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-Q on 15-Aug-2013All Recent SEC Filings

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

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


15-Aug-2013

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 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, 2013 and filed with the SEC on July 1, 2013. 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 ("USD" or "$") at various pertinent dates and for pertinent periods.

Overview

We currently operate in three business segments in the People's Republic of China ("China" or the "PRC"): (i) retail pharmacies (in which we include our medical clinics and online sales), (2) wholesale of similar products that we carry in our pharmacies, and (3) farming and selling herbs used for traditional Chinese medicine ("TCM").

Our drugstores offer a wide variety of third-party medicinal products, including prescription and over-the-counter ("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 52 pharmacies under two store brand names: 47 "Jiuzhou Grand Pharmacy" stores in Hangzhou, and 5 "Lydia Grand Pharmacy" stores in Shanghai. Since May 2010, we have also been selling certain OTC drugs and nutritional supplements through our website at www.dada360.com.

We operate a wholesale business through Zhejiang Jiuxin Medicine Co., Ltd. ("Jiuxin Medicine"), distributing third-party pharmaceutical products primarily to trading companies throughout China. We also farm certain herbs used in TCM, which we sold to a local vendor in the past.

In May 2013, we applied to open another medical clinic in Xiasha, a sub-district of Hangzhou. We have also relocated our "Jiuzhou Grand Pharmacy" store in Gongcheng to be adjacent to the new clinic. As of the date of this Form 10-Q, our application has not been approved but we expect approval in the near future. When approved, the clinic will be a branch of Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd.

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 3 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 year ended March 31, 2013.


Results of Operations

The following table summarizes our results of operations for the three months
ended June 30, 2013 and 2012:

                                                              Three months ended June 30,
                                                        2013                               2012
                                                              Percentage                         Percentage
                                                               of total                           of total
                                              Amount           revenue            Amount          revenue
Revenue                                    $ 15,336,519             100.0 %    $ 32,847,330            100.0 %
Gross profit                               $  3,601,169              23.5 %    $  5,144,777             15.7 %
Selling expenses                           $  1,680,842              11.0 %    $  1,858,225              5.7 %
General and administrative expenses        $  2,640,818              17.2 %    $  2,846,578              8.7 %
(Loss) income from operations              $   (720,491 )            (4.7 )%   $    439,974              1.3 %
Other (expense) income, net                $    (40,413 )            (0.3 )%   $     98,698              0.3 %
Change in fair value of purchase option                                                (158
derivative liability                       $     12,665               0.1 %    $            )           (0.0 )%
Income tax expense                         $     39,520               0.3 %    $      3,882              0.0 %
Net income attributable to controlling                                              534,887
interest                                   $   (787,516 )            (5.1 )%   $                         1.6 %
Net loss attributable to noncontrolling                                                (255
interest                                   $       (243 )            (0.0 )%   $            )           (0.0 )%

Revenue

Our revenue decreased by $17,510,811 or 53.3% period over period, primarily due to the decrease in our wholesale business and herb farming business, offset by an increase in our retail business:

(1) Retail sales, which accounted for approximately 71.2% of total revenue for the three months ended June 30, 2013, increased by $1,957,934 or 21.9% to $10,912,390. Performance of many of our older stores have improved from concerted efforts to improve customer experience, such as hiring more physicians to increase availability of in-store consultation, and stocking each store location to better cater to its neighborhood. At the same time, many of the stores opened in the past two years are now maturing and able to accept state-sponsored medical insurance. Same-store sales increased by approximately $2,151,250 or 25.6%, while online sales contributed approximately $1,264,172 in revenue, an increase of 125.2%. The increase in same-store sales reflects implementation of our key drugstore operation strategy such as promoting sale through our doctors and clinics, as well as modest economic growth in China. Retail margin, however, fell from 26.0% to 25.7% due to price adjustments caused by government drug price control. Our store count decreased to 51 as of June 30, 2013, from 65 a year ago. However, because the stores that we closed were underperforming with low sale volume, their closure had little effect on our overall retail sales.

(2) Wholesale revenue, which represented 28.8% of total revenue for the three months ended June 30, 2013, decreased by $16,944,654 or 65.0%. Such significant contraction resulted from ongoing implementation of our new wholesale strategy to focus on profitability rather than sales volume. Thus, our wholesale profit margin increased from 2.5% to 18.6%. However, until we can achieve first-tier distributor status with more vendors, we will continue to have limited access to more lucrative sales channels such as hospitals, and do not expect our wholesale business to expand significantly in the immediate future.

(3) Sales from our herb farming business amounted to $0 for the three months ended June 30, 2013 as compared to $2,524,091 a year ago. Because market prices were lower than anticipated, we decided to hold off harvesting certain herbs (such as ginkgo trees which, although can be harvested, will increase in value with age), and to keep what we have harvested in inventory, until prices reached an acceptable level. We generally plant herbs based on our best estimate as to future market demands, and harvest and sell them when market conditions are favorable. 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.

Quarterly Revenue by Segment

The following table breaks down the revenue for our three business segments for
the three months ended June 30, 2013 and 2012:

                                           Three months ended June 30,
                                      2013                             2012
                                           % of total                       % of total       Variance by        % of
                             Amount          revenue          Amount          revenue          amount          change
Revenue from retail
business
   Revenue from
drugstores                $  9,648,218            62.9 %   $  8,393,098            25.6 %   $   1,255,120          15.0 %
   Revenue from online
sales                        1,264,172             8.2 %        561,358             1.7 %         702,814         125.2 %
     Sub-total of
retail revenue              10,912,390            71.1 %      8,954,456            27.3 %       1,957,934          21.9 %

Revenue from wholesale
business                     4,424,129            28.8 %     21,368,783            65.0 %     (16,944,654 )      (79.3) %
Revenue from farming
business                             -               - %      2,524,091             7.7 %      (2,524,091 )     (100.0) %
Total revenue             $ 15,336,519             100 %   $ 32,847,330             100 %   $ (17,510,811 )      (53.3) %


The revenue fluctuation period over period reflected the following:

(1) Drugstore revenue increased by approximately $1.2 million or 15% period over period, primarily due to three factors. First, we reconfigured operating strategy to refocus on our strengths. For example, by hiring additional doctors for our clinics, we were able to attract and serve more patients who in turn purchased their medication from our stores. Second, all of the stores that we opened in Hangzhou during the past two years are now able to accept state-sponsored medical insurance, six of which were unable to do so a year ago. Since insurance reimbursement accounted for approximately 50% our drugstore revenue from Hangzhou in the past year, the ability to accept medical insurance is a significant factor in a store's operating performance. Third, the modest growth in Chinese economy has encouraged consumers to spend, so a modest increase in drug sales is expected.

(2) Wholesale revenue decreased by $16,944,654 or 79.3% period over period. The drop in wholesale revenue is a reflection of our strategy to focus on profitability. Although we achieved our sales volume in the prior period quickly through competitive pricing, we incurred loss as result of low profit margin and rising overhead. Since our third fiscal quarter of fiscal 2013, we have ceased certain low margin sales and are focusing on profitability rather than sales volume. Although this strategy may impact our ability to achieve first-tier distributor status, we believe that focusing on profitability rather than volume is critical for our overall operations going forward.

(3) Online sales increased by $702,814 or 125.2% period over period. We have been working with business-to-consumer online vendors, including Taobao, by posting our products on their online platforms, which direct customers back to our website. Such arrangement has exposed our online presence to a wider consumer base. In addition, since the end of 2012, we have expended considerable efforts in identifying popular products that can drive sales. As a result, we have seen steady growth in online sales.

Gross Profit

Gross profit decreased by $1,543,608 or 30.0% period over period primarily as a
result of the contraction in wholesale business.  At the same time, gross margin
increased from 15.7% to 23.6% from higher wholesale profit margin, offset by a
lower retail profit margin. The average gross margin for each of our three
business segments are as follows:

                                                                Three months ended
                                                                     June 30,
                                                                2013           2012
               Average gross margin for retail business            25.7 %        26.0 %
               Average gross margin for wholesale business         18.6 %         2.5 %
               Average gross margin for farming business            N/A          90.9 %

Retail gross margin decreased primarily due to price adjustments that we made. 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 at or near cost as their pharmacies are indirectly subsidized through the government. We also adjusted prices to match or better other competitors' prices. Accordingly, overall retail gross profit margin decreased.

Wholesale gross margin increased because we are now focused on profitability for this segment such as by selling high margin products. By comparison, our drive to generate sales volume by selling very low margin products created the low gross margin a year ago.

Selling and Marketing Expenses

Sales and marketing expenses decreased by $177,383 or 9.5% period over period. The decrease in absolute dollars is mainly due to the strict expense budget we implemented in 2013 as well as closure of low performing drugstores, which slowed down rental increase and lowered depreciation expense related to store improvement. However, such expenses as a percentage of our revenue increased to 11.0%, from 5.7% for the same period a year ago as a result of significantly lower wholesale revenue. We expect future sales and marketing expenses to not deviate significantly from its current levels.

General and Administrative Expenses

General and administrative expenses decreased by $205,760 or 7.2% period over period. Such expenses as a percentage of revenue increased to 17.2% from 8.7% for the same period a year ago. The decrease in absolute dollars reflects our tight budget control as well as closure of low performing drugstores, which stemmed related overhead. The increase in percentage of revenue is mainly a result of a lower overall revenue base for the three months ended June 30, 2013. We expect future general and administrative expenses to remain at its current levels.


(Loss) Income from Operations

As a result of decreased sales revenue, we had loss from operations of $720,491, as compared to income from operations of $439,974 a year ago. Our operating margin for the three months ended June 30, 2013 and 2012 was (4.7)% and 1.3%, respectively.

Income Taxes

Our income tax expense increased by $35,638 period over period due to tax levied on Jiuzhou Pharmacy's profit.

Net Income

As a result of the foregoing, net income decreased by $1,322,391 period over period.

Liquidity

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

                                                            Three months ended
                                                                 June 30
                                                          2013              2012
Net cash (used in) provided by operating activities   $   (729,734 )    $ (2,823,330 )
Net cash (used in) investing activities               $   (118,044 )    $   (306,767 )
Net cash (used in) provided by financing activities   $ (1,146,182 )    $  2,907,409

For the three months ended June 30, 2013, cash used in operating activities amounted to $729,734, as compared to $2,823,330 a year ago. The change is primarily attributable to an increase in cash provided by accounts receivable of $7,521,462, advances to suppliers of $1,748,263, offset by an increase in cash used in accounts payable of $3,838,476 and other payable and accrued liabilities of $1,221,908. The negative operation cash flow reflects the net loss incurred in this quarter.

For the three months ended June 30, 2013, net cash used in investing activities amounted to $118,044, as compared to $306,767 a year ago. The change is the result of decreases in spending on equipment.

For the three months ended June 30, 2013, net cash used in financing activities amounted to $1,146,182, as compared to $2,907,409 in net cash provided by financing activities a year ago. The change is primarily the result of increase in restricted cash of $1,377,848.

As of June 30, 2013, we had cash of approximately $2,711,399. Our total current assets as of June 30, 2013, were $47,106,824 and total current liabilities were $31,486,853, which resulted in a net working capital of $15,619,971.

Capital Resources

As reflected in our consolidated financial statements, we had net loss for the three months ended June 30, 2013. We have taken measures to address this, such as qualifying all of our stores in Hangzhou to accept state-sponsored insurance, and trying 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 this will significantly lower our wholesale revenue in the near term.

As of June 30, 2013, we had approximately $12 million of receivables, $17 million in advances and $15 million in accounts payable. The advances are prepayments to vendors such as drug manufacturers and other distributors. We typically receive products from these vendors within three to six months after making prepayments. However, we may have difficulty collecting the advances if we do not continue purchasing from these vendors. In the event that we do not receive timely payment on our receivables, are unable to timely liquidate our advances against inventory purchase and/or are required to pay our accounts payable we may need additional capital resources, which we may or may not be able to obtain. Even if we do find a source of additional capital, we may not be able to obtain such additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel and capital expenditures. Such reductions could materially and adversely affect our business and ability to compete. Otherwise, we believe that with our projected working capital for the next twelve months, we will be able to meet our obligations for the next twelve months. However, if we are to acquire additional businesses or further expand our operations, we may need additional capital, which may not be available on terms favorable to us or at all.


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:

                             Retail           Drug                             Total
Periods ending June 30,    drugstores      wholesale      Herb farming         amount
2014                      $  2,836,808     $  226,610          $      -     $  3,063,418
2015                         1,011,560        256,010                 -        1,267,570
2016                           292,862        282,139                 -          575,001
2017                           176,782        287,897                 -          464,679
2018                            57,040        287,897                 -          344,937
Thereafter                           -        424,537                 -          424,537

Off-balance Sheet Arrangements

We do not have any outstanding financial guarantees or commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Exchange Rates

Our subsidiaries and affiliated companies in the PRC maintain their books and records in RMB, the lawful currency of the PRC. In general, for consolidation purposes, we translate their assets and liabilities into USD using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the unaudited condensed consolidated financial statements or otherwise disclosed in this report were as follows:

                                            June 30, 2013      March 31, 2013     June 30, 2012
Balance sheet items, except for the        USD1: RMB 0.1620   USD1: RMB 0.1594   USD1: RMB 0.1582
registered and paid-up capital, as of
end of period/year

Amounts included in the statement of       USD1: RMB 0.1612   USD1: RMB 0.1586   USD1: RMB 0.1580
Operations and statement of cash flows
for the period/ year ended

No representation is made that RMB amounts have been, or would be, converted into USD at the above rates.

Inflation

We believe that inflation has not had a material effect on our operations to date.

  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.