth fiscal quarter. Because we have little access to lucrative sales channels such as hospitals, we have qualified as a first-tier distributor with only a limited number of vendors thus far. Until we are able to achieve first-tier distributor status with more vendors, we do not expect our wholesale business to significantly expand in the immediate future.

(3) Sales from our herb farming business accounted for $2,534,380 or approximately 2.8% of our total revenue for the year ended March 31, 2013 as compared to $4,217,574 a year ago. Our margin from this business is significant: 91.2% for fiscal 2013 and 94.9% for fiscal 2012. In fiscal 2013, we planted and harvested herbs based on our best estimate as to future market demands. We anticipate that we will continue doing so in upcoming fiscal year, but do not expect a significant increase from fiscal 2013 in terms of revenue or gross profit.


Revenue by Segment.

The following table breaks down the revenue for our three business segments for
the years ended March 31, 2013 and 2012:

                                             Years ended December 31,
                                      2013                              2012
                                            % of total                       % of total       Variance by
                             Amount          revenue           Amount          revenue           amount          % of change
Revenue from retail
business
   Revenue from
drugstores                $ 37,678,835             42.1 %   $ 64,981,643              69 %   $  (27,302,808 )           (42.0 )%
   Revenue from online
sales                        3,047,245              3.4 %      1,092,705               1 %        1,954,540             178.9   %
     Sub-total of
retail revenue              40,726,080             45.5 %     66,074,348              70 %      (25,348,268 )           (38.4 )%

Revenue from wholesale
business                    46,235,086             51.7 %     24,060,963              26 %       22,174,123              92.2 %
Revenue from herb
farming business             2,534,380              2.8 %      4,217,574               4 %       (1,683,194 )           (39.9 )%
Total revenue             $ 89,495,546              100 %   $ 94,352,885           100.0 %   $   (4,857,339 )            (5.1 )%

The revenue fluctuation year over year reflected the following combined factors:

(1) Drugstore revenue decreased by approximately $27.3 million or 42.0% year over year, primarily due to three factors. Local government has been controlling the cost of its insurance programs by reducing the number and types of subsidized drugs. In addition, as more drugs are subject to price control, we must either reduce our prices accordingly or stop carrying the affected drugs. The retail drug market in Hangzhou, where our stores are still predominantly located, has also become very competitive with many neighborhood drugstores opening. Accordingly, we do not expect our retail sales to recover quickly in the near future.

(2) The growth in wholesale revenue is a reflection of our volume-driven strategy during the first half of fiscal 2013. Sales during that period amounted to approximately $37,535,949, or 81.2% of total wholesale revenue. Starting in the third quarter of fiscal 2013, however, we have halted efforts to achieve sales volume through low margin sales and are focusing on profitability. Wholesale revenue for fiscal 2012 was also less because we only had eight months of wholesale operation, as Jiuxin Medicine was acquired in August 2011.

(3) Online sales increased by $1,954,540 or 178.9% year over year, 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.

Gross profit decreased by $12,927,808 or 46.9% year over year from substantial
decline in retail sales. Gross margin also decreased, from 29.2% to 16.4%, as a
result of lower retail and wholesale profit margins. The average gross margin
for each of our three business segments for the years ended March 31, 2013 and
2012 are as follows:

                            Years ended
                             March 31,
                          2013         2012
Retail business            24.4 %      33.0 %
Wholesale business          5.2 %       7.4 %
Herb farming business      91.2 %      94.9 %

Retail gross margin decreased primarily due to price adjustments we were forced to make. Some adjustments were made to comply with government price controls. Others were made to stay competitive with local community hospitals that are able to sell near cost due to government subsidies. We also adjusted prices to match or beat other competitors. As a result, our overall retail gross profit margin decreased.

The first half of fiscal 2013 is responsible for the decrease in wholesale gross margin. As we were relying on very competitive prices to stimulate sales during that period, our profit margin from that period is only 3.0%. We ceased certain low profit margin wholesale business since then, and profit margin accordingly improved in the second half of fiscal 2013. Profit margin was over 10% in the fourth fiscal quarter.

The gross margin for our herb farming business is achieved through our ability to control quality through monitoring the cultivation process which, in turn, has enabled us to command good pricing. Provided that market demands remain robust, we expect profit margin to remain high even if we continue to sell our harvests to just the vendor that we have been selling to.

Selling and Marketing Expenses.

Sales and marketing expenses increased by $3,718,744 or 43.8% year over year primarily due to promotional activities and advertising, as well as $573,461 in year-end employee bonuses to retain talent and address labor cost inflation. Included in selling and marketing expense is one-time leasehold improvement impairment of $275,805 and $1,993,483 related to store closings and the termination of a new store project, respectively, and $384,276 in amortization of leasehold improvement for Jiuxin Medicine. In fiscal 2013, we closed 17 stores and charged the residual value of store improvements (such as immovable store decoration) into expense. We also shut down construction for a new pharmacy and terminated the project when the scheduled paving for a nearby thoroughfare to the city center was suspended indefinitely by the Hangzhou government. As a result, we recorded a direct write-off of a construction-in-progress. Rental expense in fiscal 2013 was also $273,599 more than in fiscal 2012 due to the booming Chinese real estate market. We expect our labor and rental cost will continue to rise in the future.


General and Administrative Expenses.

General and administrative expenses increased by $6,417,975 or 74.8% year over year. Such expenses as a percentage of our revenue increased to 16.8% from 9.1% for the same period a year ago. The increase in absolute dollars as well as a percentage of revenue mainly resulted from write-offs and allowances of bad debt, including $846,094 of direct write-offs from government health insurance, as well as allowances from our wholesale operations, including $4,700,924 related to accounts receivable and $2,846,822 related to advances to suppliers. Because most aged receivables were reserved in fiscal 2013, we anticipate that general and administrative expenses should decrease in the future.

Impairment of Goodwill.

During the year ended March 31, 2013, we recorded a goodwill impairment charge of $1,473,606 previously recognized in connection with the acquisitions of Jiuxin Medicine and Shanghai Zhongxing. Such impairment was made after we estimated the fair value of each of these businesses and determined that the implied fair value was lower than the carrying value. Accordingly, we fully impaired goodwill by writing down goodwill of $1,403,933 for Jiuxin Medicine and $69,673 for Shanghai Zhongxing.

Income (Loss) from Operations.

Income from operations decreased by $24,538,133 year over year, resulting in operating loss of $14,055,961 for the year ended March 31, 2013, as compared to operating income of $10,482,172 a year ago. Operating margin for the fiscal years ended March 31, 2013 and 2012 was (25.1)% and 11.1%, respectively.

Income Taxes.

Income tax expense decreased by $2,294,563 year over year, as a result of our operating loss and an income tax waiver granted to Qianhong Agriculture.

Net Loss.

For the fiscal year ended March 31, 2013, we recorded net loss of $14,334,525. Included in net loss are bad debt allowances of $7,615,067, bad debt write-offs of $846,094, goodwill impairment of $1,473,606, and a charge to expense of $2,269,288 in leasehold improvement for our closed stores.

Liquidity

Accounts receivable

Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. In fiscal 2013, the collections of certain accounts were delayed. To prepare for potential loss in such accounts, we made corresponding reserves.

Our accounts receivable aging was as follows for the periods described below:

                                              Retail            Drug              Herb             Total
From date of invoice to customer            drugstores        wholesale         farming           amount
1- 3 months                                $  4,724,698     $   4,133,868     $          -     $   8,858,566
4- 6 months                                     293,117         1,362,800                -         1,655,917
7- 9 months                                     106,120           593,077                -           699,197
10 - 12 months                                        -           515,057        2,154,925         2,669,982
Over one year                                     5,941         4,116,173            1,275         4,123,389
Allowance for doubtful accounts                 (86,946 )      (4,631,449 )      (309,848)        (5,028,242 )
Total accounts receivable                  $  5,042,930     $   6,089,526     $  1,846,352     $  12,978,808

Accounts receivable from our retail business mainly consists of reimbursements from government health insurance bureaus and commercial health insurance programs. Usually we collect our receivables within one to two months.


Accounts receivable from our drug wholesale business and herb farming business consist of receivables from our customers such as drug distributors. Usually we collect our receivable within six months. Our ability to collect is attributed to the steps that we take prior to extending credit to our customers as discussed above. If we are having difficulty collecting, we take the following steps: cease existing shipments to the customer, visit the customer to request payment on past due invoice, and if necessary, take legal recourse. If all of these steps are unsuccessful, management would then determine whether or not the receivable should be reserved or written off. The aggressive volume-driven sales strategy that Jiuxin Medicine initially pursued loosed certain customer credit policy such as background check. The lack of timely customer account reconciliation caused by several accounting staff rotations also impacted the collection for several wholesale accounts. To accommodate for potential loss in account receivable, we put up reserve for what we do not believe to be collectible, and most aged receivables were reserved in fiscal 2013. As discussed earlier, Jiuxin Medicine transitioned away from focusing on sales volume beginning in the second half of fiscal 2013, and we tightened our customer credit policy and strengthened monitoring of uncollected receivables. As a result, we do not expect a significant increase in bad debts going forward and believe the charge to these accounts is more than likely one-time in nature.

Subsequent to March 31, 2013 and through May 31, 2013, we collected $3,967,458 in receivables relating to our drugstore business, $1,766,982 relating to our wholesale business, and $1,541,849 relating to our herb farming business.

Advances to suppliers

Advances to suppliers are mainly prepayments to secure certain products or services and favorable pricing. The aging of our advances to suppliers is as follows for the periods described below:

                                              Retail            Drug            Herb            Total
From date of cash prepayment to customer    drugstores        wholesale        farming         amount
1- 3 months                                $     57,815     $   9,959,910     $       -     $  10,017,725
4- 6 months                                      18,516         4,193,702             -         4,212,219
7- 9 months                                       3,207         1,307,564        55,790         1,366,561
10 - 12 months                                      759           479,999             -           480,758
Over one year                                         -         3,041,968             -         3,041,968
Allowance for doubtful accounts                       -        (3,596,197 )           -        (3,596,197 )
Total advances to suppliers                $     80,297     $  15,386,947     $  55,790     $  15,523,034

Advances to suppliers for our retail business mainly consist of deposits and prepayments to contractors, which will be transferred into leasehold improvement once store construction is completed.

Advances to suppliers for our drug wholesale business consist of prepayments to our vendors such as drug manufacturers and other distributors. We typically receive products from vendors within three to six months after making prepayments. We continuously monitor delivery from and payments to our vendors and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. If we are having difficulty receiving products from a vendor, we take the following steps: cease purchasing products from the vendor, ask for return of our prepayment promptly, and if necessary, take legal recourse. If all of these steps are unsuccessful, management would then determine whether or not the prepayments should be reserved or written off. To facilitate its initial expansion, Jiuxin Medicine made significant prepayments to certain vendors. Lack of timely supplier account reconciliation caused by several accounting staff rotations delayed the monitoring of such accounts. To accommodate potential loss in advances to suppliers, we made full reserve for all accounts over a year and 50% reserve for accounts over 10 months.

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

                                                                Years ended
                                                                 March 31
                                                          2013              2012
Net cash (used in) provided by operating activities   $   (313,339 )    $  19,967,243
Net cash used in investing activities                 $ (2,404,359 )    $ (14,862,667 )
Net cash provided by (used in) financing activities   $  3,369,122      $  (7,934,286 )

For the fiscal year ended March 31, 2013, net cash used in operating activities amounted to $313,340, as opposed to net cash provided by operating activities of $19,967,243 a year ago. The change is primarily due to decreased net income of $21,905,161.

For the fiscal year ended March 31, 2013, net cash used in investing activities amounted to $2,404,359 as opposed to net cash used in investing activities of $14,892,667 a year ago. The decrease of $12,458,308 was a result of decreased expenditures for leasehold improvements of $4,650,061, a decrease in equipment purchases of $4,500,089, and a business acquisition made during fiscal 2012 of $3,308,158.

Net cash provided by financing activities was $3,369,122 for the fiscal year ended March 31, 2013, primarily from increase in notes payable of $2,928,146 and restricted cash of $675,380, as opposed to net cash used in financing activities of $7,934,286 during the prior fiscal year as a result of a paydown of $8,230,193 of notes payable.

As of March 31, 2013, we had cash of approximately $4,524,094. Our total current assets as of March 31, 2013, were $45,727,120 and our total current liabilities were $29,674,803, which resulted in a net working capital of $15,480,317.

Capital Resources

As reflected in our consolidated financial statements, we had net loss for the year ended March 31, 2013. Several factors contributed to such loss, such as bad debt expenses from our drug wholesale operation, reserving against advances to suppliers that will potentially not be utilized, increasing price controls and competitions that have continued to pressure our retail drugstore operation, as well as stricter insurance requirements that have tightened the buying habits of our drugstore customers. We have taken measures to address some of these challenges, such as closing 17 underperforming pharmacies and looking to open additional in-store clinics to drive customer traffic. We have also adjusted our wholesale strategy to favor profitability over immediate growth, even though we anticipate that this will lower our wholesale revenue in the near term.


Our principal sources of liquidity consist of existing cash on hand, bank facilities from local banks as well as personal loans from our principal shareholders, and such bank facilities and personal loans were significant sources of our funding during fiscal 2013. We have an agreement to borrow up to $5.3 million from a local bank. Any borrowing therefrom is secured by our assets pursuant to a collateral agreement, as well as the personal guarantees of some of our principal shareholders. As of March 31, 2013, $3.1 million remains available for future borrowing from such bank. Our good credit history with local banks may also enable us to obtain additional credit lines from the same banks or seek new loans from other banks if necessary. In addition, our CEO Mr. . . .

  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
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


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.