UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number: 001-34711
CHINA JO-JO DRUGSTORES, INC.
(Exact name of issuer as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
Hai Wai Hai Tongxin Mansion Floor 6
Gong Shu District, Hangzhou City
Zhejiang Province
P. R. China
(Address of principal executive offices)
98-0557852
(I.R.S. Employer
Identification Number)
310008
(Zip Code)
Registrant’s telephone number, including area code +86 (571) 88077078
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.001 par value
Trading Symbol(s)
CJJD
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and in Rule 12b-2 of the
Exchange Act (Check one):
Large Accelerated Filer
Non-accelerated filer
☐
X
Accelerated Filer
Smaller reporting company
Emerging growth company
☐
X
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
As of September 30, 2018, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $25.5 million, based on a
closing price of $1.61 per share of common stock as reported on the NASDAQ Capital Market on such date.
As of June 28, 2019, the registrant had 32,936,786 shares of common stock outstanding.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED MARCH 31, 2019
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Signatures.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Conditions and Results of Operation.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Exhibits and Financial Statement Schedules.
Form 10-K Summary
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Forward Looking Statements
This report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations
and assumptions concerning future events or future performance of the registrant. Readers are cautioned not to place undue reliance on these forward-looking
statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,”
“believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective
investors should carefully review various risks and uncertainties identified in this report, including the matters set forth under the captions “Risk Factors” and in
the registrant’s other SEC filings. These risks and uncertainties could cause the registrant’s actual results to differ materially from those indicated in the
forward-looking statements. The registrant undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future
events or developments.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and
factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may
differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Relating to Our Business ” below, as
well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of
the date of this report. We file reports with the Securities and Exchange Commission (the “SEC”). You can read and copy any materials we file with the SEC
at the SEC’s Public Reference Room located at 100 F. Street, NE, Washington, D.C. 20549, on official business days during the hours of 10 a.m. to 3 p.m.
You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the
SEC, including the registrant.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to
advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
ii
ITEM 1.
BUSINESS.
Overview
PART I
We are a retailer and distributor of pharmaceutical and other healthcare products typically found in retail pharmacies in the People’s Republic of China
(“PRC” or “China”). Prior to acquiring Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”) in August 2011 (see “Our Corporate History and Structure -
HJ Group” below), we were primarily a retail pharmacy operator. We currently have one hundred and twenty-one (121) store locations under the store brand
“Jiuzhou Grand Pharmacy” in Hangzhou city and its adjacent town Lin’an. Additionally, we operate eight drugstores, controlled by Hangzhou Jiuzhou Grand
Pharmacy.
We currently operate in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale business selling products similar to
those we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).
Our stores provide customers with a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”) drugs, nutritional
supplements, TCM, personal and family care products, and medical devices, as well as convenience products, including consumable, seasonal, and promotional
items. Additionally, we have doctors licensed in both western medicine and TCM on site for consultation, examination and treatment of common ailments at
scheduled hours. Three (3) stores have adjacent medical clinics offering urgent care (to provide treatment for minor ailments such as sprains, minor lacerations,
and dizziness that can be treated on an outpatient basis), TCM (including acupuncture, therapeutic massage, and cupping) and minor outpatient surgical
treatments (such as suturing). Our stores vary in size, but presently average close to 200 square meters per store. We attempt to tailor each store’s product
offerings, physician access, and operating hours to suit the community where the store is located.
We operate our pharmacies (including the medical clinics) through the following companies in China that we control through contractual
arrangements(refer to “Contractual Arrangements with HJ Group and the Key Personnel” below in this report regarding the details of contractual
arrangements:
● Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), which we control contractually, operates our “Jiuzhou Grand
Pharmacy” stores;
● Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) (“Jiuzhou Clinic”), which we control
contractually, operates one (1) of our three (3) medical clinics; and
● Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”), which we control contractually, operates our other medical
clinics.
In addition, we operate pharmacies through Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”), which are directly held by Jiuxin Investments
Management Co. Ltd. We also operates nine stores, which are held by Jiuzhou Pharmacy. We tend to expand our clinics network adjacent to our drugstores
through Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd. (“Linjia Medical”), which are controlled by Jiuzhou Pharmacy.
We also offer OTC drugs and nutritional supplements for sale through a website (www.dada360.com) operated by Jiuzhou Pharmacy. For the fiscal
year ended March 31, 2019, retail revenue, including pharmacies, medical clinics accounted for approximately 67.3% of our total revenue, while online
pharmacy revenue accounted for 8.1% of our total revenue.
Since August 2011, we have operated a wholesale business through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”), distributing third-party
pharmaceutical products (similar to those carried by our pharmacies) primarily to trading companies throughout China. Jiuxin Medicine is wholly owned by
Jiuzhou Pharmacy. For the fiscal year March 31, 2019, wholesale revenue accounted for approximately 24.6% of our total revenue.
We also have an herb farming business cultivating and wholesaling herbs used for TCM. This business is conducted through Hangzhou Qianhong
Agriculture Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned subsidiary. During the fiscal year ended March 31, 2019, we generated no
revenue from our herb farming business.
Throughout this report, we will sometimes refer to Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, Lin’An Jiuzhou, as well as the subsidiaries of
Jiuzhou Pharmacy, collectively as “HJ Group.”
Our Corporate History and Structure
We were incorporated in Nevada on December 19, 2006, under the name “Kerrisdale Mining Corporation,” with a principal business objective to
acquire and develop mineral properties. Although we had acquired certain mining claims, we were not operational.
1
On July 14, 2008, we amended our Articles of Incorporation to increase our authorized capital stock from 75,000,000 shares of common stock, par
value $0.001 per share, to 500,000,000 shares of common stock, par value $0.001 per share, and authorized the issuance of 10,000,000 shares of “blank check”
preferred stock, par value $0.001 per share. With respect to the preferred shares, our Board of Directors has the right to set its designations, preferences,
limitations, privileges, qualifications, dividend, conversion, voting, and other special or relative rights.
On September 17, 2009, we acquired control of Renovation Investment (Hong Kong) Co., Ltd., a limited liability company incorporated in Hong Kong
on September 2, 2008 (“Renovation”), pursuant to a share exchange agreement.
On September 24, 2009, we amended our Articles of Incorporation to change our name from “Kerrisdale Mining Corporation” to “China Jo-Jo
Drugstores, Inc.”
On April 9, 2010, we implemented a 1-for-2 reverse stock split of our issued and outstanding shares of common stock and a proportional reduction of
our authorized shares of common stock, by filing a Certificate of Change pursuant to Nevada Revised Statutes 78.209 with the Nevada Secretary of State on
April 6, 2010. All share information in this report takes into account this reverse stock split.
On April 28, 2010, we completed a registered public offering of 3,500,000 shares of our common stock at a price of $5.00 per share, resulting in gross
proceeds to us, prior to deducting underwriting discounts, commissions and offering expenses, of approximately $17,500,000.
On July 24, 2015, we closed a registered direct offering of 1.2 million shares of common stock at $2.50 per share with gross proceeds of
approximately $3 million from our effective shelf registration statement on Form S-3.
On January 23, 2017, we completed a private offering of 4,840,000 shares of the common stock at a price of $2.20 per share with gross proceeds of
$10,648,000.
On April 15, 2019, we closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds of $10,000,020
from our effective shelf registration statement on Form S-3. In a concurrent private placement we issued to the investors unregistered warrants to purchase up
to an aggregate of 3,000,006 shares of common stock at an exercise price of $3.00 per share. The placement agent receives warrants to purchase up to
240,000 shares of the common stock with an exercise price of $3.125 per share.
Renovation
Renovation was formed by the owners of HJ Group, as defined below, as a special purpose vehicle to raise capital overseas, in accordance with the
requirements of China’s State Administration of Foreign Exchange (“SAFE”). SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange
Administration for Financing and Round-Trip Investment Undertaken by Domestic Residents Through Overseas Special-Purpose Vehicles (“Circular
No. 75”) on October 21, 2005. To further clarify the implementation of Circular 75, on May 31, 2007, SAFE issued a supplementary official notice known as
Hui ZhongFa [2007] No. 106 (“Circular 106”). Circular 75 and Circular 106 require the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of HJ
Group submitted their applications to SAFE on July 25, 2008. On August 16, 2008, SAFE approved the applications, permitting these Chinese nationals to
establish Renovation as an offshore, special purpose vehicle which was permitted to have foreign ownership and participate in foreign capital raising activities.
After SAFE’s approval, the owners of HJ Group became holders of one hundred percent (100%) of Renovation’s issued and outstanding capital stock on
September 2, 2008. See “ Relevant PRC Regulations - SAFE Registration ” below.
Jiuxin Management
Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”) was organized in the PRC on October 14, 2008. Since all of its issued and
outstanding capital stock is held by Renovation, a Hong Kong company, Jiuxin Management is deemed a “wholly foreign owned enterprise” (“WFOE”) under
applicable PRC laws.
Jiutong Medical
Hangzhou Jiutong Medical Technology Co., Ltd. (“Jiutong Medical”) was organized in the PRC on December 20, 2011. Like Jiuxin Management,
Jiutong Medical is also deemed a WFOE because it is wholly owned by Renovation. In November 2013, Jiutong Medical acquired the right to use of a piece of
land, for which we intended to establish a herb processing plant. However, as our herb business has not grown, we have not started constructing the plant as of
March 31, 2019. In the future, we may use the land for other purpose such as the construction of a warehouse.
Shouantang Technology
Shouantang Technology was organized in the PRC on July 16, 2010. Like Jiuxin Management and Jiutong Medical, it is also deemed a WFOE because
it is wholly owned by Renovation.
In November 2010, Shouantang Technology acquired one hundred percent (100%) of Quannuo Technology and its wholly-owned subsidiary,
Hangzhou Quannuo Grand Pharmacy Co., Ltd. (“Hangzhou Quannuo”), pursuant to an equity ownership transfer agreement. Quannuo Technology was
organized in the PRC on July 7, 2009, and Hangzhou Quannuo was established on July 8, 2010. Hangzhou Quannuo has terminated its State Administration of
Industry and Commerce (“SAIC”) license in April 2015 and currently has no operations.
2
In November 2015, we sold all of the equity interests of Quannuo Technology to six individuals for approximately $17,121 (RMB107,074). Quannuo
Technology previously provided technical support to our online pharmacy and incurred accumulated losses over the last five years of its operations. After the
sale, its technical support function has been transferred back to Jiuzhou Pharmacy, which hosts our online pharmacy.
Qianhong Agriculture
Qianhong Agriculture was organized in the PRC on August 10, 2010 for our herb farming business. We planted ginkgo, also known as maidenhair,
trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the
longer it grows the more valuable it becomes. As of March 31, 2019, we have not harvested or sold any herbs.
Shouantang Bio
On October 11, 2014, the Company, through Jiuzhou Pharmacy, formed Shouantang Bio-technology Co., Ltd. (“Shouantang Bio”) by contributing
$0.16 million (RMB1 million) as its registered capital. Shouantang Bio was formed to sell nutritional supplements under its own brand name, Shouantang.
Jiuyi Technology
On September 10, 2015, Renovation set up an entity named Hangzhou Jiuyi Medical Technology Co. Ltd, (“Jiuyi Technology”) with registered capital
of $5 million, which was originally intended to provide additional technical support such as webpage development to our online pharmacy business. Later on, we
decided to move online technical supports back to Jiuzhou Pharmacy, so Jiuyi Technology had no significant online technical operations. Jiuyi Technology is
located in Hangzhou, China.
Lin’an Jiuzhou
On March 31, 2017, the Company, through Jiuxin Management, formed Lin’an Jiuzhou Grand Pharmacy Co. Ltd, (“Lin’an Jiuzhou”) with registered
capital of $725,570 (RMB 5 million), to expand our retail pharmacies in Lin’an City.
Linjia Medical
On September 27, 2017, the Company, through Jiuzhou Pharmacy, formed and held 51% of Zhejiang Jiuzhou Linjia Medical Investment and
Management Co. Ltd. with registered capital of $2,979,460 (RMB20 million), to expand our clinics network adjacent to our drugstores. After extensive market
research, Linjia Medical started operation of its clinics in late calendar year 2018.
Ayi Health
On March 29, 2019, the Company, through Jiuzhou Pharmacy, formed and currently holds 51% of the equity of Zhejiang AyiGe Medical Health
Management Co., Ltd.(“Ayi Health”), which is intended to provide technical support such as IT and customer support to our health management business in
the future.
HJ Group
Jiuzhou Pharmacy is a PRC limited liability company established on September 9, 2003 by Mr. Lei Liu (55%), Mr. Chong’an Jin (23%) and Ms. Li Qi
(22%). Hangzhou Kuaileren Grand Pharmacy Co., Ltd. (“Kuaileren”), originally a subsidiary of Jiuzhou Pharmacy, was dissolved on April 9, 2011. Prior to its
dissolution, Kuaileren operated a “Kuaileren Grand Pharmacy” store, which is now a “Jiuzhou Grand Pharmacy” store. On July 1, 2014, Mr. Chong’an Jin
transferred all of the equity interests he held in Jiuzhou Pharmacy to Mr. Lei Liu and Ms. Li Qi. As a result of this transfer, Mr. Lei Liu held 61% and Ms. Li
Qi held 39% equity interests of Jiuzhou Pharmacy. On August 21, 2017, after Mr. Lei Liu transferred certain shares to Ms. Li Qi, Mr. Lei Liu held 56.7% and
Ms. Li Qi held 43.3%. On April 25, 2018, Mr. Wei Chen, who is associated with CareRetail Holdings Limited, agreed to invest RMB200,000 and hold 1% of
Jiuzhou Pharmacy. As a result, Mr. Lei Liu held 56.13% and Ms. Li Qi has held 42.87% equity interests of Jiuzhou Pharmacy. Mr. Lei Liu and Ms. Li Qi are
from time to time referred to in this report as Key Personnel.
Jiuzhou Pharmacy currently has one subsidiary, Jiuxin Medicine, which was organized in the PRC on December 31, 2003. In April 2011, Jiuzhou
Pharmacy entered into an equity ownership transfer agreement with the owners of Jiuxin Medicine, and its business license was transferred to Jiuzhou
Pharmacy, although no consideration was paid. On August 25, 2011, the acquisition of Jiuxin Medicine was completed for $4.7 million (RMB 30 million.)
Jiuzhou Clinic is a PRC general partnership established on October 10, 2003 by Mr. Liu (39%), Mr. Jin (31%) and Ms. Qi (30%). Jiuzhou Clinic is a
medical practice currently operating adjacent to the “Jiuzhou Grand Pharmacy” store in Daguan, providing primary, urgent, minor surgical, and traditional
medical care services. Additionally, Jiuzhou Clinic’s physicians consult with and examine patients at other “Jiuzhou Grand Pharmacy” stores.
Jiuzhou Service is a PRC limited liability company established on November 2, 2005 by Mr. Liu (39%), Mr. Jin (31%) and Ms. Qi (30%). Jiuzhou
Service is licensed as a healthcare management company and currently manages the medical clinic operating adjacent to the “Jiuzhou Grand Pharmacy” stores
in Wenhua and Xiasha, providing services similar to those at the Daguan clinic. In November 30, 2017, Mr. Jin transferred his shares to Mr. Liu and Ms. Qi.
After the transfer, Mr. Liu owns 56.7% and Ms. Qi owns 43.3% of the Jiuzhou Service.
We control HJ Group through contractual arrangements. See “Contractual Arrangements with HJ Group and the Key Personnel” below.
3
Contractual Arrangements with HJ Group and the Key Personnel
Our relationships with HJ Group and the Key Personnel are governed by a series of contractual arrangements that they have entered into with Jiuxin
Management.
PRC regulations on foreign investment currently permit foreign companies to establish or invest in WFOEs or joint ventures that engage in wholesale
or retail sales of pharmaceuticals in China. For retail sales, however, these regulations restrict the number and size of pharmacies that a foreign investor may
own. If a chain operates more than thirty (30) stores and sells branded pharmaceutical products from different suppliers, a foreign investor may own only up to
forty nine percent (49%) of such chain. The contractual arrangements with Jiuzhou Pharmacy render such restrictions inapplicable to us, since neither we nor
our subsidiaries own equity interests in Jiuzhou Pharmacy, while at the same time we retain control of its drugstore chain by virtue of the contractual
arrangements.
Similarly, PRC regulations place certain restrictions on foreign ownership of medical practices. Foreign investors can only acquire ownership interests
through a Sino-foreign joint venture and not through a WFOE. Since we do not have actual equity interests in Jiuzhou Clinic or Jiuzhou Service, and instead
control these entities through contractual arrangements, such regulations do not apply to us or our structure.
Under PRC laws, Jiuxin Management, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic are each independent business entities not exposed or
subject to the liabilities incurred by any of the other three (3) entities. The contractual arrangements constitute valid and binding obligations of the parties to
such agreements. Each of the contractual arrangements, and the rights and obligations of the parties thereto, are enforceable and valid in accordance with the
laws of the PRC. These contractual arrangements, as amended and in effect, include the following:
Consulting Services Agreements. Pursuant to certain exclusive consulting services agreements (the “Consulting Services Agreements”), Jiuxin
Management has the exclusive right to provide Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic with general business operation services, including
advisory and strategic planning services, as well as consulting services related to their current and future operations (the “Services”). Additionally, Jiuxin
Management owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or
derived from the provision of the Services. Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic must each pay a quarterly consulting services fee in RMB to
Jiuxin Management that is equal to its profits for such quarter. This agreement is in effect until and unless terminated by written notice of a party to the
agreement in the event that: (a) a party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or dissolution, ceases to carry
on business, or becomes unable to pay its debts as they become due; (b) Jiuxin Management terminates its operations; or (c) circumstances arise which would
materially and adversely affect the performance or the objectives of the agreement. Jiuxin Management may also terminate the agreement with any of Jiuzhou
Pharmacy, Jiuzhou Service or Jiuzhou Clinic if one of them breaches the terms of the agreement, or without cause.
Operating Agreements. Pursuant to certain operating agreements (the “Operating Agreements”), Jiuxin Management agrees to guarantee the
contractual performance by Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic of their agreements with any third party. In return, the Key Personnel must
appoint designees of Jiuxin Management to the boards of directors and senior management of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic. In
addition, each of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic agrees to pledge its accounts receivable and all of its assets to Jiuxin Management.
Moreover, without the prior consent of Jiuxin Management, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot engage in any transactions that could
materially affect their respective assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or
purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party, or transfer of any
agreements relating to their business operations to any third party. They must also abide by corporate policies set by Jiuxin Management with respect to their
daily operations, financial management and employment issues. The term of this agreement is from August 1, 2009 until the maximum period of time permitted
by law. Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot terminate this agreement.
Equity Pledge Agreements. Pursuant to certain equity pledge agreements (the “Equity Pledge Agreement”), the Key Personnel have pledged all of
their equity interests in Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic to Jiuxin Management in order to guarantee these companies’ performance of
their respective obligations under the Consulting Services Agreement. If these companies or the Key Personnel breach their respective contractual obligations,
Jiuxin Management, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Key Personnel have also agreed that
upon occurrence of any event of default, Jiuxin Management shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead
of the Key Personnel to carry out the security provisions of this agreement, and to take any action and execute any instrument that Jiuxin Management may
deem necessary or advisable to accomplish the purposes of this agreement. The Key Personnel agree not to dispose of the pledged equity interests or take any
actions that would prejudice Jiuxin Management’s interests. This agreement will expire two (2) years after the obligations of Jiuzhou Pharmacy, Jiuzhou
Service and Jiuzhou Clinic under the Consulting Services Agreement have been fulfilled.
Option Agreements. Pursuant to the option agreements, the Key Personnel irrevocably grant Jiuxin Management or its designee an exclusive option to
purchase, to the extent permitted under PRC law, all or part of their equity interests in Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic for the cost of the
initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Jiuxin Management or its designee has
sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement commenced from August 1, 2009 and continues for
the maximum period of time permitted by law.
4
Voting Rights Proxy Agreements. Pursuant to the voting rights proxy agreements, the Key Personnel irrevocably grant a designee of Jiuxin
Management the right to exercise the voting and other ownership rights of the Key Personnel in Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic,
including the rights to (i) attend any meeting of the Key Personnel (or participate by written consent in lieu of such meeting) in accordance with applicable laws
and each company’s incorporating documents, (ii) sell or transfer all or any of the equity interests of the Key Personnel in these companies, and (iii) appoint
and vote for the companies’ directors. The proxy agreement may be terminated by mutual consent of the parties or upon thirty (30) days’ written notice from
Jiuxin Management.
Other than as pursuant to the foregoing contractual arrangements, Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic cannot transfer any funds
generated from their respective operations. The contractual arrangements were originally entered into on August 1, 2009, and amended on October 27, 2009.
Our Current Corporate Structure
The following diagram illustrates our current corporate structure as of June 10, 2019:
5
The table below summarizes the status of the registered capital of our PRC subsidiaries and controlled companies as of the date of this report:
Entity Name
Jiutong Medical
Jiuzhou Clinic
Jiuzhou Pharmacy
Jiuzhou Service
Jiuxin Management
Jiuxin Medicine
Qianhong Agriculture
Shouantang Technology
Shouantang Bio
Jiuyi Technology
Lin’an Jiuzhou
Jiuben Pharmacy
Jiumu Pharmacy
Jiuheng Pharmacy
Jiujiu Pharmacy
Jiuli Pharmacy
Jiurui Pharmacy
Jiuxiang Pharmacy
Jiuyi Pharmacy
Linjia Medical
Ayi Health
Our Business
Pharmacies
Entity
Type
Subsidiary
VIE
VIE
VIE
Subsidiary
VIE
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
VIE
VIE
VIE
VIE
VIE
VIE
VIE
VIE
VIE
VIE
Registered
Capital
USD 2,600,000
N/A
USD 733,500
USD 73,350
USD 14,500,000
USD 1,564,000
USD 1,497,000
USD 11,000,000
USD 162,900
USD 5,000,000
USD 725,570
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 2,979,460
USD1,489,730
Registered
Capital Paid
USD 2,600,000
N/A
USD 733,500
USD 73,350
USD 14,500,000
USD 1,564,000
USD 1,497,000
USD 11,000,000
USD 162,900
USD 2,500,000
USD 72,557
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 15,920
USD 1,489,730
None
Due Date for
Unpaid Registered
Capital
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
September 25, 2026
March 31, 2027
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
We currently have one hundred and twenty-one (121) pharmacies throughout Hangzhou, the provincial capital of Zhejiang and neighborhood cities.
Pharmacy sales accounted for approximately 89.2% of our retail revenue, and 67.3% of our total revenue, for the fiscal year ended March 31, 2019. We offer
primarily third-party products at our pharmacies, including:
● Approximately 1,376 prescription drugs (252 of which require a physician’s prescription and the remainder requiring customer personal
information registration only), sales of which accounted for approximately 32.5% of our retail revenue for the fiscal year ended March 31, 2019;
● Approximately 1,769 OTC drugs, sales of which accounted for approximately 43.4% of our retail revenue for the fiscal year ended March 31,
2019;
● Approximately 613 nutritional supplements, including a variety of healthcare supplements, vitamin, mineral and dietary products, sales of which
accounted for approximately 8.8% of our retail revenue for the fiscal year ended March 31, 2019;
● TCM, including drinkable herbal remedies and pre-packaged herbal mixtures for making soup, sales of which accounted for approximately 9.0%
of our retail revenue for the fiscal year ended March 31, 2019;
● Sundry products (i.e., personal care products such as skin care, hair care and beauty products, convenience products such as soft drinks,
packaged snacks, and other consumable, cleaning agents, stationeries, and seasonal and promotional items tailored to local consumer demand for
convenience and quality), sales of which accounted for approximately 1.3% of our retail revenue for the fiscal year ended March 31, 2019; and
● Medical devices (i.e., family planning and birth control products, early pregnancy test products, portable electronic diagnostic apparatus,
rehabilitation equipment, and surgical tools such as hemostats, needle forceps and surgical scissors), sales of which accounted for approximately
5.0% of our retail revenue for the fiscal year ended March 31,2019.
6
We favor retail locations in well-established residential communities with relatively concentrated consumer purchasing power or are located in close
proximity to local hospitals, and evaluate potential store sites to assess consumer traffic, visibility and convenience. Depending on its size, each drugstore has
between two (2) to eight (8) pharmacists on staff, all of whom are properly licensed. We only accept prescriptions from licensed health care providers, and
verify the validity, accuracy, and completeness of all prescriptions. We also ask all prescription customers to disclose their drug allergies, current medical
conditions, and current medications. Most pharmacies also maintain a TCM counter staffed by licensed herbalists.
After opening, a location without SHI coverage may take up to one year to achieve our projected revenue goals for that particular location. Various
factors influence individual store revenue including, but not limited to: location, nearby competition, local population demographics, square footage, and
government insurance coverage.
All of our one hundred and twenty-one (121) of our drugstores are located in Hangzhou city and its adjacent town Lin’an.
To enhance our customers’ experience, we have licensed physicians available at several of our “Jiuzhou Grand Pharmacy” locations for consultation,
examination and treatment of common ailments at scheduled hours. In addition, our Daguan, Wenhua and Xiasha stores have adjoining medical clinics that
provide urgent care (for conditions such as sprains, minor lacerations, and dizziness), TCM treatments (including acupuncture, therapeutic massage,
moxibustion, and cupping), and minor outpatient surgical treatments (such as suturing).
To ensure quality and personal attention for patients, we employ only licensed doctors and certified nurses and technicians. Patient treatment at our
three (3) Jiuzhou Clinics and Jiuzhou Service, and all Linjia Clinics follow nationally established clinical practice guidelines from China’s Ministry of Health. We
currently have fifty-six (56) physicians and sixty-seven (67) clinic staff. In-store consultations and examinations by our physicians are provided free-of-charge
to ensure that customers are being prescribed and taking the appropriate medication for their ailments, and to afford customers convenience.
We view our medical services as more consumer-driven than other health care specialties, because consumers requiring the types of medical services
that we provide often seek treatment on their own accord. We have developed our medical services to respond to the public need for convenient access to
medical consultations and/or care and the significant savings that we can provide as compared to a more traditional medical setting such as a hospital. Many of
our patients often need immediate access to medical services, do not have a regular physician, or may lack suitable alternatives. Patient flow is derived from
the physical presence of our drugstores, not from pre-existing doctor-patient relationships or referrals from other healthcare providers.
We generate limited revenue directly from our clinics. However, our clinic brings patients into our stores, where they then purchase medical products.
Online Sales
Since May 2010, we have been retailing OTC drugs and nutritional supplements on the Internet at www.dada360.com. Before November 2015, our
subsidiary Quannuo Technology operated and maintained the website pursuant to the Internet Pharmaceutical Transaction Service Qualification Certificate
issued by the State Food and Drug Administration (the “SFDA”) of Zhejiang Province, which allows us to engage in online retail pharmaceutical sales
throughout China. As we sold all our equity interests in Quannuo Technology in November 2015, we have transferred our online pharmacy operation function
to Jiuzhou Pharmacy. We have established payment methods with banks and online intermediaries such as Alipay, and are cooperating with business-to-
consumer online vendors such as Taobao. By using Taobao’s platform in addition to our own website as mentioned above, we can be exposed to a wider range
of customers.
Online sales accounted for approximately 10.8% of our retail revenue, and 8.1% of our total revenue, for the fiscal year ended March 31, 2019. Online
sales accounted for approximately 16.4% of our retail revenue, and 12.6% of our total revenue, for the fiscal year ended March 31, 2018.
Wholesale
Since acquiring Jiuxin Medicine in August 2011, we have been distributing third-party products primarily to drug distributors throughout China,
including:
● Approximately 1,154 prescription drugs, the sales of which accounted for approximately 63.4% of our wholesale revenue for the fiscal year
ended March 31, 2019 as compared to approximately 343 prescription drugs, the sales of which accounted for approximately 56.0% of our
wholesale revenue for the fiscal year ended March 31, 2018;
● Approximately 1,282 OTC drugs, the sales of which accounted for approximately 33.9% of our wholesale revenue for the fiscal year ended
March 31, 2019 as compared to approximately 253 OTC drugs, the sales of which accounted for approximately 42.6% of our wholesale revenue
for the fiscal year ended March 31, 2018;
7
● Approximately 307 nutritional supplements, the sales of which accounted for approximately 1.1% of our wholesale revenue for the fiscal year
ended March 31, 2018 as compared to approximately 31 nutritional supplements, the sales of which accounted for approximately 0.8% of our
wholesale revenue for the fiscal year ended March 31, 2018;
● TCM products, the sales of which accounted for approximately 1.0% of our wholesale revenue for the fiscal year ended March 31, 2019, as
compared to TCM products, the sales of which accounted for approximately 0.3% of our wholesale revenue for the fiscal year ended March 31,
2018;
● Sundry products, the sales of which accounted for approximately 0.1% of our wholesale revenue for the fiscal year ended March 31, 2019 as
compared to Sundry products, the sales of which accounted for approximately 0.2% of our wholesale revenue for the fiscal year ended March
31, 2018; and
● Medical devices, the sales of which accounted for approximately 0.5% and 0.0%, of our wholesale revenue for the fiscal year ended March 31,
2019 and 2018, respectively.
Wholesale revenue increased primarily as a result of our ability to resell certain products, which our retail stores made large orders on, to other
vendors. As our retail drugstores achieved large quantity sales of certain brand name merchandise, we were able to negotiate for lower purchase prices than
the market level on such merchandise. As a result, certain vendors who were unable to obtain better prices than ours, will turn to us for such merchandise,
leading the wholesale volume to grow. On the other side, we have been trying to act as a local agent for well-known health products in Zhejiang Province. For
example, we signed a strategic cooperation agreement with Dong’a Gelatin (DEEJ) and act as its local sale agent in Zhejiang Province. Until we can establish
a new customer base and secure the status to serve as provincial or national exclusive sale agent for certain popular drugs, we do not expect our wholesale
business to increase significantly in the immediate future.
Herb Farming
From 2010 to the third quarter of fiscal 2013, we had been cultivating and harvested ten (10) types of herbs, such as fructusrubi (used in TCM to
promote blood circulation), white atractylodes rhizome (used in TCM to treat physical and mental fatigue), atractylodesmacrocephala (used in TCM to control
sweating), ginkgo seeds (used in TCM to treat asthma), and ginkgo trees used for TCM on approximately forty eight (48) acres of leased land in Lin’an,
approximately thirty (30) miles from Hangzhou.
We planted ginkgo trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature
enough to harvest. Typically, the longer the plant grows, the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their
market value in the future. We may continue growing trees and cultivating other herbs in the future.
Herb farming revenue accounted for no revenue for the fiscal year ended March 31, 2019.
Our Customers
Retail Customers
For the fiscal year ended March 31, 2019, our pharmacies collectively served an average of 13,645 customers per day. We periodically conduct
qualitative customer surveys to help us build a stronger understanding of our market position and our customers’ purchasing habits.
Pharmacy customers pay by cash, debit or credit cards, mobile devices or medical insurance cards under Hangzhou and Zhejiang’s medical insurance
programs. During the fiscal year ended March 31, 2019, approximately 10% of our pharmacy revenue came from cash sales, 57% from Hangzhou’s medical
insurance cards (where most of our pharmacies are located), and 33% from debit and credit cards, Zhejiang’s medical insurance cards, Alipay and other
charge cards.
8
We maintain strict cash control procedures at our pharmacies. Our integrated information management system records the details of each sale, which
we control from our headquarters. Depending on each location’s sales activities, cash may be deposited daily or several times per week in designated bank
accounts.
For sales made to eligible participants in the national medical insurance program, we generally obtain payments from the relevant government social
security bureaus on a monthly basis. See “Relevant PRC Regulations - Reimbursement under the National Medical Insurance Program.” According to
relevant regulations, a drugstore usually needs to operate for at least one (1) year before it can apply to be licensed to accept Hangzhou’s medical insurance
cards. As of the date of this report, eighty-nine (89) of our one hundred and twenty-one (121) “Jiuzhou Grand Pharmacy” stores are licensed to accept medical
insurance cards. Those of our stores that accept medical insurance cards are designated as such by clear signage on their storefront windows.
Online Sales Customers
Our online customers consist primarily of consumers between the ages of 20 and 40. While our website is accessible throughout China, approximately
thirty percent (30%) of our online sales during the fiscal year ended March 31, 2019, were from Zhejiang and neighboring Jiangsu and Shanghai.
Wholesale Customers
Our wholesale customers are primarily third-party trading companies that purchase from us to resell to pharmacies throughout China. We also supply
some hospitals and pharmacies, although they collectively make up less than 10.0% of our wholesale customers currently.
Herb Farming Customers
Our farming customers primarily include local herb vendors. For the fiscal year ended March, 31, 2019, we have not harvested or sold any herbs.
Marketing and Promotion
Our marketing and promotion efforts are focused on our retail segment, specifically, our pharmacies, and our strategy is to build brand recognition,
increase customer flow, build strong customer loyalty, maximize repetitive customer visits, and develop incremental revenue opportunities.
Our marketing department designs chain-wide marketing efforts while each store designs local promotions based on local demographics and market
conditions. We also launch single store promotional campaigns and community activities in connection with the opening of new stores. Our store managers and
staff are also encouraged to propose their own advertising and promotional plans, including holiday promotions, posters and billboards. In addition, we offer
special discounts and gift promotions for selected merchandise periodically in conjunction with our suppliers’ marketing programs. We also provide ancillary
services such as providing free blood pressure readings in our stores.
Many of our promotional programs are designed to encourage manufacturers to invest resources to market their brands within our stores. We charge
manufacturers promotional fees in exchange for the right to promote and display their products in our stores during promotional periods. We also allow
manufacturers and distributors to station salespeople in our stores to promote their products, for which we receive a fee. Since manufacturers provide
purchasing incentives and information to help customers make informed purchase decisions, we believe that manufacturer-led promotions improve our
customers’ shopping experience. We work to maintain strong inventory positions for merchandise featured in our promotions, as we believe this increases the
effectiveness of our spending on promotional activities.
We regularly run advertisements in selected newspapers to promote our brands and the products carried in our stores. Under our agreements with
certain newspapers, we run one-page weekly and monthly advertisements, as applicable, and the newspapers publish healthcare-related feature articles relating
to our advertised products on or around the dates of our advertisements. We also promote our brands and products using billboards and radio and television
commercials. Depending on our agreement with a particular manufacturer, advertising expenses are borne either by us, the manufacturer of the products being
advertised, or are shared as a joint expense. Our advertisements are designed to promote our brands, our corporate image and the prices of products available
for sale in our stores.
As part of our marketing campaign, we offer rewards cards to customers, which provide certain exclusive discounts. After a customer signs up for
the rewards card, we communicate via the customer’s preferred method: e-mail, traditional mail or text messages. For the fiscal year ended March 31, 2019,
approximately 63.9% of our customers used their rewards cards to make purchases. We intend to further extend this program to enhance the customer
experience and for customer retention. For every 10 Yuan spent at our stores, we award 1 membership point. Every 20 points can be exchanged for a 1 Yuan
coupon, redeemable towards merchandise purchased at our stores. The reward points never expire, but cannot be applied towards products reimbursed by the
local SIC agent. As a result, we recorded unused membership points as accrued expense.
9
Our clinic staff also regularly offers free seminars and outreach programs covering various health issues that are topical to the communities where our
stores are located. Such events are designed not only to raise public health awareness, but to reach potential customers for our drugstores.
To promote our online business, we are cooperating with Taobao, the largest online vendor in China, to help raise awareness among potential
customers. Taobao lists our products on its platform, which then directs consumers back to our website to make their purchases.
Logistics
Before March 31, 2018, we used Jiuxin Medicine’s resources to support our logistics needs in Hangzhou. Beginning March 31, 2018, we outsourced
our logistics service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd (“Astro Boy Logistic”). As a result, Jiuxin Medicine’s warehouse lease
has been terminated. Astro Boy Logistic provides us with approximately 14,000 square meters facility located approximately eighteen (18) miles from our
headquarters, which served as our central distribution center. Astro Boy Logistics’ staff and vehicles make regular deliveries to our pharmacies and wholesale
customers. Jiuxin Medicine, however, continues to negotiate with various suppliers and make orders.
We employ third-party logistics companies for deliveries to wholesale customers outside Hangzhou. We believe that reliable logistics providers are
readily available and can be replaced without any material interruptions to our business.
Suppliers
We currently source retail products from approximately 120 suppliers, including trading companies and direct manufacturers. We source wholesale
products from approximately 380 suppliers, including many of those that provide our retail products. For the fiscal year ended March 31, 2019, one supplier,
HuaDong Pharmaceutical Co., Ltd. accounted for more than twenty-two percent (22.0%) and twenty-two percent (22.7%) of our total purchases and total
purchase deposits. The suppliers are neither related to nor affiliated with us. For the fiscal year ended March 31, 2018, one supplier, HuaDong Pharmaceutical
Co., Ltd. accounted for more than nineteen percent (19.0%) and thirteen percent (13.1%) of our total purchases and total purchase deposits. The suppliers are
neither related to nor affiliated with us.
We believe that competitive sources are readily available for substantially all of the products we require for our retail and wholesale businesses. As
such, we believe that we can change suppliers without any material interruption to our business. To date, we have not experienced any significant difficulty in
sourcing our suppliers.
Quality Control
We strongly emphasize quality control, which starts with procurement. In addition to their market acceptance and costs, we select products based on
Good Manufacturing Practice and Good Supply Practice (“GSP”) compliance status of their suppliers. We also assess product quality based on the
manufacturer’s facilities and capabilities, including technology, packaging and logistics. We conduct random quality inspections of each batch of products we
procure, and replace any supplier who fails to pass such inspections.
We also enforce strict quality control measures at our distribution center. All products are screened upon their arrival, and those with evidence of
defects or damages are immediately rejected. Products that pass the screening process are recorded and stored strictly according to each manufacturer’s
temperature and other requirements. Products (for both our pharmacies and wholesale customers) are verified against the appropriate delivery orders prior to
leaving the facility. We use vehicles with cold-temperature storage to make deliveries as necessary.
All of our pharmacy employees participate in a mandatory thirty-six (36) hour training program regarding quality control annually, and we regularly
dispatch quality inspectors to our stores to monitor the service quality of our staff.
Competition
The drugstore industry in China is intensely competitive, rapidly evolving and highly fragmented. We compete on the basis of store location,
merchandise selection, prices and brand recognition. Many of our competitors include large, national drugstore chains that may have more financial resources,
stronger brand strength, and management expertise than us, including China Nepstar Chain Drugstore Ltd., LBX Pharmacy, and TianTianHao Grand
Pharmacy. Other competitors include local and independent drugstores and government-operated pharmacies, as well as discount stores, convenience stores,
and supermarkets with respect to sundry and other non-medicinal products that we carry.
The wholesale pharmaceutical distribution industry in China is likewise competitive and highly fragmented. We compete with regional distributors, such
as Zhengchen Pharmaceutical Co., Ltd. and Hangzhou Xiaoran Pharmaceutical Co., Ltd., as well as national operators such as Fengwoda Pharmaceutical Co.,
Ltd. and Jiuzhoutong Pharmaceutical Co., Ltd. These competitors have substantially greater logistics capacities and more financial resources, as well as more
industry-relevant experience, than us.
10
The online pharmacy is an emerging business in China. We are competing with other online vendors that may be supported by major drugstore chains
or initiated by smaller local drugstore chains. In order to compete effectively, we are cooperating with Taobao, the largest online vendor in China. We also
invest significant resources in selecting products we believe are most suitable for online sales, such as those we have the exclusive right to sell. We have
invested significant resources identifying popular products that we believe can drive sales, while simultaneously controlling costs. In fiscal 2019, we have
continued working with large insurance companies in China such as the People’s Insurance Company (Group) of China Limited, which sells online products to
their enrolled insurance customers. Commercial health insurance has expanded rapidly in recent years in China, especially after the government began
restricting its Social Health Insurance (“SHI”) budget. We expect the close cooperation with commercial insurance companies and active strategy on e-
commerce platforms will drive up our online sales.
China’s herb market is highly specialized. We have not incurred any herb sales in fiscal 2019.
Intellectual Property
We currently have the following trademarks registered with the Trademark Office of the SAIC:
● “Jiuzhou Tongxin” is a Classes 5 and 35 trademark (for pharmaceuticals and advertisement) issued on February 14, 2011 and March 7, 2013
respectively, registered under Jiuzhou Pharmacy, which we plan to use to brand certain products that we may sell in our stores;
● “Jiuzhou” is a Classes 5, 35 and 44 trademark (for medical services) issued in April and May 2012, registered under Jiuzhou Pharmacy, which we
plan to use to brand our medical services;
● “Shouantang” a Classes 5, 10, 30, 35 and 44 trademark (for pharmaceuticals, construction, food, advertisement and medical services) issued on
October 2011, and a Classes 3、42、6、19、20、24、31、26、32 and 29 (for oil, diary and others) trademark issued in August and October 2015,
registered under Jiuzhou Pharmacy, which we are using to brand certain products that we sell in our stores; and
● “Jinyuliangyan” is a Class 29 trademark (for food and oil) issued in June 2011, registered under Jiuzhou Pharmacy, which we are using to brand
certain products that we sell in our stores; and
● “Jiuying” is a Classes 5, 35 and 44 trademark (for healthcare and nutritional supplement) issued in December 2012 and February 2013, registered
under Jiuzhou Service, which we are using to brand our service and products that we sell in our clinics.
We own and operate the following websites: www.dada360.com (for online sales), www.jiuzhou-drugstore.com (our corporate website used in
China), and www.jiuzhou360.com (our English-language corporate website). We also own two (2) inactive domain names. We do not own any patents, nor do
we have any pending patent applications, and we are not a beneficiary of any licenses, franchises, concessions or royalty agreements.
All of our employees are required to enter into written employment agreements with us, pursuant to which they are subject to confidentiality
obligations.
Employees
As of March 31, 2019, we had 1,079 employees combined in our retail and wholesale operations, consisting of 1,019 full-time and 60 part-time
employees. The number of employees for each area of operations, and such employees as a percentage of our total workforce, are as follows:
Non-pharmacist store staff
Pharmacists
Management - non-pharmacists
Physicians
Non-physician clinic staff
Wholesale - non-warehouse
Wholesale - warehouse
Online pharmacy - technicians
Online pharmacy - non-technicians
Total
11
As of
March 31, 2019
Employees
518
292
69
56
67
36
0
8
33
1,079
Percentage
48.0%
27.1%
6.4%
5.2%
6.2%
3.3%
0.0%
0.7%
3.1%
100.00%
We strongly emphasize the quality of our employees at all levels, including in-store pharmacists and store staff who directly interact with our
customers. We provide extensive training for newly recruited employees in the first three (3) months of their employment. The training is designed to
encompass a number of areas, such as knowledge of our products and effective customer service. In addition, we regularly carry out training programs on
medicinal information, nutritional information, and selling skills for our store staff and in-store pharmacists. We believe these programs have played an important
role in strengthening the capabilities of our employees.
Various drug manufacturers also pay us to have their representatives in our drugstores, and accordingly, we train them under our store policies and
procedures.
Relevant PRC Regulations
SAFE Registration
In October 2005, SAFE issued Circular 75. Circular 75 regulates foreign exchange matters in relation to the use of a special purpose vehicle by PRC
residents to seek offshore equity financing and conduct “round trip investment” in China. The Key Personnel, who are PRC residents, are in compliance with
Circular 75 and its implementing circulars.
Dividend Distribution
Under current applicable laws and regulations, each of our consolidated PRC entities, including WFOEs and domestic companies, may pay dividends
only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our consolidated
PRC entities is required to deposit at least ten percent (10%) of its after-tax profit based on PRC accounting standards each year into its statutory surplus
reserve fund until the accumulative amount of such reserve reaches fifty percent (50%) of its registered capital. These reserves are not distributable as cash
dividends. As of March 31, 2019 the accumulated balance of our statutory reserve funds reserves amounted to $1.31 million, and the accumulated losses of our
consolidated PRC entities amounted to $15.04 million.
Taxation
The current PRC Enterprise Income Tax Law (the “EIT Law”), and the implementation regulations for the EIT Law issued by China’s State Council,
became effective as of January 1, 2008. Under the EIT Law, enterprises are classified as either resident or non-resident enterprises. An enterprise established
outside of China with its “de facto management bodies” located within China is considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law defines a “de facto management body” as a
managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and
properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due
to the relatively short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of
entities organized under the laws of foreign jurisdictions on a case-by-case basis.
If the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of PRC tax consequences
could follow. First, we may be subject to enterprise income tax at a rate of twenty five percent (25%) on our respective worldwide taxable income, as well as
PRC enterprise income tax reporting obligations. Second, although the EIT Law provides that “dividends, bonuses and other equity investment proceeds
between qualified resident enterprises” is exempted income, and the implementing rules of the EIT Law refer to “dividends, bonuses and other equity
investment proceeds between qualified resident enterprises” as the investment proceeds obtained by a resident enterprise from its direct investment in another
resident enterprise, it is still unclear whether the dividends we receive from Jiuxin Management would be classified as “dividends between qualified resident
enterprises” and therefore qualify for tax exemption.
If we are treated as a non-resident enterprise under the EIT Law, any dividends that we receive from Jiuxin Management (assuming such dividends
are deemed to be sourced from within the PRC) (i) may be subject to a five percent (5%) PRC withholding tax, provided that we own more than twenty five
percent (25%) of the registered capital of Jiuxin Management incessantly within twelve (12) months immediately prior to obtaining such dividends from Jiuxin
Management, and if the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Arrangement”) is applicable, or (ii) if the Arrangement does not
apply (i.e. the PRC tax authorities may deem us to be a conduit not entitled to treaty benefits), may be subject to a ten percent (10%) PRC withholding tax.
Similarly, if we are treated as a non-resident enterprise, and Renovation is treated as a resident enterprise, then any dividends that we receive from Renovation
(assuming such dividends were considered sourced within the PRC) may be subject to a ten percent (10%) PRC withholding tax. Any such taxes on dividends
could materially reduce the amount of dividends, if any, that we could pay to our shareholders.
12
Finally, the new “resident enterprise” classification could result in a situation in which a ten percent (10%) PRC tax is imposed on dividends we pay to
our investors that are non-resident enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or,
despite the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment or place of
business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of our shares by such
investors is also subject to a ten percent (10%) PRC income tax if such gain is regarded as income derived from sources within China. In such event, we may
be required to withhold a ten percent (10%) PRC tax on any dividends paid to our investors that are non-resident enterprises. Our investors that are non-
resident enterprises also may be responsible for paying PRC tax at a rate of ten percent (10%) on any gain realized from the sale or transfer of our common
shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain.
Moreover, the State Administration of Taxation issued the Notice on Strengthening the Administration of Enterprise Income Tax on Share
Transfer Income of Non-Resident Enterprises No. 698 (“Circular 698”) on December 10, 2009, which reinforces taxation on transfer of non-listed shares by
non-resident enterprises through overseas holding vehicles. Circular 698 applies retroactively and was deemed to be effective as of January 2008. Pursuant to
Circular 698, where (i) a foreign investor who indirectly holds equity interest in a PRC resident enterprise through an offshore holding company indirectly
transfers equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and (ii) the offshore holding company is located in
a jurisdiction where the effective tax rate is lower than twelve and a half percent (12.5%) or where the offshore income of its residents is not taxable, the
foreign investor is required to provide the tax authority in charge of that PRC resident enterprise with certain relevant information within thirty (30) days of the
transfer. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer
is abusing forms of business organization and there is no reasonable commercial purpose other than avoidance of PRC enterprise income tax, the tax authorities
will have the power to conduct a substance-over-form re-assessment of the nature of the equity transfer. A reasonable commercial purpose may be
established when the overall offshore structure is set up to comply with the requirements of supervising authorities of international capital markets. If the State
Administration of Taxation’s challenge of a transfer is successful, they will deny the existence of the offshore holding company that is used for tax planning
purposes. Since Circular 698 has a brief history, there is uncertainty as to its application.
General PRC Government Approval
As a wholesale distributor and retailer of pharmaceutical products, we are subject to regulation and oversight by different levels of the food and drug
administration in China, in particular, the SFDA. The Drug Administration Law of the PRC, as amended, provides the basic legal framework for the
administration of the production and sale of pharmaceutical products in China and governs the manufacturing, distributing, packaging, pricing, and advertising of
pharmaceutical products in China. The corresponding implementation regulations set out detailed rules with respect to the administration of pharmaceuticals in
China. We are also subject to other PRC laws and regulations that are applicable to business operators, retailers, and foreign-invested companies.
Distribution of Pharmaceutical Products
A distributor of pharmaceutical products must obtain a distribution permit from the relevant provincial or designated municipal- or county-level SFDA.
The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems, personnel, and
equipment. The distribution permit is valid for five (5) years, and the holder must apply for renewal of the permit within six (6) months prior to its expiration. In
addition, a pharmaceutical product distributor needs to obtain a business license from the relevant administration for industry and commerce prior to
commencing its business. All of our consolidated entities that engage in the retail pharmaceutical business have obtained necessary pharmaceutical distribution
permits, and we do not expect to face any difficulties in renewing these permits and/or certifications.
In addition, under the Supervision and Administration Rules on Pharmaceutical Product Distribution, promulgated by the SFDA on January 31,
2007, and effective May 1, 2007, a pharmaceutical product distributor is responsible for its procurement and sales activities and is liable for the actions of its
employees or agents in connection with their conduct of distribution on behalf of the distributor. A retail distributor of pharmaceutical products is not allowed to
sell prescription pharmaceutical products or Tier A OTC pharmaceutical products listed in the national or provincial medical insurance catalogs without the
presence of a certified in-store pharmacist. See “Reimbursement under the National Medical Insurance Program .”
Restrictions on Foreign Ownership of Wholesale or Retail Pharmaceutical Business in China
PRC regulations on foreign investment currently permit foreign companies to establish or invest in WFOEs or joint ventures that engage in wholesale
or retail sales of pharmaceuticals in China. For retail sales, these regulations restrict the number and size of pharmacies that a foreign investor may establish. If
a foreign investor owns more than thirty (30) stores that sell a variety of branded pharmaceutical products sourced from different suppliers, the foreign
investor’s ownership interests in the stores are limited to forty nine percent (49%).
In lieu of equity ownership, our WFOE, Jiuxin Management, has entered into contractual arrangements with Jiuzhou Pharmacy and the Key
Personnel.
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Good Supply Practice Standards
GSP standards regulate wholesale and retail pharmaceutical product distributors to ensure the quality of distribution of pharmaceutical products in
China. All wholesale and retail pharmaceutical product distributors are required to apply for GSP certification within thirty (30) days after obtaining drug
distribution permits. The current applicable GSP standards require pharmaceutical product distributors to implement strict controls on the distribution of
medicine products, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management, and
quality control. Specifically, the warehouse must be able to store the pharmaceutical products at various required temperatures and humidity, and handle
transport, warehouse entries, delivery, and billing by computerized logistics management systems. The GSP certificate is usually valid for five (5) years.
Currently, Jiuzhou Pharmacy, and Jiuxin Medicine are all GSP certified.
Prescription Administration
Under the Rules on Administration of Prescriptions promulgated by the SFDA, effective May 1, 2007, doctors are required to include the chemical
ingredients of the medicine they prescribe in their prescription and are not allowed to include brand names in their prescription. This regulation is designed to
provide consumers with choices among different pharmaceutical products that contain the same chemical ingredients.
Advertisement of Pharmaceutical Products
Under the Advertising Law of PRC, the contents of an advertisement must be true, lawful, without falsehood, and must neither deceive nor mislead
consumers. Accordingly, advertisement must be examined by the competent authority prior to its publication or broadcast through any form of media. In
addition, advertisement of pharmaceutical products may only be based on a drug’s approved indication of use statement, and may not contain any assurance of
a product’s efficiency, treatment efficiency, curative rate, or any other information prohibited by law. Advertisement for certain drugs should include an
admonishment to seek a doctor’s advice before purchasing and application. Advertising is prohibited for certain drugs such as anesthetics and psychotropic
drugs.
To further prevent misleading advertising of pharmaceutical products, the SAIC and the SFDA jointly promulgated the Standards for Examination
and Publication of Advertisements of Pharmaceutical Products and Measures for Examination of Advertisement of Pharmaceutical Products in March
2007. Under these regulations, an approval must be obtained from the provincial level of food and drug administration before a pharmaceutical product may be
advertised. In addition, once approved, an advertisement’s content may not be altered without further approval. Such approval, once obtained, is valid for one
(1) year.
Product Liability and Consumers Protection
Product liability claims may arise if the products sold have any harmful effect on consumers. The injured party may make a claim for damages or
compensation. The General Principles of the Civil Law of the PRC, which became effective in January 1987, state that manufacturers and sellers of
defective products causing property damage or injury shall incur civil liabilities for such damage or injuries.
The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’
rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such
sales, revocation of business licenses, imposition of fines, and, in severe circumstances, may be subject to criminal liability.
The Administrative Measures for Drug Recalls was issued by the SFDA in December 2007, and covers two (2) types of drug recalls, namely
voluntary recalls and compulsory recalls. Under such regulation, wholesalers are obliged to assist drug manufacturers with any drug recall. In addition, a
wholesaler must immediately cease to sell any drug that the wholesaler learns has any safety issues, and must immediately notify the manufacturer or its
supplier as well as report the matter to the SFDA.
The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on
January 1, 1994 to protect consumers’ rights when they purchase or use goods or services. All business operators must comply with this law when they
manufacture or sell goods and/or provide services to customers. In extreme situations, pharmaceutical product manufacturers and distributors may be subject to
criminal liability if their goods or services lead to the death or injuries of customers or other third parties.
The Tort Law of the PRC was promulgated on December 26, 2009 and went into effect on July 1, 2010. The Tort Law provides that manufacturers
and distributors who produce or sell defective products shall be responsible for the damage caused by the defective products.
Reimbursement under the National Medical Insurance Program
Eligible participants in the national medical insurance program, consisting primarily of urban residents, are entitled to purchase medicine when
presenting their medical insurance cards in an authorized pharmacy, provided that the medicine they purchase has been included in the national or provincial
medical insurance catalogs. Depending on relevant local regulations, authorized pharmacies can either (i) sell medicine on credit and obtain reimbursement from
relevant government social security bureaus on a monthly basis, or (ii) receive payments from the participants at the time of their purchases, and the
participants in turn obtain reimbursement from relevant government social security bureaus.
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Medications included in the national and provincial medical insurance catalogs are divided into two (2) tiers. Purchases of Tier A pharmaceutical
products are generally fully reimbursable, except that certain Tier A pharmaceutical products are only reimbursable to the extent the medications are used
specifically for the purposes stated in the medical insurance catalogs. Purchasers of Tier B pharmaceutical products, which are generally more expensive than
those in Tier A, are required to make a certain percentage of co-payments, with the remaining amount being reimbursable. The percentage of reimbursement
for Tier B OTC products varies in different regions in the PRC. Factors that affect the inclusion of medicine in the medical insurance catalogs include whether
the medicine is consumed in large volumes and commonly prescribed for clinical use in China and whether it is considered to be important in meeting the basic
healthcare needs of the general public.
China’s Ministry of Labor and Social Security, together with other government authorities, has the power to determine which medicines are included in
the national medical insurance catalog every two (2) years, under which of the two (2) tiers the included medicine falls, and whether an included medicine
should be removed from the catalog.
Sales of Nutritional Supplements and other Food Products
A distributor of nutritional supplements and other food products must obtain a food circulation permit from its local Administration of Industry and
Commerce. The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems,
personnel, and equipment. The food circulation permit is valid for three (3) years, and the holder must apply for renewal of the certificate within thirty (30) days
prior to its expiration. Currently, Jiuxin Medicine, Jiuzhou Pharmacy, and our drugstores all hold a valid Food Circulation Permit, except for our Lin’an store and
Ren’airu store, which do not sell food products and therefore is not required to hold such a permit. We are in the process of renewing the permits for two (2)
stores that has expired in April 2016, and believe that there will little to no difficulty in renewing such permits.
Medical Practice
Healthcare providers in China are required to comply with many laws and regulations at the national and local government levels. The laws and
regulations applicable to our medical practice include the following:
● We must register with and maintain an operating license from the local public health authority for each clinic that we operate, each of which is
subject to annual review by the public health authority;
● The Licensed Physician Act requires that we only hire PRC licensed physicians;
● All waste material from our clinics must be properly collected, sterilized, deposited, transported and disposed of, and we are required to keep
records of the origin, type and amount of all waste materials that we generate for at least three (3) years;
● We must have at least three (3) physicians, five (5) nurses and one (1) technician on staff at each clinic; and
● We must establish and follow protocols to prevent medical malpractice, which require us to: (i) insure that patients are adequately informed
before they consent to medical operations or procedures; (ii) maintain complete medical records which are available for review by the patient,
physicians and the courts; (iii) voluntarily report any event of malpractice to a local government agency; and (iv) support and justify the medical
services we provide in any administrative investigation or litigation. If we fail to comply with applicable laws and regulations, we could suffer
penalties, including the loss of our license to operate.
Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions
As per China’s commitments to the World Trade Organization, “Foreign service suppliers are permitted to establish joint venture hospitals or clinics
with local Chinese partners with quantitative limitations in line with China’s needs. Foreign majority ownership is permitted.” In accordance with the Interim
Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions issued jointly by the Ministry of Health (“MOH”)
and the Ministry of Commerce (“MOFCOM”) in 2000, the Chinese party of Sino-foreign joint ventures and cooperative medical institutions shall hold no less
than thirty percent (30%) of shares and legal rights or interest, which also mean foreign investors are allowed to hold a maximum stake of seventy percent
(70%). Such regulations also specify that the establishment of Sino-foreign joint venture and cooperative medical institutions should be approved respectively by
MOH and MOFCOM. In other words, foreigners are allowed to run hospitals or clinics in the form of equity or co-operative joint ventures with an equity
interest of up to seventy percent (70%) lasting up to twenty (20) years.
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Internet Pharmaceutical Sales
China’s central government regulates Internet access, the distribution of online information and the conduct of online commerce through strict business
licensing requirements and other government regulations. Companies which sell pharmaceutical products to consumers through the Internet are required to
obtain: (1) a drug distribution permit; (2) an Internet pharmaceutical information provider qualification certificate, renewable every five (5) years; (3) an
Internet pharmaceutical transaction service qualification certificate, renewable every five (5) years; (4) a value-added telecommunication operation permit; and
(5) registration with the Administration of Information Industry. Internet pharmacies are not allowed to distribute prescription drugs. The websites that sell
pharmaceutical products must ensure transaction security and enable the consumers to consult with licensed pharmacists. Also, an Internet-based business in
China is required to obtain and maintain certain assets relevant to its business, such as delivery and storage facilities. Jiuzhou Pharmacy obtained all above-
mentioned certificates and registrations and launched www.dada360.com in May 2010 and renewed the certificates in 2015. Quannuo Technology has been
operating the website and providing software and technical supports since November 2010. Since December 2015, such online pharmacy operation function
has been transferred to Jiuzhou Pharmacy after the sale of Quannuo Technology in November 2015. During the year ended March 31,2019, the Company also
sold pharmaceutical and other products via certain third-party platforms such as Tmall and JD.com.
TCM Manufacturing
The SFDA has adopted a non-mandatory licensing process for TCM manufacturers according to Good Agricultural Practice (“GAP”) for Chinese
Crude Drugs. Manufacturers who meet the government-set requirements will be granted a GAP certificate. Since we do not process the herbs that we harvest
and the GAP certification is not mandatory, we have not applied for such certification, and currently have no plan of doing so.
Environmental Matters
Our drugstore and wholesale operations do not involve any activities subject to specific PRC environmental regulations. Our medical clinics are in
compliance with applicable regulations regarding the administration of medical wastes, including collections, temperate storage, and packaging and labeling of
medical wastes. Pursuant to such regulations, we contract with DadiWeikang Medical Wastes Disposal Center to dispose of all medical wastes generated by
our clinics.
Principal Executive Office
Our principal executive office is located at 6th Floor, Hai Wai Hai Tongxin Mansion, Gong Shu District, Hangzhou City, Zhejiang Province, China. Our
main telephone number is +86-571-8807-7078, and fax number is +86-571-8807-7108.
ITEM 1A.
RISK FACTORS.
You should carefully consider the risks described below together with all of the other information included in this report before making an
investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-
looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed.
In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
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Risks Relating to Our Business in General
Future acquisitions are expected to be a part of our growth strategy, and could expose us to significant business risks.
We have grown our business, in part, through the acquisition of stores over the years. One of our strategies going forward is to continue our growth by
acquiring additional drugstores. However, we cannot provide assurance that we will be able to identify and secure suitable acquisition opportunities. Our ability
to consummate and integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets,
internal demands on our resources and, to the extent necessary, our ability to obtain any necessary financing for larger acquisitions on terms that are
satisfactory to us. Moreover, if an acquisition target is identified, the third parties with whom we seek to cooperate may not select us as a potential partner or
we may not be able to enter into arrangements on commercially reasonable terms. The negotiation and completion of potential acquisitions, whether or not
ultimately consummated, could also significantly divert management’s time and resources and may potentially disrupt our existing business. Furthermore, we
cannot provide any assurance that the expected synergies from future acquisitions will actually materialize. Additionally, future acquisitions could result in the
incurrence of additional indebtedness, costs, and contingent liabilities, causing us to significantly increase our interest expense, leverage and debt service
requirements if we incur additional debt to pay for an acquisition or investment, issue common stock that would dilute our current shareholders’ percentage
ownership, or incur write-offs and restructuring and other related expenses. Future acquisitions may also expose us to potential risks, including risks associated
with:
● the integration of new operations, services and personnel;
● unforeseen or hidden liabilities;
● the diversion of financial or other resources from our existing businesses;
● difficulties in entering markets or lines of business in which we have no or limited direct prior experience;
● our inability to generate sufficient revenue to recover costs and expenses of the acquisitions; and
● potential loss of, or harm to, relationships with employees or customers.
Any of the above could significantly disrupt our ability to manage our business and materially and adversely affect our business, financial condition and
results of operations.
We face significant competition, and if we do not compete successfully against existing and new competitors, our revenue and profitability could be
materially and adversely affected.
Both the drugstore, online pharmacy and wholesale pharmaceutical distribution industries in China are highly competitive, and we expect competition to
intensify in the future. Our primary drugstore competitors include other drugstore chains and independent drugstores. Increasingly, we also face competition
from discount stores, convenience stores and supermarkets as we expand our offering of non-drug convenience products and services. We compete for
customers and revenue primarily on the basis of store location, merchandise selection, price, services offered, and our brand name. Our online pharmacy
competitors include other online pharmaceutical vendors. As more large traditional drugstore chain companies entered into the online sales, we face competition
ranging from prices to service. Our primary wholesale competitors include regional and national players. In addition, we may be subject to additional
competition from new entrants to both industries in China. We could also face increased competition from foreign companies if the Chinese government
removes the restrictions on the entry of foreign companies into these industries.
Some of our larger competitors may enjoy competitive advantages, such as:
● greater financial and other resources;
● larger variety of products;
● more extensive and advanced supply chain management systems;
● greater pricing flexibility;
● larger economies of scale and purchasing power;
● more extensive advertising and marketing efforts;
● greater knowledge of local market conditions;
● stronger brand recognition; and
● larger sales and distribution networks.
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As a result of the aforementioned advantages, we may be unable to offer products similar to, or more desirable than, those offered by our
competitors, market our products as effectively as our competitors, or otherwise respond successfully to competitive pressures. As competition increases in the
markets in which we operate, a significant increase in general pricing pressures could occur, which could require us to reevaluate our pricing structures to
remain competitive. Our competitors may be able to offer larger discounts on competing products, and we may not be able to profitably match those discounts.
Furthermore, our competitors may offer products that are more attractive to our customers or that render our products uncompetitive. In addition, the timing of
the introduction of competing products into the market could affect the market acceptance and market share of our products. Our failure to successfully
compete could materially and adversely affect our business, financial condition, results of operation, and prospects.
Changes in economic conditions and consumer confidence in China may influence the drugstore industry, consumer preferences and spending
patterns.
Our business and revenue growth primarily depend on the size of the pharmaceutical market in China. As a result, our revenue and profitability may
be negatively affected by changes in national, regional or local economic conditions and consumer confidence in China. In particular, as we focus on our
expansion of pharmacies in metropolitan markets, where living standards and consumer purchasing power are relatively high, we are especially susceptible to
changes in economic conditions, consumer confidence and customer preferences of the urban Chinese population. External factors beyond our control that
affect consumer confidence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions, and acts of war
or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns.
A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our front-end and pharmacy sales and negatively
impact our profitability. In addition, acts of war or terrorism may cause damage to our facilities, disrupt the supply of the products and services we offer in our
stores, or adversely impact consumer demand. Any of these factors could have a material adverse effect on our business, financial condition and results of
operations.
We may not be able to timely identify or otherwise effectively respond to changing customer preferences, and we may fail to optimize our product
offering and inventory position.
The pharmaceutical industry in China is rapidly evolving and is subject to rapidly changing customer preferences that are difficult to predict. Our
success depends on our ability to anticipate and identify customer preferences, and adapt our product selection to meet these preferences. In particular, we
must optimize our product selection and inventory positions based on sales trends. We cannot provide assurance that our product selection, especially our
selection of nutritional supplements and food products, will accurately reflect customer preferences at any given time. If we fail to accurately anticipate either
the market for our products or customers’ purchasing habits or fail to respond to customers’ changing preferences promptly and effectively, we may not be
able to adapt our product selection to customer preferences or make appropriate adjustments to our inventory positions, which could significantly reduce our
revenue and have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to establish effective advertising, marketing and promotional programs.
Our success depends on our ability to establish effective advertising, marketing and promotional programs, including pricing strategies implemented in
response to competitive pressures and/or to drive demand for our products. Our advertisements are designed to promote our brand, our corporate image and
the prices of products available for sale in our stores. Our pricing strategies and value propositions must be appropriate for our target customers. If we are not
able to maintain and increase the awareness of our pharmacy’s brand and the products and services we provide, we may not be able to attract and retain
customers and our reputation may also suffer. We expect to incur substantial expenses in our marketing and promotional efforts to both attract and retain
customers. However, our marketing and promotional activities may be less successful than we anticipate, and may not be effective at building our brand
awareness and customer base. In addition, the government may impose restrictions on how marketing and promotional activities can be conducted. We cannot
provide assurance that our current and proposed budget for marketing activities will be adequate to support our future growth. Failure to successfully execute
our advertising, marketing and promotional programs may result in material decreases in our revenue and profitability.
Our ability to grow our business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of
our current leases.
Our ability to grow our business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are
acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use regulations and other regulations
applicable to the kinds of stores we seek to construct may impact our ability to find suitable locations and influence the cost of constructing our stores. The
expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close
or relocate stores. Furthermore, changing local demographics at existing store locations could materially and adversely affect revenue and profitability levels at
those stores, and overall our business, financial condition, results of operation, and prospects.
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We have significant cash deposits with our suppliers and landlords in order to obtain and maintain our inventory and maintain and establish store
locations, which we may not be able to recover in the event of bankruptcy by our suppliers or landlords or other events beyond our control.
Our ability to obtain products and maintain inventory at, and to establish and maintain leases for, our pharmacies, is dependent upon our ability to post
and maintain significant cash deposits with our suppliers and landlords. Many vendors in China are unwilling to ship merchandise on credit and instead require
cash deposits, and landlords may require security deposits consisting of the equivalent of twelve (12) months of rent . As of March 31, 2019, we had
approximately $2.5 million deposited with suppliers and approximately $3.4 million deposited with landlords for our pharmacies. If we are unable or unwilling to
establish such advances and deposits, our ability to generate sales and expand our business could be adversely affected. In general, we expect the amounts
required for advances and deposits to increase as we undertake our expansion plans, complete store openings and expand our business through acquisitions or
otherwise. We do not generally receive interest on the deposits made to suppliers or landlords, and such deposits are subject to the risk of loss as a result of the
creditworthiness or bankruptcy of the party who holds our funds, as well as the risk from any illegal acts associated with the third party, such as conversion,
fraud, theft or dishonesty. If these circumstances were to arise, we could find it difficult or impossible, due to the unpredictability of legal proceedings in China,
to recover all or a portion of the amount on deposit with our vendors or landlords.
If we are unable to optimize management of our procurement and distribution activities, we may be unable to meet customer demand while
increasing the burden on managing our supply chain.
Since May 2011, we have been using Jiuxin Medicine’s facility as our distribution center for both our retail and wholesale businesses. Starting from
March 31, 2018, we outsourced our logistic service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd (“Astro Boy Logistic”). As a result,
Jiuxin Medicine’s warehouse lease has been terminated. Astro Boy Logistic provides us with a facility with approximately 14,000 square meters located
approximately eighteen (18) miles from our headquarters, which served as our central distribution center. Astro Boy Logistic’s staff and vehicles make regular
deliveries to our pharmacies and wholesale customers. Our ability to meet customer demand may be significantly limited if we do not successfully and
efficiently conduct our distribution activities, or if Astro Boy Logistic’s facility is destroyed or shut down for any reason, including as the result of natural
disasters. Any disruption in the operation of our distribution activities could result in higher costs or longer lead times associated with distributing our products.
Since it is difficult to predict accurate sales volume in our industry, we may be unable to optimize our distribution activities, which may result in excess or
insufficient inventory, warehousing, fulfillment or distribution capacity. Furthermore, failure to effectively control product damage during the distribution process
could decrease our operating margins and reduce our profitability.
All product procurement is handled through our corporate headquarters. Such centralization is intended to reduce the cost of goods sold as a result of
volume purchase benefits. However, we may be less successful than anticipated in achieving these volume purchase benefits. In addition, such centralization is
expected to increase the complexity of tracking inventory and could place additional burdens on the management of our supply chain. If we cannot successfully
reduce our costs through centralizing procurement, our profitability and prospects could be materially and adversely affected.
Failure to maintain optimal inventory levels could increase our inventory holding costs or cause us to lose sales, either of which could have a
material adverse effect on our business, financial condition and results of operations.
We need to maintain sufficient inventory levels to operate both of our retail and wholesale businesses successfully as well as meet customer
expectations. However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of rapid changes
in product life cycles, changing consumer preferences, uncertainty of the success of product launches, seasonality, and manufacturer backorders and other
vendor-related problems. We cannot provide assurance that we can accurately predict these trends and events and avoid over-stocking or under-stocking
products. In addition, demand for products could change significantly between the time product inventory is ordered and the time it is available for sale.
When we begin selling a new product, it is particularly difficult to accurately forecast product demand. The purchase of certain types of inventory may
require significant lead-time. As we carry a broad selection of products and maintain significant inventory levels for a substantial portion of our merchandise,
we may be unable to sell such inventory in sufficient quantities or during the relevant selling seasons. Carrying excess inventory could increase our inventory
holding costs, and failure to have inventory in stock when a customer orders or purchases it could cause us to lose that order or that customer, either of which
could have a material adverse effect on our business, financial condition and results of operations.
We rely on computer software and hardware systems in managing our operations, the capacity of which may restrict our growth and the failure of
which could adversely affect our business, financial condition and results of operations.
We are dependent upon our integrated information management system to monitor daily operations of our retail and wholesale businesses, and to
maintain accurate and up-to-date operating and financial data for the compilation of management information. In addition, we rely on our computer hardware
and network for the storage, delivery and transmission of the data of our retail and wholesale systems. If our computer software and hardware systems fail to
meet the increasing needs of our expanding operations, our ability to grow may be constrained. Furthermore, any system failure which causes interruptions to
the input, retrieval and transmission of data or causes lags in service time could disrupt our normal operations. Although we believe that our computer software
and hardware systems are up to date and that our disaster recovery plan is adequate in handling potential failures, we cannot provide assurance that we can
effectively carry out this disaster recovery plan and that we will be able to restore our operation within a sufficiently short time frame to avoid our business
being disrupted. Furthermore, our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer
viruses, security breaches, vandalism, natural disasters, catastrophic events and human error, and our disaster recovery planning cannot account for all
eventualities. If any of our computer software and/or hardware systems are damaged, fail to function properly or otherwise become unavailable, we may incur
substantial costs to repair or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability to perform critical
functions. Due to the limited coverage of business interruption insurance policies offered in China, we do not carry business interruption insurance and, as a
result, any business disruption or natural disaster could severely disrupt our business and operations and, in turn, significantly decrease our revenue and
profitability.
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We depend substantially on the continuing efforts of the Key Personnel, and our business and prospects may be severely disrupted if we lose their
services.
Our future success is dependent on the continued services of the Key Personnel but we do not maintain key-man insurance. If we lose the services of
any one of the Key Personnel, we may not be able to locate suitable or qualified replacements, which could severely disrupt our business and prospects. Each
of the Key Personnel has entered into confidentiality and non-competition agreements with us. However, if any disputes arise between us and the Key
Personnel, we cannot provide assurance, in light of uncertainties associated with the PRC legal system, that any of these agreements can be enforced in China,
the jurisdiction in which the Key Personnel reside and hold some of their assets. See ” Risks Related to Doing Business in China - You may experience
difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other
foreign laws against us or our management. “
We depend on the continued service of, and on the ability to attract, motivate and retain a sufficient number of qualified and skilled personnel for
our business.
The implementation of our business strategy and our future success also depend in large part on our continued ability to attract and retain highly
qualified and skilled personnel. We cannot provide assurance that we will be able to attract, hire and retain sufficient numbers of skilled personnel necessary to
continue to develop and grow our business. We face competition for personnel from both retail and wholesale pharmaceutical distribution operators. This
competition could require us to offer higher compensation and other benefits in order to attract and retain qualified individuals, which could materially and
adversely affect our financial condition and results of operations. On the other hand, we may be unable to attract or retain the personnel required to achieve our
business objectives, and that failure could severely disrupt our business and prospects. The process of hiring suitably qualified personnel is often lengthy. If our
recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our business strategy.
Our retail and wholesale operations require a number of permits and licenses in order to carry on their business.
We are required to obtain certain permits and licenses from various PRC governmental authorities, including a Drug Distribution Permit and a GSP
certification. We are also required to obtain food hygiene certificates for the distribution of nutritional supplements and food products. We cannot provide any
assurance that we can maintain all required licenses, permits and certifications to carry on our business at all times, and from time to time we may have not
been in the past, or may not be in the future, in compliance with all such required licenses, permits and certifications. Moreover, these licenses, permits and
certifications are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities and the standards of such renewal or
reassessment may change from time to time. We intend to apply for renewal of these licenses, permits and certifications when required by applicable laws and
regulations. Any failure by us to obtain and maintain all licenses, permits and certifications necessary to carry on our business at any time could have a material
adverse effect on our business, financial condition and results of operations. In addition, any inability to renew any of these licenses, permits and certifications
could severely disrupt our business, and prevent us from continuing to carry on our business. Any changes in the standards used by governmental authorities in
considering whether to renew or reassess our business licenses, permits and certifications, as well as any enactment of new regulations that may restrict the
conduct of our business, may also decrease our revenue and/or increase our costs, materially reducing our profitability and prospects. Furthermore, if the
interpretation or implementation of existing laws and regulations changes or if new regulations come into effect requiring us to obtain any additional licenses,
permits or certifications that were previously not required to operate our existing businesses, we cannot provide assurance that we can successfully obtain such
licenses, permits or certifications.
We may need additional capital, and the sale of equity securities could result in dilution to our stockholders, while debts may require us to make
covenants restricting how we operate.
We believe that the aggregate amount of our current cash, anticipated cash flow from operations, available borrowings under our existing bank
facilities, and personal loans from our principal shareholders should be sufficient to meet our anticipated cash needs for the near future. We may, however,
require additional cash resources due to changed business conditions or other future developments. If our resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain credit facilities. The sale of additional equity securities could result in the dilution
of our existing stockholders. We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. Even if we
are able to obtain any requisite financing, the incurrence of additional indebtedness would result in increased debt service obligations, and could result in further
operating and financing covenants that would restrict our freedom to operate our business, such as conditions that:
● limit our ability to pay dividends or require us to seek consent for the payment of dividends;
● increase our vulnerability to general adverse economic and industry conditions;
● require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to
fund capital expenditures, working capital and other general corporate purposes; and
● limit our flexibility in planning for, or reacting to, changes in our business and our industry.
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Risks Relating to Our Pharmacy Operations
Our brand names, trade secrets and other intellectual property are valuable assets. If we are unable to protect them from infringement, our business
and prospects may be harmed.
We consider our pharmacy brand names to be valuable assets. We may be unable to prevent third parties from using such brand names without
authorization, which may adversely affect our business and reputation, including the perceived quality and reliability of our products and services. We have five
(5) registered trademarks. We also own three (3) domain names that we actively use in our business.
We rely on trade secrets to protect our know-how and other proprietary information, including pricing, purchasing, promotional strategies, customer
lists and/or suppliers lists. As a result, our employees are required to sign employment agreements that contain confidentiality provisions as a condition of their
employment with us. However, trade secrets are difficult to protect. While we believe we use reasonable efforts to protect our trade secrets, our employees,
consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. In addition, confidentiality agreements executed by
the aforementioned individuals may not be enforceable or provide meaningful protection for our trade secrets or other proprietary information in the event of
unauthorized use or disclosure.
If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, such efforts could be expensive and time-
consuming, and the outcome unpredictable. Additionally, if our competitors independently develop information that is equivalent to our trade secrets or other
proprietary information, we have little recourse to enforce our rights, and our business and prospects could be harmed.
Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property
rights of others. However, since the validity, enforceability and scope of protection of intellectual property rights in the PRC are uncertain and still evolving, we
may not be successful in prosecuting these cases. In addition, any litigation, proceeding or other efforts to protect our intellectual property rights could result in
substantial costs and diversion of our resources, and could seriously harm our business and operating results. Furthermore, the degree of future protection of
our proprietary rights is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we are unable to protect
our trade names, trade secrets and other propriety information from infringement, our business, financial condition and results of operations may be materially
and adversely affected.
We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a
material adverse effect on our financial condition and results of operations.
Our success depends, in large part, on our ability to use our proprietary information and know-how without infringing third party intellectual property
rights. As litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or
indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of whom have substantial resources, may have or may
obtain intellectual property protection that will prevent, limit or interfere with our ability to conduct our business in China. Moreover, the defense of intellectual
property suits, including trademark infringement suits and related legal and administrative proceedings, can be both costly and time consuming and may
significantly divert the efforts and resources of our management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which
we may become a party could cause us to:
● pay damage awards;
● seek licenses from third parties;
● pay ongoing royalties;
● redesign our product offerings; or
● be restricted by injunctions,
Each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or
limiting their purchase from our stores, which could have a material adverse effect on our financial condition and results of operations.
The continued penetration of counterfeit products into the pharmaceutical market in China may damage our reputation and have a material adverse
effect on our business, financial condition, results of operations and prospects.
Counterfeit products have continued to make their way into the Chinese pharmaceutical market. Counterfeit products are generally sold at lower
prices compared to their authentic counterparts due to their low production costs, and in some cases may be very similar in appearance to their authentic
counterparts. Counterfeit pharmaceuticals may or may not have the same chemical content as their authentic counterparts, and are typically manufactured
without proper licenses or approvals as well as fraudulently mislabeled with respect to their content and/or manufacturer. Although China’s central government
has been increasingly active in combating counterfeit pharmaceutical and other products, China does not yet have effective regulatory control or an
enforcement system over counterfeit pharmaceutical products. Although we have implemented a series of quality control procedures in our procurement
process, we cannot provide assurance that we may not be inadvertently selling counterfeit pharmaceutical products. Any unintentional sale of counterfeit
products may subject us to negative publicity, fines and/or other administrative penalties, or may even result in litigation against us. Moreover, the increased
distribution of counterfeit products and other products in recent years may reinforce the negative image of drug distributors among consumers in China. The
continued proliferation of counterfeit products in China could have a material adverse effect on our business financial condition, and results of operation.
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As a distributor of pharmaceutical and other healthcare products, we are exposed to inherent risks relating to product liability and personal injury
claims.
Distributors of pharmaceutical and other healthcare products are exposed to risks inherent in the packaging and distribution of such products. Such
risks include unintentional distribution of counterfeit, mislabeled or contaminated drugs, and, with respect to our pharmacies, improper filling of prescriptions,
labeling of prescriptions and adequacy of warnings. Errors in the packaging or dispensing of pharmaceuticals could lead to serious injury or death. Furthermore,
the applicable PRC laws, rules and regulations require our in-store pharmacists to offer counseling to our customers, without additional charge, about
medication, dosage, delivery systems, common side effects, and other information the in-store pharmacists deem significant. Our in-store pharmacists
sometimes also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these
effects, and we may be liable for claims arising from any advice given by our in-store pharmacists. Product liability or personal injury claims may be asserted
against us with respect to any of the products or pharmaceuticals we sell or services we provide, and we may be required to pay for substantial monetary
damages for any successful product liability or personal injury claim against us. We may, however, in product liability claims, have the right under applicable
PRC laws, rules and regulations to recover from the relevant manufacturer any compensation we paid to our customers in connection with such claim. Even if
we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources in the
process, which could disrupt our business. Our reputation and our brand names may also suffer as a result of any product liability or personal injury claims
against us. Like many other similar companies in China, we do not carry product liability insurance. A product recall or damage to our reputation in the event of
a product liability or personal injury claim or judgment against us could have a material adverse effect on our business, financial condition and results of
operations.
We may be subject to fines and penalties if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under
China’s National Medical Insurance Program.
Eligible participants in China’s national medical insurance program, mainly consisting of urban residents in China, are entitled to buy medicines using
their medical insurance cards from an authorized pharmacy, provided that the medicines they purchase have been included in the national or provincial medical
insurance catalogs. The pharmacy, in turn, obtains reimbursement from the relevant government social security bureaus. Moreover, the applicable PRC laws,
rules and regulations prohibit pharmacies from selling goods other than pre-approved medicines when purchases are made with medical insurance cards. We
have established procedures to prohibit our drugstores from selling unauthorized goods to customers who make purchases with medical insurance cards.
However, we cannot provide assurance that those procedures will be strictly followed by all of our employees in all of our stores.
Risks Relating to Our Medical Services
If we do not attract and retain qualified physicians and other medical personnel, our ability to provide medical services would be adversely affected.
The success of our medical services will, in part, be dependent upon the number and quality of doctors, nurses and other medical support personnel
that we employ and our ability to maintain good relationships with them. Our medical staff may terminate their employment with us at any time. If we are
unable to successfully maintain good relationships with them, our ability to provide medical services may be adversely affected.
The provision of medical services is heavily regulated in the PRC and failure to comply with those regulations could result in penalties, loss of
licensure, additional compliance costs or other adverse consequences.
Healthcare providers in China, as in most other populous countries, are required to comply with many laws and regulations at the national and local
government levels. These laws and regulations relate to: licensing; the conduct of operations; the ownership of facilities; the addition of facilities and services;
advertising; confidentiality, maintenance and security issues associated with medical records; billing for services; and prices for services. If we fail to comply
with applicable laws and regulations, we could suffer penalties, including the loss of our licenses to operate. In addition, further healthcare legislative reform is
likely, and could materially and adversely affect our business and results of operations in the event that we do not comply or if the cost of compliance is
prohibitive. The above list of certain regulated areas is not exhaustive, and it is not possible to anticipate the exact nature of future healthcare legislative reform
in China. Depending on the priorities set by the Chinese Ministry of Health, the political climate at any given time, the continued development of the Chinese
healthcare system and many other factors, future legislative reforms may be highly comprehensive, including stringent infection control policies, improved rural
healthcare facilities, increased regulation of the distribution of pharmaceuticals, and numerous other policy matters. Consequently, the implications of these
future reforms could result in penalties, loss of licensure, additional compliance costs or other adverse consequences we cannot foresee at the present time.
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As a provider of medical services, we are exposed to inherent risks relating to malpractice claims.
As a provider of medical services, any misdiagnosis or improper treatment may result in negative publicity regarding us or our services, which would
harm our reputation. If we are found liable for malpractice, we may be required to pay substantial monetary damages. Furthermore, even if we successfully
defend ourselves against a malpractice claim, we could be required to spend significant management, financial and other resources in the process, which could
disrupt our business, and our reputation and brand name may also suffer. Since malpractice claims are not common in China, we do not carry malpractice
insurance. As a result, any imposition of malpractice liability could materially harm our business, financial condition and results of operations.
We face competition that could adversely affect our results of operations.
Our clinics compete with a large number and variety of healthcare facilities in their respective markets. There are numerous government-run and
private hospitals and clinics available to the general populace. There can be no assurance that these or other clinics, hospitals or other facilities will not
commence or expand such operations, which would increase their competitive position. Furthermore, there can be no assurance that a healthcare organization
that having greater resources in the provision or management of healthcare services will not decide to engage in operations similar to those being conducted by
us in Hangzhou.
Risks Related to Our Herb Farming
Our herb farming business is subject to the volatility of prices for raw TCM herbs.
We currently planted gingko trees in our leased farm land. However, in the future, we may continue to cultivate and sell certain herbs in bulk to third-
party vendors, based on local market prices primarily determined by TCM manufacturers and trading companies. Such market prices have increased
significantly in recent years in response to changes in the supply of and demand for raw herbs, market uncertainty and a variety of additional factors that are
beyond our control, including inflation, changes in weather, disease outbreaks, domestic government regulation, market speculation and overall economic
conditions. There can be no assurance that market prices, which historically have fluctuated widely, will continue to increase or remain stable, and any future
declines in prices may negatively impact the viability of our herb farming business.
Unforeseen and severe weather can reduce cultivation activities and lead to a decrease in anticipated harvest.
Seasonal climate change and weather variations such as levels of rainfall and temperature may, among other things, affect the quality, overall supply
and availability of raw herbs. Sustained adverse weather conditions in Zhejiang Province in general and in Lin’an in particular where our herbs are planted,
such as rain, extreme cold or snow, could disrupt or curtail cultivation activities. This in turn could reduce our anticipated harvest yields, delay the timing of our
anticipated harvest and distribution, and negatively affect the quality of our harvest. In addition, natural disasters such as fires, earthquakes, snowstorms, floods
or droughts, or natural conditions such as crop disease, pests or soil erosion, may also negatively impact our cultivation and harvest.
In addition, the actual climatic conditions of Zhejiang Province and of Lin’an in particular may not conform to historical patterns and may be affected
by variations in weather patterns, including any potential impact of climate change. The effects of climate change may produce more unpredictable weather
events that may adversely affect our ability to cultivate and harvest successfully.
The occurrence of any of these may materially harm our herb farming business.
We have limited control over the availability and the quality of the local farmers with whom we cooperate because we do not employ them directly.
We rely on local farmers to farm and harvest our herbs, but do not employ them directly. Instead, they are recruited and employed by the local
villagers’ committees with whom we negotiate. We have limited control over the availability and the quality of this labor force. A shortage of suitable laborers
may adversely affect our harvest yields.
Risks Related to Our Online Sales
We rely on computer software and hardware systems in managing our online sales, the capacity of which may restrict our growth and the failure of
which could adversely affect our business, financial condition and results of operations.
We are dependent upon our electronic commerce system to carry out our online sales. Any system failure which causes interruptions to the input,
retrieval and transmission of data, or increases in service time could disrupt our normal operations. Although we believe we have a disaster recovery plan that
can handle the failure of our computer software and hardware systems, we cannot provide assurance that we can effectively carry out this disaster recovery
plan and that we will be able to restore our operation within a sufficiently short time frame to avoid disruption to our business. Any failure in our computer
software and/or hardware systems could have a material adverse effect on our business, financial condition and results of operations. In addition, if the
capacity of our computer software and hardware systems fails to meet the increasing needs of our operations, our ability to grow may be constrained.
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Our online business decreased in the fiscal year ended March 31, 2019 and we cannot assure our efforts for alternative vendors will result in the
increase in revenues from online pharmacy in the coming years.
Our online pharmacy sales decreased by approximately $3,348,471, or 27.6% for the year ended March 31, 2019, as compared to the year ended
March 31, 2018. The decrease was primarily caused by the decline in business via e-commerce platforms. In order to increase the popularity of our products,
we have made considerable efforts to identify popular products that can drive sales, while keeping a close watch on cost. However, due to the suspension of
OTC drug sales on e-commerce platforms such as Alibaba in the second quarter of fiscal year 2017 by the China Food and Drug Administration (“CFDA”),
our sales via these e-commerce platforms have been curtailed. As a result, our sales via these e-commerce platforms decreased by 33.4% period over period.
We are adding more non-medical health products such as nutritional supplements into our sales menu to counteract the decline in sale of OTC drug category.
For instance, we are opening a dendrobium candidum flagship store at Tmall with a popular local brand. The brand has a large customer base in Hangzhou.
However, there is no assurance our efforts will lead in the increase in our online sales.
If our online business fails to obtain and maintain the requisite assets, licenses, qualified personnel and approvals required under the complex
regulatory environment for Internet-based businesses in China, the business prospects for such business may be materially and adversely affected.
Internet-based businesses in China are highly regulated by China’s central government, and numerous regulatory authorities are empowered to issue
and implement regulations governing various aspects of these businesses. Our online business is operated by our PRC subsidiary, Jiuzhou Pharmacy, which is
required to obtain and maintain certain assets relevant to its business, such as computers and other electrical equipment, as well as applicable licenses or
approvals from different regulatory authorities. These assets and licenses are essential to the operation of an e-commerce business and are generally subject to
annual review by the relevant governmental authorities. Furthermore, we may be required to obtain additional licenses. If we fail to obtain or maintain any of
the required assets, licenses or approvals, our Internet business may be deemed illegal and it may be subject to various penalties, such as confiscation of illegal
income, fines, and/or the discontinuation or restriction of its operations. Any such disruption may materially and adversely affect the prospects of our online
business.
Risks Related to Our Corporate Structure
Chinese regulations limit foreign ownership of any pharmacy operator with thirty (30) or more stores, and limit foreign ownership of medical clinics
to Sino-foreign joint venture. The entities that operate our pharmacies and clinics are controlled by us through contractual arrangements. The
validity of such contractual arrangements is uncertain. If the Chinese government determines that these contractual arrangements do not comply
with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in the relevant
Chinese laws and regulations may materially and adversely affect our business.
Current PRC regulations limit foreign ownership of a pharmacy operator to forty nine percent (49%) if such operator owns interests in thirty (30) or
more drugstores in China that sell a variety of branded pharmaceutical products sourced from different suppliers. Since we do not own any equity interests in
Jiuzhou Pharmacy (or its subsidiary Jiuxin Medicine), but instead control it through contractual arrangements, we do not believe that the regulations limiting
foreign ownership apply to us even if Jiuzhou Pharmacy or Jiuxin Medicine expands beyond thirty (30) stores. In fact, Jiuzhou Pharmacy has expended to one
hundred and twenty-one (121) stores as of March 31, 2019.
Similarly, PRC regulations restrict foreign ownership of medical practices in China to Sino-foreign joint ventures. Since we do not have any actual
equity interest in Jiuzhou Clinic or Jiuzhou Service, but control these entities through contractual arrangements, we do not believe that such PRC regulations are
applicable to us or our structure.
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There are, however, uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws,
rules and regulations governing the validity and enforcement of our contractual arrangements. Although the structures for operating our business in China
(including our corporate structure and contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service and the Key Personnel) comply with all
applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we
cannot provide assurance that a regulatory authority will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or
regulations. If any such authority determines that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual
arrangements may become invalid or unenforceable, and we may not be able to consolidate the operations of HJ Group with our results of operations. In
addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements that may be applicable to our contractual
arrangements. For example, pursuant to the PRC Property Rights Law that became effective on October 1, 2007 (the “Property Law”), the pledge of any
equity interests of a PRC private entity shall become effective once it is duly registered with the local branches of the SAIC. Following the promulgation of the
Property Law, the SAIC further issued the Administrative Measures for Registrations of Share Pledge on September 1, 2008, which provided detailed
procedural guidance for the local SAIC offices to handle the registrations of pledged shares. The Equity Pledge Agreement that forms a part of the contractual
arrangements creates a legally binding obligation on the parties upon the execution date; however, the pledge established under such agreement does not
become effective until due registration with the local SAIC office. On May 18, 2010, registration of the pledged equity interests in Jiuzhou Pharmacy was
completed.
The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other
licenses, and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by the relevant governmental bodies may be
revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our
businesses. We cannot provide assurance that our current ownership and operating structure will not be found in violation of any current or future Chinese laws
or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease the provision of certain
services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business
operations, which could materially and adversely affect our business, financial condition and results of operations.
If we are determined to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required
governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
● revoking the business and operating licenses of the HJ Group entities;
● discontinuing or restricting the operations of the HJ Group entities;
● imposing conditions or requirements with which we or the HJ Group entities may not be able to comply;
● requiring us or the HJ Group entities to restructure the relevant ownership structure or operations; and/or
● imposing fines.
The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial
condition, results of operations and prospects.
We may be adversely affected by complexity, uncertainties and changes in Chinese regulation of drugstores and the practice of medicine.
The Chinese government regulates drugstores and the practice of medicine, including foreign ownership and requirements for licenses and permits.
These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain
circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations.
The interpretation and application of existing Chinese laws, regulations and policies and possible new laws, regulations or policies have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, pharmaceutical businesses in
China, including our business. We currently only have contractual control over the HJ Group entities, and do not own them due to the restrictions on foreign
ownership of such companies. However, changes to laws in the PRC may force us to restructure our ownership structure or our operations, which would
severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.
Uncertainties relating to the regulation of drugstores and medical practice in China also extend to evolving licensing practices, which means that
permits, licenses or operations at our company may be subject to challenge. This may disrupt our business or subject us to sanctions, requirements to increase
capital, or other conditions or enforcement. In turn, this could compromise enforceability of related contractual arrangements, or have other harmful effects on
us.
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Our contractual arrangements with HJ Group and the Key Personnel may not be as effective in providing control over these entities as direct
ownership.
We have no equity ownership interest in HJ Group, and rely on contractual arrangements to control and operate the HJ Group companies and their
businesses. These contractual arrangements may not be as effective in providing control over these companies as direct ownership. For example, any one of
them could fail to take actions required for our business despite its contractual obligation to do so. Under such circumstances, we may have to rely on legal
remedies under Chinese law, which may not be effective in providing us any relief. In addition, we cannot provide assurance that the Key Personnel will act in
our best interests.
Since we rely on contractual arrangements to control HJ Group and for substantially all of our revenue, the termination of such agreements will
severely and detrimentally affect our continuing business viability under our current corporate structure.
Since we do not own equity interests of HJ Group, the termination of our contractual arrangements with them would sever our ability to continue
receiving payments from them under our current holding company structure. We cannot provide assurance that there will not be any event or reason that may
cause the contractual arrangements to terminate. In the event that the contractual arrangements terminate, we will lose our control over them and their
business operations and, as a result, over our primary sources of revenue. This may have a severe and detrimental effect on our continuing business viability
under our current corporate structure, which in turn may affect the value of your investment. Should this occur, we may seek to acquire control of HJ Group
through other means, although we cannot guarantee that we will do so, nor can we guarantee that we will be successful if we do.
We rely principally on dividends paid by our consolidated operating entities to fund any cash and financing requirements we may have, and any
limitation on the ability of our consolidated PRC entities to pay dividends to us could have a material adverse effect on our ability to conduct our
business.
We are a holding company and rely principally on dividends paid by our consolidated PRC operating entities for cash requirements, including the funds
required to service any debt we may incur, which are passed on to us through Jiuxin Management. If any of the consolidated operating entities incurs debt in its
own name in the future, the instruments governing the debt may restrict dividends or other distributions on our equity interest to us. In addition, the PRC tax
authorities may require us to adjust our taxable income under the contractual arrangements in a manner that would materially and adversely affect our ability to
pay dividends and other distributions on our equity interest.
Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our consolidated PRC entities only out of their retained
earnings, if any, determined in accordance with PRC accounting standards. Under PRC laws, rules and regulations, our consolidated PRC entities are required
to set aside at least ten percent (10%) of their after-tax profit each year, based on PRC accounting standards, into their statutory surplus reserve funds until the
accumulative amount of such reserves reaches fifty percent (50%) of their respective registered capital. As a result, our consolidated PRC entities are
restricted in their ability to transfer a portion of their net income to us whether in the form of dividends, loans or advances. As of March 31, 2019, our restricted
reserves totaled $1,309,109(RMB 9,460,695). Our restricted reserves are not distributable as cash dividends. Any limitation on the ability of our consolidated
operating entities to pay dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends, or otherwise fund and conduct our business.
Certain management members of HJ Group have potential conflicts of interest with us, which may adversely affect our business and your ability for
recourse.
Mr. Lei Liu, our Chief Executive Officer and Chairman of our Board of Directors, is also the executive director of Jiuzhou Pharmacy, a general
partner of Jiuzhou Clinic, and the supervising director of Jiuzhou Service. In addition, Mr. Liu has also lent us money out of his personal funds to help facilitate
our payments of expenses in the U.S., as well as to purchase a land use right. Ms. Li Qi, our Corporate Secretary and a member of our Board of Directors, is
the general manager of each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and a general partner of Jiuzhou Clinic. Conflicts of interests between
their respective duties to our company and HJ Group may arise. As our directors and executive officers, they have a duty of loyalty and care to us under U.S.
and Hong Kong law when there are any potential conflicts of interests between our company and HJ Group. We cannot provide assurance, however, that
when any conflicts of interest arise, both of them will act completely in our interests or that conflicts of interests will be resolved in our favor. For example, they
may determine that it is in HJ Group’s interests to sever the contractual arrangements with Jiuxin Management, irrespective of the effect such action may have
on us. In addition, either one of them could violate his or her legal duties by diverting business opportunities from us to others, thereby affecting the amount of
payment that HJ Group is obligated to remit to us under the Consulting Services Agreement.
In the event that you believe that your rights have been infringed under securities laws or otherwise as a result of any one of the circumstances
described above, it may be difficult or impossible for you to bring an action against HJ Group, or our officers or directors who are members of the management,
all of whom reside within China. Even if you are successful in bringing an action, the laws of China may render you unable to enforce a judgment against the
assets of HJ Group and its management, all of which are located in China.
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Risks Related to Doing Business in China
We rely on contractual arrangements with our VIE for our operations, which may not be as effective in providing control over these entities as direct
ownership.
Our operations and financial results are dependent on our VIEs, Jiuzhou Pharmacy (including its subsidiaries and controlled entities), Jiuzhou Clinic and
Jiuzhou Service, in which we have no equity ownership interest and must rely on contractual arrangements to control and operate the businesses of our VIEs.
These contractual arrangements are not as effective in providing control over the VIEs as direct ownership. For example, the VIEs may be unwilling or unable
to perform its contractual obligations under our commercial agreements. Consequently, we would not be able to conduct our operations in the manner currently
planned. In addition, the VIEs may seek to renew its agreements on terms that are disadvantageous to us. Although we have entered into a series of
agreements that provide us with substantial ability to control the VIEs, we may not succeed in enforcing our rights under them insofar as our contractual rights
and legal remedies under PRC law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire
or enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
In January 2015, China’s Ministry of Commerce released draft legislation that could change how the government regulates corporate structures,
especially for VIEs controlled by foreign investments. Instead of looking at “ownership”, the draft law focused on the entities or individuals hold control of a
VIE. If a VIE is deemed to be controlled by foreign investors, it may be barred from operating in restricted sectors or the prohibited sectors listed on a
“negative list”, where only companies controlled by Chinese nationals could operate, even if structured as VIEs. As of the report date, no formal legislation has
been implemented.
In the event that the draft law is implemented in any form, and that the Company’s business was characterized as one of the “restricted” or
“prohibited” sectors, the VIEs the Company currently maintains contractual arrangements with may be barred from operation which will materially adversely
affect our business.
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the
profitability of such business.
Policies of the PRC government can have significant effects on economic conditions in China. Our interests may be adversely affected by changes in
policies by the PRC government, including:
● changes in laws, regulations or their interpretation;
● confiscatory taxation;
● restrictions on currency conversion, imports or sources of supplies and export tariff; and
● expropriation or nationalization of private enterprises.
Although the PRC government has been pursuing economic reform policies for more than two (2) decades, we cannot assure you that the government
will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political
disruption, or other circumstances affecting the PRC’s political, economic and social life.
Uncertainties with respect to the Chinese legal system could adversely affect us.
We conduct our business through our subsidiaries and controlled companies in the PRC. Our operations in China are governed by Chinese laws and
regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to WFOE. The
Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, Chinese legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China.
However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their
nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the Chinese legal system is based in part
on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may
not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of our resources and our management’s attention.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or
our management based on United States or other foreign laws.
We are a holding company and conduct our business through our subsidiaries and controlled companies in the PRC. In addition, all of our operating
assets are located in, and all of our other senior executive officers reside within, China. As a result, it may not be possible to effect service of process within
the United States or elsewhere outside China upon those of our senior executive officers and directors that do not reside in the United States, including with
respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does
not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts. As a result,
our public shareholders may face substantially more difficulty in protecting their interests through actions against our management or directors than would
shareholders of a corporation with assets and management located in the United States.
We may need to obtain additional governmental approvals to open new drugstores. Our inability to obtain such approvals will have a material
adverse effect on our business and growth.
According to the Measures on the Administration of Foreign Investment in the Commercial Sector (the “Measures”) promulgated by China’s
Ministry of Commerce (the “MOC”), which became effective on June 1, 2004, a company that is directly owned by a foreign invested enterprise needs to
obtain relevant governmental approvals before it opens new retail stores. However, there are no specific laws, rules or regulations with respect to whether
such approvals are necessary for a company that is contractually controlled by a foreign invested enterprise. In addition, the Measures state that the MOC will
promulgate a detailed implementation regulation to govern foreign invested enterprises engaging in drug sale. However, such implementation regulation has not
yet been promulgated. Therefore, we cannot provide assurance that the MOC will not require such approvals to be obtained, or as to when any regulation of
such requirements may be implemented. If additional governmental approvals are deemed to be necessary and we are unable to obtain such approvals on a
timely basis or at all, our business, financial condition, results of operations and prospects, as well as the trading price of our common stock, will be materially
and adversely affected.
The advent of recent healthcare reform directives from China’s central government may increase both competition and our cost of doing business.
Under the auspices of the Healthy China 2020 program (the “Program”), published by China’s National Development and Reform Commission in
October 2008, the central government has set in motion a series of policies in fairly rapid succession aimed to improve China’s healthcare system. Such policies
include (1) discouraging hospitals from both prescribing and dispensing medication, (2) the unveiling in April 2009 of formal healthcare reform guidelines aimed
at improving the availability of and subsidies for “essential” drugs, and (3) the announcement in August 2009 of China’s National Essential Drugs List
(“NEDL”), initially listing approximately three hundred (300) medicines to be sold at government-controlled prices. While an underlying goal of these policies is
to make drugs more accessible to China’s poorer population, these policies also serve to create opportunities that in turn will intensify business competition in
the Chinese retail drugstore industry, as well as competition for skilled labor and retail spaces. Additionally, we expect the NEDL to result in a rise in the
number of government-subsidized community healthcare service centers, which in turn may erode the convenience and price advantage that our drugstores
traditionally enjoy against hospitals.
The PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production
costs.
In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective
on January 1, 2008 (the “LC Law”). The LC Law formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions. Considered one of the strictest labor laws in the world, among other things, the LC Law provides for specific standards and procedures for the
termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay
upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the LC Law
requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for ten
(10) consecutive years or more or has had two (2) consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term”
can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth
under the new law. Because of the lack of implementing rules for the LC Law and the precedents for the enforcement of such a law, the standards and
procedures set forth under the LC Law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in
the PRC that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the LC Law,
downsizing of either more than twenty (20) people or more than ten percent (10%) of the workforce may occur only under specified circumstances, such as a
restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business
operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the
employment contract, thereby making the performance of such employment contract impossible. To date, there has been very little guidance and precedent as
to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us
exclusively within the PRC are covered by the LC Law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less
severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods
specific to our business, the LC Law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial
condition.
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We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi,
especially with respect to foreign exchange transactions.
Fluctuations in the value of the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the
U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. We receive substantially all of our revenues in RMB. Under
our current structure, our income is primarily derived from payments from the three (3) HJ Group companies. Shortages in the availability of foreign currency
may restrict the ability of our subsidiaries and our PRC affiliated entities to remit sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from
SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The
Chinese government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign
currencies to our stockholders.
From 1995 until July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately
Renminbi 8.3 per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the
U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. As a consequence, the
Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the
current situation may last and when and how it may change again. There remains significant international pressure on the PRC government to adopt a
substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S.
dollar. Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert
U.S. dollars we receive from securities offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of
making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a
negative effect on the U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%, represented the
largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that can only come
from further cuts in the exchange rate.
Fluctuations in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and
economic conditions. Our revenues, costs, and financial assets are mostly denominated in RMB, while our reporting currency is the U.S. dollar. Accordingly,
this may result in gains or losses from currency translation on our financial statements. We rely entirely on fees paid to us by our affiliated entities in China.
Therefore, any significant fluctuation in the value of RMB may materially and adversely affect our cash flows, revenues, earnings, financial position, and the
value of, and any dividends payable on, our stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would, to the extent that we
need to convert U.S. dollars into RMB for such purposes, make any new RMB denominated investments or expenditures more costly to us. An appreciation of
RMB against the U.S. dollar would result in foreign currency translation gains for financial reporting purposes when we translate our RMB denominated
financial assets into U.S. dollars, as the U.S. dollar is our reporting currency.
In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S.
dollars without giving effect to any underlying change in our business or results of operations. The income statements of our operations are translated into U.S.
dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these
foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign
subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all.
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Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are subject to restrictions on making payments to us.
We rely substantially on our contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service for our revenue. The Chinese
government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience
difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if these companies incur debt on their own
in the future, the instruments governing the debt may restrict their ability to make payments. If we are unable to receive all of the revenues from our operations
through these contractual arrangements, we may be unable to pay dividends on our common shares.
Dividends we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax.
The EIT Law provides that a maximum income tax rate of twenty percent (20%) is applicable to dividends payable to non-PRC investors that are
“non-resident enterprises,” to the extent such dividends are derived from sources within the PRC. However, the State Council has reduced such rate to ten
percent (10%) through the implementation regulations. We are a Nevada holding company and substantially all of our income is derived from our subsidiaries
and controlled companies located in the PRC. Therefore, dividends paid to us from China may be subject to the ten percent (10%) income tax if we are
considered a “non-resident enterprise” under the EIT Law. If we are required to pay income tax for any dividends we receive from our PRC subsidiaries
under the EIT Law and its implementation regulations, it may have a material and adverse effect on our net income and materially reduce the amount of
dividends, if any, we may pay to our shareholders.
We face risks related to disease epidemics and other outbreaks.
Our business could be adversely affected by the effects of disease outbreaks. Any prolonged recurrence of any adverse public health developments in
China may have a material adverse effect on our business operations. For instance, health or other government regulations adopted in response may require
temporary closure of our stores or offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We
have not adopted any written preventive measures or contingency plans to combat any future epidemic outbreak.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete
with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices may occur in the PRC. If our competitors engage in these practices, they may receive preferential treatment in the PRC, giving them an
advantage in securing business, which would put us at a disadvantage. We cannot provide assurance that our employees or other agents will not engage in such
conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
At various times in recent years, the United States and China have had significant disagreements over political and economic issues. Controversies
may arise in the future between the two countries. Any political or trade controversies between the United States and China, whether or not directly related to
our business, could reduce the price of our common stock.
Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public
Company Accounting Oversight Board, and consequently investors may be deprived of the benefits of such inspection.
Our auditor, the independent registered public accounting firm that issued the audit reports included elsewhere in this annual report, as an auditor of
companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States) (the
“PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United
States and applicable professional standards. Our auditor is located in China and the PCAOB is currently unable to conduct inspections on auditors in China
without the approval of the PRC authorities. Therefore, our auditor, like other independent registered public accounting firms operating in China, is currently not
inspected by the PCAOB.
In May 2013, the PCAOB announced that it has entered into a Memorandum of Understanding (“MOU”) on Enforcement Cooperation with the
China Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance (the “MOF”). The MOU establishes a cooperative framework between
the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it
provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their
investigative duties. In addition to developing enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit
joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
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Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality
control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to
conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and
quality control procedures, investors may be deprived of such benefits.
The slowing economic growth in China may assert a negative impact on our operation and financial results.
According to several articles published by the Wall Street Journal, CNN, and BBC News in January 2016, after experiencing rapid growth for more
than a decade, China’s economy has been hit by shrinking foreign and domestic demand, weak investment, factory overcapacity and oversupply in the property
market, and has experienced a painful slowdown in the last two years. In 2016, China’s economy grew by 6.7%, compared with 6.9% a year earlier, marking
its slowest growth in a quarter of a century. As the government tried to shift the growth engine away from manufacturing and debt-fueled investment toward
the services sector and consumer spending, the outlook of the Chinese economy is uncertain.
In the next two to three years, China’s growth performance could deteriorate because of the overhang of its real estate bubble, massive
manufacturing overcapacity, and the lack of new growth engines. The International Monetary Fund expected China’s economy to grow by 6.4% in 2018-2020.
If China’s economy slows down further, it may negatively affect our business operation and financial results.
Risks Related to an Investment in Our Securities
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to
pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings for
our operations.
NASDAQ may delist our common stock from trading on the NASDAQ Capital Market for failing to maintain a minimum bid price of $1.00, which
could limit investors’ ability to effect transactions in our common stock and subject us to additional trading restrictions.
On May 9, 2013, we received a letter from The NASDAQ Stock Market LLC (“NASDAQ”), notifying us of our failure to maintain a minimum
closing bid price of $1.00 over the then preceding thirty (30) consecutive trading days for its common stock, as required by NASDAQ Listing Rule 5550(a)(2)
(the “Bid Price Rule”). The letter stated that the company had until November 5, 2013, to demonstrate compliance by maintaining a minimum closing bid price
of at least $1.00 for a minimum of ten (10) consecutive trading days. In the meantime, we were included in a list of non-compliant companies posted on
NASDAQ’s website commencing on May 16, 2013.
On November 6, 2013, NASDAQ granted us an additional 180-day period, or until May 5, 2014, to remain listed on the NASDAQ Capital Market and
to regain compliance with the Bid Price Rule. Under NASDAQ Listing Rules, we were granted this extension because we met the continued listing
requirement for market value of publicly held shares and all other applicable NASDAQ listing requirements, except the bid price requirement.
On January 16, 2014, we received a letter from NASDAQ notifying us that we had regained compliance with the Bid Price Rule, as the closing bid
price of our common stock had been at or above $1.00 per share for at least 10 consecutive trading days. However, we cannot provide assurance that we will
remain compliant with the Bid Price Rule in the future. If NASDAQ delists our common stock from trading on its exchange, we could face significant material
adverse consequences including:
● a limited availability of market quotations for our common stock;
● a limited amount of news and analyst coverage for our company; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
Although publicly traded, the trading market in our common stock may be substantially less liquid than the average stock quoted on the NASDAQ
Capital Market, and such low trading volume may adversely affect the price of our common stock.
Although our common stock has been listed on the NASDAQ Capital Market since April 22, 2010, the historical trading volume of our common stock
has generally been low. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for you to sell your
shares of common stock at a price that is attractive to you.
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The market price for our stock may be volatile, and such volatility may subject us to securities litigation.
The market price for our stock may be volatile and, when compared to seasoned issuers, subject to wide fluctuations in response to various factors,
many of which are beyond our control, including the following:
● actual or anticipated fluctuations in our quarterly operating results;
● changes in financial estimates by securities research analysts;
● conditions in the retail pharmacy markets;
● changes in the economic performance or market valuations of other retail pharmacy operators;
● announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
● addition or departure of key personnel;
● fluctuations of exchange rates between RMB and the U.S. dollar;
● intellectual property litigation; and
● general economic or political conditions in China.
As an illustration of such volatility, the closing price of our common stock during the fifty two (52) weeks preceding the date of this report ranged from
a low of $1.17 to a high of $2.73. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not
related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our
stock.
In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
Techniques employed by manipulative short sellers in Chinese small-cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying
identical securities back at a later date to return to the lender. The short seller hopes to profit from the difference in the sale price of the borrowed securities
and the purchase price of the replacement shares. As it is therefore in the short seller’s best interests for the price of the stock to decline, there have been
incidents of short sellers publishing, or arranging to publish negative opinions in order to create negative market momentum. While traditionally these disclosed
shorts have been limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and
technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly
attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall
Street firms and independent research analysts. These short attacks have, in the past, resulted in the selling of shares in the market, on occasion on a large
scale and broad base. Issuers with business operations based in the PRC, that have limited trading volumes and that are susceptible to higher volatility levels
than U.S. domestic large-cap stocks can be particularly vulnerable to such short attacks.
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject
to the certification requirements imposed by the SEC in Regulation Analyst Certification and, accordingly, the opinions they express may be based on distortion
of the actual facts or, in some cases, fabrication of the facts. In light of the limited risks involved in publishing such information, and the enormous profit that
can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that
disclosed shorts will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of
freedom of speech, applicable state law (often called Anti-SLAPP statutes), or issues of commercial confidentiality, in the manner in which we can proceed
against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside
the U.S. with little or no assets or identity requirements – should we be targeted for such an attack and the rumors not dismissed by market participants, our
stock will likely suffer from a temporary, or possibly long term, decline in market price.
Our officers and directors own a substantial portion of our outstanding common stock, which will enable them to influence many significant
corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.
As of June 28, 2019, our directors and executive officers collectively controlled approximately 9,244,482 or 28.6% of our outstanding shares of stock
entitled to vote on all corporate actions. These stockholders, acting together, could have a substantial impact on matters requiring the vote of the shareholders,
including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger,
takeover or other change in our control, even if these actions would benefit us and our shareholders. This control could adversely affect the voting and other
rights of our other shareholders and could depress the market price of our common stock.
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The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights for
our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and
employees.
Our bylaws contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, and we are
prepared to give such indemnification to our directors and officers to the extent provided by Nevada law. We may also have contractual indemnification
obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and any
costs resulting therefrom may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might
otherwise benefit our company and shareholders.
Legislative actions, potential new accounting pronouncements and higher insurance costs may impact our future financial position and results of
operations.
Over the last decade or so, there have been many regulatory changes, including the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. There may potentially be new accounting pronouncements or regulatory rulings or
changes that will have an impact on our future financial position and results of operations. In addition, insurers are likely to increase premiums as a result of
high claims rates over the past several years, which we expect will increase our premiums for insurance policies. These and other potential changes could
materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act, as amended,
adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report,
which contains management’s assessment of the effectiveness of our internal controls over financial reporting. We reported certain material weaknesses
involving control activities, specifically internal control weaknesses relating to finance personnel, in light of the continuing lack of sufficient experience by our
accounting staff in U.S. GAAP-based reporting and SEC rules and regulations. Such material weaknesses were noted for the past five (5) fiscal years, based
on factors including: (i) the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes; (ii) the
significance of the audit adjustments and their impact on the overall financial statements; (iii) how appropriately we complied with U.S. GAAP on transactions;
and (iv) how accurately we prepared supporting information to provide to our independent auditors on a quarterly and annual basis. As such, we did not
maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control deficiencies could be
detected and/or prevented.
Although we believe that we have made significant efforts to address the foregoing weaknesses, we believe that our efforts to date have not yet been
sufficient to fully remediate such weaknesses. We will continue our efforts during the current fiscal year, although there can be no assurance that compliance
will be achieved in this time frame.
Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for
the foreseeable future. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports
and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the
loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our
common stock. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to
comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company like us.
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ITEM 2.
PROPERTIES
We are headquartered in Hangzhou, China. We own three properties. Additionally, our current leased properties are as follows:
Description
Principal executive office
Location
Hai Wai Hai Tongxin Mansion Floor 5&6
Gong Shu District, Hangzhou City
Zhejiang Province, China
Size
(square meters)
Lease expiration
date
December 27, 2021
4,000
Pharmacies (1)
Various locations in Hangzhou, Zhejiang Province, China
Range from
79 to 1,713
September 2018 to
October 2033
Farmland for herb cultivation (2)
Qianhong Township, Hangzhou, Zhejiang Province, China
196,677
February 1, 2040
Land (2)
Qianhong Township, Hangzhou, Zhejiang Province, China
18,616
February 1, 2040
(1) As of the date of this report, we maintain operating leases in connection with our 121 pharmacies. See Note 10, “Long Term Deposits,” and Note 22,
“Commitments and Contingencies” to the Financial Statements. The leases do not contain any material escalating lease payments or contingent rental
payment terms. We must negotiate with the landlords for an extension of the current leases or enter into new leases upon their termination, upon which
our landlords may request a rent increase. Under applicable PRC law, we have priority over other potential lessees with respect to the leased store
space on the same terms. We also do not expect any significant difficulties in renewing the existing leases upon their expiration, where desired. Our
community stores are normally relatively small in size and the fixtures inside such stores are easily movable. As a result, we do not expect our drugstore
operations to be materially and adversely affected by any failure to renew current leases or enter into new leases.
(2) We lease the land from The People’s Government of Qianhong Village under a 30-year lease entered in February 2010. The rent for the land was
prepaid in full in May 2010. See Note 11, “Other Noncurrent Assets,” and Note 12, “Intangible Assets,” to the Financial Statements.
ITEM 3.
LEGAL PROCEEDINGS.
We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending
litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder holding more than five
percent of our common stock, is an adverse party or has a material interest adverse to our company.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock trades on the NASDAQ Capital Market under the symbol “CJJD”.
Based on the records of our transfer agent, we had 32,936,786 shares of common stock issued and outstanding as of June 28, 2019.
Holders
Based on the records of our transfer agent, there were 43 stockholders of record of our common stock as of June 28, 2019 (not including beneficial
owners who hold shares at broker/dealers in “street name”).
Transfer Agent
Our transfer agent is American Stock Transfer & Trust Company, LLC, whose address is 6201, 15th Avenue, Brooklyn, New York 11219, and
whose telephone number is (718) 921-8206.
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Dividends
While there are no restrictions that limit our ability to pay dividends, we have not paid, and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. Our policy is to retain all earnings, if any, to provide funds for the operation and expansion of our business. The
declaration of dividends, if any, will be subject to the discretion of our Board of Directors, who may consider such factors as our results of operations, financial
condition, capital needs and acquisition strategy, among others, in making its determination.
Securities Authorized for Issuance under Equity Compensation Plans
Please see the discussion in Item 12 titled “Equity Compensation Plan Information” below.
Recent Sales of Unregistered Securities
On January 23, 2017, we issued 4,840,000 shares of Common Stock to an institutional investor for a total proceeds of $10,648,000. The shares are
restrictive with a standard legend under the Securities Act of 1933, as amended (the “Securities Act”). No other sales of unregistered securities were made in
fiscal 2018 and 2019.
On April 15, 2019, we issued unregistered warrants to the investors in a concurrent private placement to a registered direct offering pursuant to a
Securities Purchase Agreement dated April 11, 2019 (the “2019 Securities Purchase Agreement”), by and among the Company and the purchasers named
therein, to purchase up to an aggregate of 3,000,006 shares of common stock at an exercise price of $3.00 per share (the “2019 Warrants”). The 2019
Warrants shall be initially exercisable six months following issuance and expire five and one-half years from the issuance date of the 2019 Warrants. H.C.
Wainwright & Co., LLC (the “Placement Agent”) (or its designees) shall also receive warrants to purchase such number of shares of common stock as is
equal to 6% of the aggregate number of shares of common stock sold in the offering, or 240,000 warrants (the “2019 PA Warrants”), with substantially the
same terms as the 2019 Warrants being issued to the investors, except that the Placement Agent’s warrants will expire on April 11, 2024 and the warrants
exercise price shall be $3.125.
Within 30 business days from the date of the 2019 Securities Purchase Agreement, the Company shall file a registration statement on Form S-1
providing for the resale by the investors of Common Stock issuable upon exercise of the 2019 Warrants and the 2019 PA Warrants and use commercially
reasonable best efforts to cause such registration to become effective no later than 90 business days from the date of the 2019 Securities Purchase
Agreement.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
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 the fiscal years ended March 31, 2019 and
2018 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 other than in compliance with the SEC rules and regulations.
Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United
States. See “Exchange Rates” at the end of this section 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 four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale of products similar to those that we
carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).
36
Our drugstores offer customers a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”) drugs, nutritional
supplements, TCM, personal and family care products, medical devices, and convenience products, including consumable, seasonal, and promotional items.
Additionally, we have licensed doctors of both western medicine and TCM on site for consultation, examination and treatment of common ailments at
scheduled hours. As of March 31, 2019, we had 121 pharmacies in Hangzhou city and its adjacent town Lin’an under the store brand of “Jiuzhou Grand
Pharmacy.”
Since May 2010, we have also been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online. Our online
pharmacy sells through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s own platform all over China. In
fiscal year 2019, in order to keep competitive in certain third-party platforms such as Tmall, we have spent reasonable resources on marketing our products
through these third-party platforms. Our sales through our own platform are primarily generated by customers who use their private commercial medical
insurances package.
We operate a wholesale business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those carried by our pharmacies)
primarily to trading companies and other local drugstores in China. We also farm certain herbs used in TCM but have not made sales in the year ended March
31, 2019.
Critical Accounting Policies and Estimates
In preparing our audited 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 audited consolidated financial statements accompanying in this
report.
Revenue recognition
In May 2014, the FASB issued ASU No. 2014-09, which creates Topic 606, Revenue from Contracts with Customers. The new guidance outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial
statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue
recognition guidance, including industry-specific guidance. The standard is effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative
effect transition method. On April 1, 2018, we adopted the guidance in ASC 606 and all the related amendments and applied the new revenue standard to all
contracts using the modified retrospective method. Based on the new standard our revenue recognition policies related to membership rewards programs will
change. But the impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. We
expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
Impairment of definite-lived intangible assets
The Company evaluates the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. These long-lived assets are grouped and evaluated for impairment at the lowest level at which individual cash flows
can be identified. When evaluating these long-lived assets for potential impairment, the Company first compares the carrying amount of the asset group to the
asset group’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than that carrying amount of
the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset
group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s
carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges).
The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group’s future
sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated
sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including, but not limited to, general economic
and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued
efforts of competitors to gain market share and consumer spending patterns.
37
There were no material impairment losses for definite-lived intangible assets recognized in any of the years ended March 31, 2019 and 2018.
We currently recorded awarded membership points as accrued expense. The adoption of the policy will require us to deduct the membership rewards
directly from our retail revenue. In other words, we will present such amounts in net sales as opposed to our current reduction of operation expense
classification.
Results of Operations
Comparison of years ended March 31, 2019 and 2018
The following table summarizes our results of operations for the years ended March 31, 2019 and 2018:
Revenue
Gross profit
Selling expenses
General and administrative expenses
Impairment of long-lived assets
Loss from operations
Interest income
Other income (expense), net
Change in fair value of derivative liability
Income tax expense
Net loss
Revenue
Years ended December 31,
2019
2018
Amount
107,551,012
25,108,043
24,265,184
1,718,989
-
(876,130)
112,887
(93,311)
(326,452)
134,763
(1,317,769)
$
$
$
$
$
$
$
$
$
$
$
Percentage
of total
revenue
100.0% $
23.3% $
22.6% $
1.6% $
-% $
(0.8)% $
0.1% $
(0.1)% $
(0.3)% $
0.1% $
(1.2)% $
Percentage
of total
revenue
100.0%
20.9%
19.5%
18.5%
1.6%
(18.8)%
0.5%
0.2%
0.4%
0.1%
(17.7)%
Amount
96,112,706
20,125,169
18,739,492
17,823,661
1,583,186
(18,021,170)
478,976
201,096
357,421
76,256
(17,059,933)
Primarily due to the rise in our retail stores pharmacy business, revenue increased by $11,438,306 or 11.9% for the year ended March 31, 2019, as
compared to the year ended March 31, 2018, partially offset by the decrease in our online sales.
Revenue by Segment
The following table breaks down the revenue for our four business segments for the year ended March 31, 2019 and 2018:
For the year ended March 31,
Revenue from retail drugstores
Revenue from online sales
Revenue from wholesale business
Revenue from farming business
Total revenue
2019
Amount
72,334,409
8,784,459
26,432,144
-
107,551,012
$
$
% of total
revenue
67.3% $
8.1%
24.6%
-%
100.0% $
38
2018
Amount
61,977,582
12,132,930
22,002,194
-
96,112,706
% of total
revenue
64.5% $
12.6%
22.9%
-%
100.0% $
Variance by
amount
10,356,827
(3,348,471)
4,429,950
-
11,438,306
% of
change
16.7%
(27.6)%
20.1%
-%
11.9%
Retail drugstores sales, which accounted for approximately 67.3% of total revenue for the year ended March 31, 2019, increased by $10,356,827, or
16.7% compared to the year ended March 31, 2018, to $72,334,409. Same-store sales increased by approximately $9,465,094, or 15.9%, while new stores
contributed approximately $755,419 in revenue in the year ended March 31, 2019.Excluding the RMB depreciation effect, the same store sales increased by
approximately 17.4% period over period.
The increase in our retail drugstore sales is primarily due to consumer-facing benefits such as emphasis on on-site medical care, chronic disease
management services, incremental DTP (Direct-to-Patient) business caused by continuous hospital medical reform, promotional campaigns such as our fifteen
year anniversary sales, and maturing of stores opened a year ago. Convenient on-site medical support at our pharmacies has been our hallmark from the
beginning of our business. Suitable medical support from our doctors has proven to be critical to our superior store sales. Linking doctor care with drug sales
has become our business guidance for the future. By adding more doctor-provided services at stores, we have been able to promote our store sales. In January
2019, we had a grand opening of another flagship store in South Hangzhou. The store hosts both our drugstore and clinic and is expected to expand our
business model.
DTP drugs are usually low profit margin new medicines not sold at hospitals. As part of the PRC’s recent medical reform package, local governments
require the revenue percentage from drug sales at public hospitals to decline. In order to achieve lower drug sales percentage out of their total revenue, the
public hospitals chose to abandon sales of low profit margin DTP products first. As the biggest drugstore network in Hangzhou City, Jiuzhou Pharmacy had
quite a few of our stores located adjacent to local hospitals. Additionally, we have actively contacted local vendors of certain DTP products that we were
previously not selling and were able to sell these DTP products in our stores. By setting special counters selling DTP products at our stores, sales in our
drugstores have increased.
Implementing marketing campaigns suited to local communities has been an important tool in driving sales. We usually cooperated with brand-name
pharmaceutical manufacturers in our marketing campaigns. Brand-name medical products sales improve our store reputation, which is beneficial to our long-
term sales.
Furthermore, since fiscal year 2018, we have accelerated our expansion of new stores, which is expected to generate more retail drugstore revenues.
Eighteen stores have become qualified for municipal government insurance reimbursement after about a year’s operation. Sales reimbursed from municipal
government insurance program usually account for more than 50% of our total sales at maturing stores. As these stores gained such qualifications, their sales
increased quickly as compared to the previous year. Our store count is 122 at March, 2018 and 121 at March 31, 2019.
Our online pharmacy sales decreased by approximately $3,348,471, or 27.6% for the year ended March 31, 2019, as compared to the year ended
March 31, 2018. The decrease was primarily caused by a decline in our sales via various e-commerce platforms, offset by the increase in business referred
from Pharmacy Benefit Management (“PBM”) providers, as further explained below. We operate our online business via e-commerce platforms such as Tmall
and JD.com as well as our own official online pharmacy website. Such arrangements with third-party platforms have exposed our online presence to a wider
consumer base due to the official suspension of OTC drug sales on e-commerce platforms such as Alibaba and strong competition, our sales via these e-
commerce platforms have been curtailed. As a result, our sales via these e-commerce platforms decreased by 33.4% period over period. We are adding more
non-medical health products such as nutritional supplements into our sales menu to counteract the decline in sale of OTC drug category. Our official website
sales increased by 7,502 or 0.4% year over year, primarily as we explored more Pharmacy Benefit Management (“PBM”) providers, who draw insured
customers from private health insurance companies to spend on health products at drugstores.
Wholesale revenue increased by $4,429,950 or 20.1%, primarily as a result of our ability to resell certain products, which our retail stores made large
order on, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name products, we were able to bargain for lower purchase
prices than the market level on these merchandises. As a result, vendors who were unable to obtain a better price than ours, turned to us for these products,
causing the increase in the wholesale volume. Additionally, we strategically act as provincial agent for Dong’e Ejiao and sold significant amounts of Ejiao with
in Zhejiang Province. However, hospitals are still the dominant drug retailers in China. Local hospitals usually have strong ties with their existing suppliers and
we have not been able to make significant progress in becoming a major supplier to local hospitals.
In the year ended March 31, 2019 and 2018, we have not harvested and generated revenue from our farming business. We planted ginkgo trees during
the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the longer it
grows the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their market value in the future. We anticipate that we will
continue to grow ginkgo trees and cultivate other herbs in the future.
39
Gross Profit
Gross profit increased by $4,982,874 or 24.8% period over period primarily as a result of an increase in gross profit provided by retail stores sale,
which increased significantly in the year ended March 31, 2019. At the same time, gross margin increased from 20.9% to 23.3% due to higher retail profit
margins. The average gross margins for each of our four business segments are as follows:
Average gross margin for retail drugstores
Average gross margin for online sales
Average gross margin for wholesale business
Average gross margin for farming business
Year ended
March 31,
2019
2018
29.2%
11.8%
11.3%
N/A
25.9%
10.5%
12.7%
N/A
Retail gross margins increased primarily because of introducing new suppliers, and renegotiating prices with our suppliers continuously. By hiring
talented procurement employees, who have decades of experience in the drug sales and purchase industry, we were able to introduce new suppliers and sign
brand name products contract to obtain more rebates. As a result, we were able to keep up with our sales profit margin. In addition, we are able to
continuously renegotiate with our vendors and press price down to acceptable levels. We expect to keep our profit margin at a reasonable level in the future.
Gross margin of online pharmacy sales increased primarily due to the increase in our sales via our own official website, as well as a decrease in sales
via third-party platforms, which are usually subject to low profit margin. We conduct our business either through certain e-commerce platforms such as Tmall
and JD.com or via our own official online pharmacy website, www.dada360.com. The sales on our own official website usually have higher profit margins
because customers referred by commercial insurance companies are premium customers who can afford premium products with higher profit margins. As
described in the above, in the year ended March 31, 2019, we achieved more sales from our own official websites. As a result, we incurred higher profit
margin.
Wholesale gross margin decreased primarily due to various products with different profit margin we carried and sold to certain pharmaceutical
vendors. In the year ended March 31, 2019, we acted as the provincial agent for Dong’e Ejiao and distributed significant amount of Ejiao in September within
Zhejiang Province. As a result, our gross profit margin was lowered significantly. Although we have attempted to market our products to major local hospitals
and other pharmacies, we have not been able to make significant progress. Until we are able to obtain status as a provincial or national exclusive sale agent for
certain popular drugs or have sales access to large local hospitals, we may have to maintain low profit margins in order to drive sales on our wholesale
business.
Selling and Marketing Expenses
Sales and marketing expenses increased by $5,525,692 or 29.5% year over year, primarily due to increase in labor and rent related to our store
expansions and rising local living cost. We opened over 50 stores at the end of calendar year 2017 and early in calendar year 2018. As a result, we experienced
increase of $2.9 million labor cost and $1.5 million rental cost. Excluding the above factors, selling and marketing expenses increased by approximately $1.2
million or 6.2%, which reflects increase in other operating cost.
40
General and Administrative Expenses
General and administrative expenses decreased by $16,104,672 or 90.4% period over period. Such expenses as a percentage of revenue decreased to
1.6% from 18.5% for the same period a year ago. In fiscal 2019, in order to use our cash more efficiently, we accelerated collection of advance to suppliers
and accounts receivables. Specifically, we focused on the collection of aged accounts of advance to suppliers and accounts receivable. As we have collected
the amount, our allowance on doubtful accounts decreased by approximately $7.7 million. Additionally, our stock compensation expense decreased by
approximately $6.8 million primarily as a result of issuing shares to our key employees in fiscal 2018. Excluding such an effect, general and administrative
expenses decreased by approximately $1.6 million or 9%, which reflects our improved control of expense such as overall management cash compensation in
fiscal year 2019.
Impairment of Long-lived Assets
We recorded an impairment of long-lived assets of $0 and $1,583,186 for the year ended March 31, 2019 and 2018. On March 31, 2018, Jiuxin
Medicine started outsourcing its logistics service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd, Jiuxin Medicine’s warehouse lease has
been terminated. As a result, approximately $1,583,186 in unamortized warehouse improvements was recognized as expense in the year ended March 31, 2018.
Such impairment was made after we estimated that the implied fair value of long-lived assets was lower than the carrying value.
Loss from Operations
As a result of the above, we had loss from operations of $876,130, as compared to loss from operations of $18,021,170 a year ago. Our operating
margin for the year ended March 31, 2019 and 2018 was (0.8)% and (18.8)%, respectively.
Other Income (Expense), Net
In the year ended March 31, 2019, other income is $(93,311) as compared to other income of $201,096 in the year ended March 31, 2018.
Income Taxes
Our income tax expense increased by $58,507 period over period due to increase in overall profit.
Net Loss
As a result of the foregoing, net loss is $1,317,769 in the year ended March 31, 2019 as compared to a net loss of $17,059,933 in the year ended
March 31, 2018.
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. To prepare for potential loss in such accounts, we made corresponding
reserves.
Our accounts receivable aging was as follows for the periods described below:
From date of invoice to customer
1- 3 months
4- 6 months
7- 12 months
Over one year
Allowance for doubtful accounts
Total accounts receivable
Retail
drugstores
Online
Pharmacy
Drug
wholesale
Herb
farming
$
$
5,022,472 $
70,694
383,867
1,726,406
(1,980,725)
5,222,714 $
713,450 $
101,532
169,028
187,179
(267,001)
904,188 $
312,763 $
1,655,203
1,139,223
457,547
(999,124)
2,565,612 $
- $
-
-
-
-
- $
Total
amount
6,048,685
1,827,429
1,692,118
2,371,132
(3,246,850)
8,692,514
Accounts receivable from our retail business mainly consist of reimbursements from local government health insurance bureaus and commercial health
insurance programs. In the year ended March 31, 2019, we wrote off an approximately $146,593 collectible from provincial and Hangzhou City government
insurance, as such amounts have been determined by the health insurance bureaus to be unqualified for reimbursement.
41
Accounts receivables from our online pharmacy business mainly consist of receivables from insurance company and a service company handling with
insurance companies. As we continue to expand our business with commercial insurance company, our receivables from them increased. Additionally, certain
receivables are from third-party platforms such as JD.com where we sell products. Usually the third-party platforms will collect from customers ordering on
their platforms and then reimburse us at a later date, such reimbursement periods times ranging from several days to a month after orders are placed.
Accounts receivable from our drug wholesale business consist of receivables from our customers such as pharmaceutical distributors and local
drugstores primarily in Zhejiang Province. In fiscal 2019, we accelerated collection of certain aged accounts from customers which we no longer or rarely sold
products to. By doing so, we are able to take better use of our cash. As a result, the overall reserve on wholesale accounts receivables decreased.
Subsequent to March 31, 2019 and through May 31, 2019, we collected approximately $5.0 million in receivables relating to our drugstore business,
approximately $1.0 million in receivables relating to our online pharmacy business, approximately $1.8 million relating to our wholesale business, and $0 relating
to our herb farming business.
Advances to suppliers
Advances to suppliers are mainly prepayments to secure certain products or services at favorable pricing. The aging of our advances to suppliers is as
follows for the periods described below:
From date of cash prepayment to suppliers
1- 3 months
4- 6 months
7- 12 months
Over one year
Allowance for doubtful accounts
Total advances to suppliers
Retail
drugstores
Online
Pharmacy
Drug
wholesale
Herb
farming
Total
amount
$
$
192,700 $
12,771
26,960
109,436
(143,762)
198,105 $
- $
-
-
-
-
- $
1,453,328 $
176,165
243,327
262,539
(383,212)
1,752,147 $
- $
-
-
-
-
- $
1,646,028
188,936
270,287
371,975
(526,974)
1,950,252
Since the acquisition of Jiuxin Medicine, we have gradually transferred almost all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou
Pharmacy only purchases certain non-medical products such as sundry. As a result, our retail chain made few advances to suppliers as of March 31, 2019.
Advances to suppliers for our drug wholesale business consist of prepayments to our vendors such as pharmaceutical manufacturers and other
distributors. We typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery from and
payments to our vendors while maintaining a provision for estimated credit losses based upon past experience and any supplier-specific issues such as the
discontinuation of inventory supply 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 action. If all of these steps are unsuccessful,
management then determines whether or not the prepayments should be reserved or written off. In fiscal 2019, in order to use our cash more efficiently, we
accelerated the collection of deposits from quite a few suppliers, especially aged accounts. We chose to only leave deposits with critical suppliers who supply
large quantities of merchandise. As a result, the outstanding advances to suppliers decreased dramatically.
Liquidity and Capital Resources
Our cash flows for the periods indicated are as follows:
Net cash provided by/used in operating activities
Net cash provided by/used in investing activities
Net cash provided by/used in financing activities
42
For the year ended
March 31,
2019
(5,603,216) $
(7,326,181) $
8,078,581 $
2018
(2,070,066)
(2,977,502)
(4,893,288)
$
$
$
For the year ended March 31, 2019 cash provided by operating activities amounted to $(5,603,216), as compared to $(2,070,066) a year ago. The
change is primarily attributable to a decrease in cash provided by bad debt direct write-offs and provisions of $7,367,487, a decrease in cash provided by stock
compensation of $6,824,463,a decrease in cash provided by accounts payable of $4,254,978 offset by an increase of $2,491,447 in advances to suppliers, an
increase in cash provided by accounts receivable of $1,955,676 and an increase in cash provided by inventories and biological assets of $1,020,386.
For the year ended March 31, 2019, net cash used in investing activities amounted to $(7,326,181), as compared to $(2,977,502) provided by investing
activities a year ago. The change is primarily attributable to the purchase of Yueming Shop for approximately $4,842,670 in the year ended March 31, 2019.
For the year ended March 31, 2019, net cash provided by financing activities amounted to $8,078,581, as compared to $(4,893,288) net cash used in
financing activities a year ago. The financing proceeds were derived from the private placement described below.
As of March 31, 2019, we had cash of approximately $9,322,463. Our total current assets as of March 31, 2019, were $56,202,981 and total current
liabilities were $55,212.286, which resulted in a working capital of $990,695.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations:
Contractual obligations
Long-Term Debt Obligations
Capital Lease Obligations
Operating Lease Obligations
Purchase Obligations
Other Long-Term Liabilities Reflected on the Registrant’s
Balance Sheet under GAAP*
Total
$
Total
-
-
18,322,510
-
Payments due by period
Less than
1 year
1-3 years
3-5 years
-
-
4,952,693
-
-
-
7,277,929
-
-
-
4,052,270
-
465,248
18,787,758
$
-
4,952,693
465,248
7,743,177
-
4,052,270
More than
5 years
-
-
2,039,618
-
-
2,039,618
* This refers to warrants to purchase shares of common stock issued to an institutional investor and a placement agent (See Note 17).
43
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 audited consolidated financial statements or
otherwise disclosed in this report were as follows:
Balance sheet items, except for the registered and paid-up capital, as of end of period/year
USD1: RMB 0.1490 USD1: RMB 0.1592
Amounts included in the statement of Operations and statement of cash flows for the period/ year ended
USD1: RMB 0.1491 USD1: RMB 0.1510
March 31,
2019
March 31,
2018
Inflation
We believe that inflation has not had a material effect on our operations to date.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Independent Registered Public Accounting Firm, and our Financial Statements and accompanying Notes to the Financial Statements
that are filed as part of the report, are listed under “Item 15. Exhibits and Financial Statement Schedules” and are set forth beginning on page F-1 immediately
following the signature pages to this report.
44
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of March 31, 2019, the end of the fiscal year covered by this report, our management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, our disclosure controls and
procedures were ineffective. They reached this conclusion due to the presence of material weaknesses in internal controls over financial reporting as described
below. Management anticipates that our disclosure controls and procedures will remain ineffective until such material weaknesses are remediated.
Management’s Report on Internal Control over Financial Reporting
We assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2019. In making this assessment, we used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO) in the Internal Control-Integrated
Framework. We are responsible for establishing and maintaining adequate internal control over financial reporting. Based on our evaluation, management
concluded that our internal control over financial reporting was ineffective as of March 31, 2019 due to the following material weaknesses:
Accounting and Finance Personnel Weaknesses - As noted in Item 9A of our annual reports on Form 10-K for the preceding fiscal years,
management concluded that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based reporting and SEC rules
and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control
deficiencies can be detected or prevented.
Management’s assessment of the control deficiency over accounting and finance personnel as of March 31, 2019 considered the same factors,
including:
● the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes;
● how adequately we complied with U.S. GAAP on transactions; and
● how accurately we prepared supporting information to provide to our independent auditors on a quarterly and annual basis.
Based on the above factors, management concluded that the lack of timely reconciliation of booking and recording from China GAAP to US GAAP
and lack of accounting staff with sufficient US GAAP experience are material weaknesses as of March 31, 2019.
Remediation of Material Weakness for the year ended March 31, 2019
Subsequent to the identification of the material weakness, we have enhanced existing controls and design and implemented new controls. We have
devoted significant time and attention to remediate the above material weakness. For example, we redesigned our system to retrieve data faster, so we are able
to identify and reconcile the GAAP difference more efficiently. In addition, we trained our accounting staff with US GAAP knowledge, so they can meet the
requirement from our auditors more efficiently. These improvements to our internal control infrastructure were implemented over the course of fiscal 2019, and
were in place in connection with the preparation of our financial statements for the year ended March 31, 2019. As such, we believe that the remediation
initiative outlined above will be sufficient to remediate as the changes become operational for a full year the material weakness in internal control over financial
reporting as discussed
45
Changes in Internal Control over Financial Reporting
In 2017, we installed a leading ERP system, SAP from Germany. SAP is a well-known management system used by many fortune 500 companies. In
fiscal 2019, we linked our SAP system with a series of local banks, so it can provide a view of overall and instant cash information. In addition, we hired
specialized managers who are able to program and develop improved procedure in the system. We expect to continually improve our internal control system.
There have been no other changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rule 13a-15 or Rule 15d-15 that occurred during the fourth quarter ended March 31, 2019, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent or detect all errors
and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute,
assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B.
OTHER INFORMATION.
None.
46
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The following table identifies our current executive officers and directors as of the date of this report, their respective offices and positions, and their
respective dates of election or appointment:
Name
Lei Liu
Ming Zhao
Li Qi
Caroline Wang (2) (3) (4)
Jiangliang He (2) (3) (4)
Genghua Gu (2) (3) (4)
Pingfan Wu (4)
Yan Liu
Age(1)
Position
54
43
46
32
56
68
54
29
Chief Executive Officer and Chairman of the Board of Directors
Chief Financial Officer
Director
Director
Director
Director
Director
Secretary
Date of Appointment
September 17, 2009
August 1, 2011
October 23, 2009
March 29, 2017
September 4, 2018
March 28, 2014
October 26, 2018
September 4, 2018
(1) As of the date of this report.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.
Biographical Information of Our Current Directors and Executive Officers
Lei Liu has served as our Chief Executive Officer and Chairman of our Board of Directors since September 17, 2009. Mr. Liu is one of the three
founders of Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western
Medicine (General Partnership) (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Service & Public Health Service Co., Ltd. (“Jiuzhou Service”) (Jiuzhou Pharmacy,
Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiaries of Jiuzhou Pharmacy, collectively as “HJ Group”), and has been the executive director of Jiuzhou
Pharmacy since September 2003 and the supervising director of Jiuzhou Service since November 2005. From December 1997 to August 2003, Mr. Liu worked
in Tai He Drugstore as a general manager. From September 1992 to November 1997, Mr. Liu was an administration official of Hangzhou Medical Junior
College, his alma mater, where he was also a researcher and an anatomy instructor from September 1983 to July 1992. Mr. Liu has been a licensed researcher
in the PRC since September 1988. As the founder and CEO responsible for our vision and direction, Mr. Liu is invaluable to us and our Board of Directors.
Ming Zhao has served as our Chief Financial Officer since August 2011. From September 2010 to July 2011, Mr. Zhao was a senior manager at
CFO Oncall, Inc., a financial consulting firm providing CFO services to U.S.-listed, China-based publicly traded companies. From December 2006 through
August 2010, Mr. Zhao was a senior auditor at Sherb & Co., LLP. From January through June 2003, Mr. Zhao worked as a financial analyst at Microsoft
Corporation. Mr. Zhao is a licensed certified public accountant. He graduated with a bachelor’s degree in accounting from Central University of Finance and
Economic in Beijing in July 1999, and obtained a master’s degree in professional accounting from the University of Washington in December 2002.
Li Qi is one of the three founders of HJ Group. Ms. Qi has served as our secretary since October 23, 2009, and is currently the general manager of
both Jiuzhou Pharmacy and Jiuzhou Service. From January 2000 to June 2003, Ms. Qi worked in Zhejiang Yikang Drugstore as a general manager. From
October 1991 to January 2000, Ms. Qi worked in the Branch Hospital of Hangzhou No. 1 People’s Hospital as a nurse. Ms. Qi is a licensed TCM pharmacist
in the PRC and is a 1991 graduate of Hangzhou Nurse School. As the founder and secretary overseeing our day-to-day corporate operations, Ms. Qi is highly
qualified to serve on our Board of Directors.
Caroline Wang has been a member of our Board since March 29, 2017. Ms. Wang has been a project manager with JC Group, a comprehensive
industrial financial group which serves the “city management”, performing internal audit and projects management for a variety of financial products since
October 2015. Prior to that, Ms. Wang served as a CFO assistant of Kandi Technologies Group, Inc. (NASDAQ:KNDI), a company engaged in the research,
development, manufacturing, and sales of vehicle products. She was mainly responsible for consolidation of financial reports and internal control audits. From
2012 to 2015, Ms. Wang was an audit department assistant manager with KPMG Huazhen LLP Hangzhou Branch, conducting financial report audits and
internal control audits for listing companies and also providing audit services to pre-IPO companies. None of these companies are related to or affiliated with
the registrant. Ms. Wang holds a master’s degree in public administration from the London School of Economics and Political Science, and a bachelor’s degree
in finance from Beijing Language and Culture University. The Board has determined that Ms. Wang has the qualification to serve as a member of the Board
given her extensive financial, accounting and auditing experience, as well as her English and Chinese bilingual capabilities to facilitate the Board’s supervision
of the management.
47
Jiangliang He, has extensive experience as a professional attorney. He has served as a partner in Dentons China, a large law firm with a presence in
approximately 45 cities in China, since August 2008. From July 1997 to July 2008, he was a partner in the Zhejiang Jiuyao law firm. From July 1984 to June
1997, he was a professor at Hangzhou School of Law. Mr. He received his bachelor’s degree in law from Beijing University.
Genghua Gu is a retired physician, professor and published scientific researcher in the field of stomatology. From 2003 to 2013, Dr. Gu was a
member of the Standing Committee of Zhejiang Province Political Consultative Conference. From 2000 to 2009, Dr. Gu was the Vice President of the
Women’s Hospital of Zhejiang University’s School of Medicine (the “School of Medicine”), where, in addition to being a chief physician, professor and
researcher, he was also in charge of logistics and financial control as part of the hospital’s management. From 1998 to 2000, Dr. Gu was the Vice President of
the Second Affiliate Hospital of the School of Medicine (the “Affiliate Hospital”), where, in addition to his medical, teaching and research duties, he was also in
charge of the hospital’s logistics. From 1995 to 1998, Dr. Gu served as the Deputy Magistrate with the Shuichang County Government in Zhejiang Province, in
charge of the county’s culture, education and hygiene programs. From 1988 to 1995, Dr. Gu was the Head of the Medical Department at the Affiliate Hospital
and was involved in planning and management of the medical department. Dr. Gu served as an oral surgeon from 1977 to 1988 at the Affiliate Hospital. Dr. Gu
graduated from Shanghai Jiaotong University’s School of Medicine, Department of Stomatology in 1977. The Board has determined that Dr. Gu should serve
as a director given his extensive medical and scientific research experience, as well as his government and hospital management and logistics experience.
Pingfan Wu graduated from Jiangxi Medical College with a major in clinical medicine. After graduation, she worked in a hospital for eight years as a
physician and an attending physician. After that, she joined Sino-American Shike/GlaxoSmithKline for 18 years until 2014. From sales representative to GSK
China Sales/Strategy Director, Ms. Wu was responsible for the sale of multiple prescription drugs/OTC products in Chinese hospitals, retail markets,
government cooperation projects and mergers and acquisitions. Since 2014 Ms. Wu has been working at Cardinal Health China Pharmaceutical Co., Ltd.,
which is among the top three largest U.S./foreign drug distribution companies in China (“Cardinal China”). She served as its retail COO, responsible for retail
channel branding/sales of the distribution products in China and online/offline business strategy planning and operation management for its Direct-to-Patient
(“DTP”) pharmacy. The DTP pharmacy is mainly a hospital-side pharmacy and the products are primarily high-value drugs.
Yan Liu, from August 15, 2017 to August 1, 2018, Mr. Liu had been a project manager with Ping An Insurance (Group) Company of China, Ltd.
(“Ping An Insurance”), a Chinese holding conglomerate whose subsidiaries mainly deal with insurance, banking, and financial services. Ping An Insurance is
one of the top 50 companies on the Shanghai Stock Exchange. While at Ping An Insurance, Mr. Liu was mainly responsible for projects dealing with the
reformation of the current Chinese medical system and market, which is a US$1.3 trillion (8 trillion yuan) industry as of 2018. Prior to that Mr. Liu had served
as Director of Investor Relations for the Company from 2015. Mr. Liu holds a bachelor’s degree in statistics from Arizona State University and a bachelor’s
degree in math from Jinan University.
Family Relationships
There are no family relationships between or among any of the current directors or executive officers except the following: Mr. Yan Liu, our
Secretary, is son of our Chairman of the Board and the Chief Executive Officer but has not been involved in any transaction with the Company during the past
two years that would require disclosure under Item 404(a) of Regulation S-K.
There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.
Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the
past ten (10) years.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own more than ten percent (10%) of a registered class
of our equity securities (“Reporting Persons”), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. The Reporting Persons
are also required by SEC rules to furnish us with copies of Section 16(a) forms they file. Based upon a review of the filings made on their behalf during the
fiscal year ended March 31, 2019, as well as an examination of the SEC’s EDGAR system Form 3, 4, and 5 filings (including amendments to such forms) and
our records, we believe that, for the fiscal year ended March 31, 2019, our directors, executive officers and holders of ten percent (10%) or more of our
common stock complied with Section 16(a) filing requirements applicable to them.
48
The Board of Directors and Committees
We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operation of our businesses.
We also seek directors who possess the qualities of integrity and candor, who have strong analytical skills, and who are willing to engage with the management
and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment to devote significant time and energy
to service on the board and its committees. We believe that all of our directors meet the foregoing qualifications.
Based on the information submitted by Ms. Caroline Wang, Mr. Jiangliang He, and Dr. Genghua Gu, our Board of Directors has determined that each
of them is independent under Rule 5605(a)(2) of The NASDAQ Listing Rules.
Our Board of Directors has three (3) committees. During the fiscal year ended March 31, 2019, our Board of Directors and its committees held the
following number of meetings and took the following number of actions by unanimous written consent:
Board of Directors
Audit Committee
Compensation Committee
Nominating Committee
49
Meetings
Unanimous
written
consents
1
1
1
1
3
1
2
2
Audit Committee
Our Audit Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs
“Investor”–“Corporate Governance”–“Documents”, and is composed of our three (3) independent directors. Our Board of Directors has determined, based on
information furnished by Ms. Caroline Wang and other available information, that she meets the requirements of an “audit committee financial expert” as that
term is defined in the rules promulgated under the Securities Act and the Exchange Act, and has accordingly designated her as such. Our Board of Directors
has also appointed her chairperson of the committee.
The responsibilities of our Audit Committee include:
● meeting with our management periodically to consider the adequacy of our internal control over financial reporting and the objectivity of our
financial reporting;
● appointing the independent registered public accounting firm, determining the compensation of the independent registered public accounting firm,
and pre-approving the engagement of the independent registered public accounting firm for audit and non-audit services;
● overseeing the independent registered public accounting firm, including reviewing its independence and quality control procedures, as well as the
experience and qualifications of the audit personnel that are providing audit services to us;
● meeting with the independent registered public accounting firm and reviewing the scope and significant findings of the audits performed by them,
and meeting with management and internal financial personnel regarding these matters; and
● reviewing our financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the activities and
recommendations of the auditors and our reporting policies and practices, and reporting recommendations to our full Board of Directors for
approval.
Compensation Committee
Our Compensation Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the
tabs “Investor”–“Corporate Governance”–“Documents”, and is made up of our three (3) independent directors. Jiangliang He is chairperson of the committee.
Our Compensation Committee oversees and, as appropriate, makes recommendations to the Board of Directors regarding the annual salaries and other
compensation of our executive officers and our employees, and other employee policies; it also provides assistance and recommendations with respect to our
compensation policies and practices.
Nominating Committee
Our Nominating Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs
“Investor”–“Corporate Governance”–“Documents”, and is made up of our four(4) independent directors. Genghua Gu is chairperson of the committee. Our
Nominating Committee assists in the selection of director nominees, approves director nominations to be presented for stockholder approval at our annual
general meeting, fills any vacancies on our Board of Directors, considers any nominations of director candidates validly made by stockholders, and reviews and
considers developments in corporate governance practices.
Code of Ethics
The Company’s Code of Ethics, which applies to all officers, directors and employees, was adopted by the Board on March 15, 2010. The Code of
Ethics was filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2010, a copy of which is available on our
website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”.
50
ITEM 11.
EXECUTIVE COMPENSATION.
Summary of Executive Compensation
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our principal executive
officer and principal financial officer during the last two (2) fiscal years. No other executive officer received compensation in excess of $100,000 during the
fiscal year ended March 31, 2019.
Summary Compensation Table
Name and Principal Position
Lei Liu,
CEO (2)(3)
Fiscal
Year
ended
March 31,
2019
2018
Salary
($)
53,676
54,360
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)
-0-
-
-0- 911,250
-0-
-0-
Non-Equity
Incentive Plan
Compensation
($)
-0-
-0-
Nonqualified
Deferred
Compensation
Earnings
($)
-0-
-0-
All Other
Compensation
($)
-0-
Total
($)
53,676
-0- 965,610
Ming Zhao,
CFO (4)
2019
2018
88,000
88,000
-0-
-0-
-
40,500
-0-
-0-
-0-
-0-
-0-
-0-
-0-
88,000
-0- 128,500
(1) Reflects the full fair value of stock issued during the applicable fiscal year for financial statement reporting purposes.
(2) Salary as reported is based on interbank exchange rate of RMB 6.6225 to $1.00 on March 31, 2018 and RMB 6.7075 to $1.00 on March 31, 2019.
(3) Mr. Liu’s compensation under “Stock Awards” for the fiscal year ended March 31, 2018, comes from the restricted stock award of 900,000 shares
granted to him on March 30, 2018 under the China Jo-Jo Drugstores, Inc. 2010 Equity Incentive Plan” (the “Plan”), after the cancellation of 225,000
shares on June 28, 2018, resulted in 675,000 shares. There is no grant of stock awards to Mr. Liu in the fiscal year ended March 31, 2019.
(4) Mr. Zhao’s compensation under “Stock Awards” includes restricted shares issued granted to him on March 30, 2018 under the Plan. There is no stock
awards in the fiscal year ended March 31, 2019.
Employment Agreements, Termination of Employment and Change-in-Control Arrangements
Except as described below, we currently have no employment agreements with any of our executive officers, nor any compensatory plans or
arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in
any executive officer’s responsibilities following a change-in-control.
Agreement with Ming Zhao
We entered into an employment agreement with Mr. Zhao dated as of August 1, 2011, under which Mr. Zhao is serving as our Chief Financial Officer
for a term of two years commencing August 1, 2011, for annual compensation of $100,000, payable in monthly installments, as well as a one-time grant of
40,000 shares of our common stock (the “Shares”) under our 2010 Equity Incentive Plan. The term of his employment was extended verbally for another two
(2) years with an amended annual compensation of $88,000 starting from October 2012. The term of this employment was extended verbally for another one
(1) years automatically (unless providing prior notice otherwise) with an annual compensation of $88,000 starting from October 2015. Mr. Zhao is also entitled
to expense reimbursement and to be included as an insured under our directors and officers insurance policy with coverage of $5,000,000. During his
employment, Mr. Zhao is subject to certain restrictive covenants, including (i) prohibition against engaging in any work that competes with us and our business
and soliciting our customers, potential customers and employees, and (ii) requirement to maintain our confidential information.
Mr. Zhao’s employment agreement terminates upon his death or disability. If Mr. Zhao is unable to perform his duties for 60 days during any 12 month
period, we may terminate the employment agreement upon 30-day written notice. We may also terminate the employment agreement for cause, upon notice if
at any time Mr. Zhao commits (a) fraudulent, unlawful or grossly negligent conduct in connection with his employment duties; (b) willful misconduct; (c) willful
and continued failure to perform his duties; (d) any felony or any crime involving moral turpitude; (e) any violation of any of our material policies; or (f) any
material breach of any written agreement with us. Mr. Zhao may terminate his employment agreement immediately upon written notice if we breach our
agreement with him.
51
Outstanding Equity Awards at Fiscal Year Ended March 31, 2019
Option Awards
Stock Awards
Equity incentive
plan awards:
number of
securities
underlying
unexercised
options
Number of
securities
underlying
unexercised
options
exercisable
unexercisable
Equity
incentive
plan
awards:
number of
securities
underlying
unexercised
unearned
options
Option
exercise
price ($)
-
-
-
-
180,000
2.50
-
30,000
2.50
-
125,000
2.50
Option
expiration
date
Nov.18,
2022-
Nov.18,
2022-
Nov.18,
2022-
Equity
incentive plan
awards:
number of
unearned
shares, units
or other
rights that
have not
vested
Equity
incentive
plan awards:
market or
payout
value of
unearned
shares, units
or other rights
that have not
vested ($)
Number of
shares
or units
of stock that
have
not vested
Market
value of
shares or
units of
stock that
have not
vested ($)
-
-
-
-
-
-
- $
- $
- $
-
-
-
Name
Lei Liu
Ming Zhao
Li Qi
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
TOTAL
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants
and rights
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
967,000
-
967,000
2.50
-
2.50
Number of
securities
remaining
available
for future
issuance
under equity
compensation
plans
4,520,000
-
4,520,000
Discussion of Summary Compensation and Grants of Plan-based Awards Tables
A summary of certain material terms of our existing compensation plans and arrangements is set forth below.
On September 21, 2010, our Board of Directors approved a stock incentive plan for officers, directors, employees, and consultants entitled “China Jo-
Jo Drugstores, Inc. 2010 Equity Incentive Plan” (the “Plan”). The maximum number of shares that may be issued under the Plan is 2,025,000 shares of our
common stock. The Plan was approved by our shareholders at our annual meeting held on November 2, 2010. On February 24, 2015, our Board of Directors
adopted and approved Amendment No. 1 to the Plan to increase the number of shares of the Company’s common stock available for issuance thereunder from
2,025,000 share limit to 4,325,000 shares. Amendment No. 1 was approved by the stockholders at the annual shareholders meeting on March 23, 2015. On
January 27, 2016, our Board of Directors adopted and approved Amendment No. 2 to the Plan to increase the number of shares of the Company’s common
stock available for issuance thereunder from 4,325,000 share limit to 7,175,000 shares. Amendment No. 2 was approved by the stockholders at the annual
shareholders meeting on March 23, 2016. Under the Plan, the Company may issue common stock and/or options to purchase common stock to our officers,
directors, employees and consultants. The Plan is administered either by our Board of Directors or a committee that it designates comprising of at least two (2)
“non-employee” directors. The board (or the committee, if one is designated) has full and complete authority, in its discretion, but subject to the express
provisions of the Plan, to grant awards, to determine the number of awards to be granted and the time or times at which awards shall be granted; to establish
the terms and conditions upon which awards may be exercised; to remove or adjust any restrictions and conditions upon awards; to specify, at the time of
grant, provisions relating to exercisability of awards and to accelerate or otherwise modify the exercisability of any awards; and to adopt such rules and
regulations and to make all other determinations deemed necessary or desirable for the administration of the Plan. On February 14, 2017, our Board of
Directors adopted and approved Amendment No. 3 to the Plan to increase the number of shares of the Company’s common stock available for issuance
thereunder from 7,175,000 share limit to 9,696,468 shares. Amendment No. 3 was approved by the stockholders at the annual shareholders meeting on March
29, 2017. As of March 31, 2019, there were 2,314,166 shares of our common stock available for future issuance under the Plan.
52
Director Compensation
The following table provides compensation information for our directors during the fiscal year ended March 31, 2019:
Fiscal
Year
ended
March 31,
2019
2019
Fees
Earned
or Paid in
Cash
($)
53,676
44,730
Director Compensation Table
Stock
Awards
($)(1)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
--
-0-
-0-
-0-
2019
12,080
-0-
-0-
2019
2019
2019
2019
2,500
6,000
3,092
3,600
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
53,676
44,730
12,080
2,500
6,000
3,092
3,600
Name
Lei Liu (2)
Li Qi (2)
Caroline
Wang
Taihong
Guo (former
director)
Genghua Gu
Jiangliang
He
Pingfan Wu
(1) Reflects dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes.
(2) Compensation is reflected in the Summary Compensation Table on page 49 above.
We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity,
although we have entered into certain agreements with some of our directors as described below. We intend to develop such a policy in the near future.
Agreement with Genghua Gu
On December 9, 2013, we entered into an agreement with Dr. Gu in the form of a director offer letter, pursuant to which we have agreed to
compensate him $6,000 annually for his services, payable in monthly installments on the last day of each month. Additionally, he is entitled to be included as an
insured under our directors and officers insurance policy.
Agreement with Caroline Wang
As of March 29, 2017, we entered into an agreement with Ms. Wang in the form of a director offer letter pursuant to which we agreed to compensate
her $12,080 (RMB80,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.
Agreement with Jiangliang He
As of September 4, 2018, we entered into an agreement with Mr. He in the form of a director offer letter pursuant to which we agreed to compensate
her $5,300 (RMB36,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.
Agreement with Pingfan Wu
As of October 26, 2018, we entered into an agreement with Ms. Wu in the form of a director offer letter pursuant to which we agreed to compensate
her $8,640 (RMB60,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.
53
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN B ENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding our common stock beneficially owned on June 28, 2019 or the latest applicable date prior to
that date, for (i) each stockholder known to be the beneficial owner of five percent (5%) or more of our outstanding common stock, (ii) each executive officer
and director, and (iii) all executive officers and directors as a group. To the best of our knowledge, subject to community and marital property laws, all persons
named have sole voting and investment power with respect to such shares, except as otherwise noted.
Common Stock Beneficially Owned
Executive officers and directors: (1)
Lei Liu, Chief Executive Officer and Chairman of the Board of Directors (4)
Ming Zhao, Chief Financial Officer
Li Qi, Director (4)
Caroline Wang, Director (5)
Genghua Gu, Director (6)
Jiangliang, He, Director
Pingfan Wu, Director
All directors and executive officers as a group (7 persons)
5% Shareholders: (1)
CareRetail Holdings Limited (7)
Super Marvel Limited (4)
Chong’an Jin (4)
Sabby Management, LLC (8)
Number of
Shares
beneficially
owned (2)
Percentage of
class
beneficially
owned (3)
8,825,482
199,000
6,409,000
-
30,000
-
-
9,433,482
4,840,000
6,030,000
6,049,000
1,651,151
26.8%
*%
19.5%
*%
*%
*%
*%
28.6%
14.7%
18.3%
18.3%
5.0%
* Less than 1%.
(1) Unless otherwise noted, the address for each of the named beneficial owners is: 6th Floor, Hai Wai Hai Tongxin Mansion, Gong Shu District, Hangzhou
City, Zhejiang Province, China, 310008.
(2) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power,
which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person
(if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially
owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as
shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock
actually outstanding.
(3) Unless otherwise noted, the number and percentage of outstanding shares of common stock is based upon 32,936,786 shares outstanding as of June 28,
2019.
(4) The address of Super Marvel Limited (“Super Marvel”) is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The
owners of Super Marvel are Lei Liu (39%), Li Qi (30%) and Chong’an Jin (31%). They are also its directors. As such, they are deemed to have or share
investment control over Super Marvel’s portfolio. According to Rule 13d-5, when two or more persons agree to act together for the purpose of acquiring,
holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes
of sections 13(d) and (g) of the Exchange Act, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such
persons. As a result, 6,030,000 shares of common stock held by Super Marvel reported herein as beneficially owned by each of Mr. Liu, Ms. Qi and Mr.
Jin, which they in turn own indirectly through their respective ownership of Super Marvel.
(5) Ms. Wang’s address is: 3601B The Center, Changle Road, Xuhui District, Shanghai, China.
(6) Dr. Gu’s address is: No.1, Xueshi Road, Hangzhou, China.
(7) The address of CareRetail Holdings Limited is Walkers Corporate Limited, Cayman Corporate Centre, 27 Hospital Road, George Town, Grand Cayman
KY1-9008. Hillhouse Capital Management, Ltd., an exempted Cayman Islands company (“Hillhouse Capital”) is hereby deemed to be the sole beneficial
owner of, and to control the voting power of, the shares of our common stock held by CareRetail. The directors of Hillhouse Capital are Jun Shen and
Colm O’Connell. Mr. Shen and Mr. O’Connell are employees of Hillhouse Capital and Mr. Lei Zhang is the President and Chief Investment Officer of
Hillhouse Capital.
(8) According to Schedule 13G filed on May 10, 2019, the address of Sabby Management, LLC is 10 Mountainview Road, Suite 205, Upper Saddle River,
New Jersey 07458. As calculated in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, Sabby Healthcare Master Fund,
Ltd. and Sabby Volatility Warrant Master Fund, Ltd. beneficially own 157,638 and 1,493,513 shares of the Company’s common stock. respectively,
representing approximately 0.48% and 4.53% of the common stock, respectively. Sabby Management, LLC, the investment manager of Sabby Healthcare
Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd., and Hal Mintz, manager of Sabby Management, LLC, share voting and investment
power with respect to these securities. Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities listed except to
the extent of their pecuniary interest therein.
54
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Our Officers and Directors’ Relationship with Us, Our Subsidiaries and VIE
As described in “ Business - Our Corporate History and Structure ” above, we control HJ Group through contractual arrangements between Jiuxin
Management, our wholly-owned subsidiary, and each of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic. HJ Group is owned by Mr. Lei Liu, Mr. Li Qi
and Mr. Chong’an Jin (the “Key Personnel”), two (2) of whom also hold positions as our executive officers and/or directors. Because the Key Personnel also
collectively own a substantial amount of our issued and outstanding common stock, we believe that our interests are aligned with those of HJ Group and the
Key Personnel. However, see ” Risk Factors - Risks Related to Our Corporate Structure - Our contractual arrangements with HJ Group and the Key
Personnel may not be as effective in providing control over these entities as direct ownership,” and “Management members of HJ Group have
potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.”
Other Related Party Transactions
Due to a director and CEO (1):
March 31,
2019
March 31,
2018
795,179
850,342
(1) Due to foreign exchange restrictions, the Company’s director and CEO, Mr. Lei Liu personally lent U.S. dollars to the Company to facilitate its payments
of expenses in the United States.
On October 11, 2016, the Company issued a total of 949,000 shares of common stock to Lei Liu, at $1.69 per share, the fair market value, or the
closing stock price on Nasdaq on October 11, 2016, to offset the debts in the amount of $1,603,810 owed to Mr. Liu.
The Company leases a retail space from Mr. Lei Liu. The lease will expire in September 2020. The rent for the year ended March 31, 2019 has not
been paid to Mr. Liu as of March 31, 2019.
On April 28, 2018, 10% of Jiuxin Medicine was sold to Hangzhou Kangzhou Biotech Co. Ltd. for a total proceeds of approximately
$75,643(RMB507,760). Mr. Lei Liu owns 51% of Hangzhou Kangzhou Biotech Co. Ltd.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Our current principal independent auditor is BDO China Shu Lun Pan Certified Public Accountants LLP (“BDO China”) whom we engaged on April
7, 2015. The following table shows the fees for audit and other services provided by BDO China in relation to our 2019 and 2018 fiscal years:
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Total
For the Fiscal
Years ended
March 31,
2019
2018
$
$
230,000 $
-
-
-
230,000 $
225,000
-
-
-
225,000
(1) Audit Fees: This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form
10-Q, and services that are normally provided by independent auditors in connection with statutory and regulatory filings or the engagement for fiscal
years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial
statements.
(2) Audit-Related Fees: This category consists of assurance and related services by our independent auditors that are reasonably related to the performance
(3)
of the audit or review of our financial statements and are not reported above under “Audit Fees.”
Tax Fees: This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical tax advice.
(4) All Other Fees: This category consists of fees for other miscellaneous items.
Pre-Approval Policies and Procedures of the Audit Committee
The Audit Committee approves the engagement of our independent auditors and is also required to pre-approve all audit and non-audit
expenses. Prior to engaging its accountants to perform particular services, the Audit Committee obtains an estimate for the service to be performed. All of the
services described above were approved by the Audit Committee in accordance with its procedure.
55
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements
PART IV
The following consolidated financial statements for the years ended March 31, 2019 and 2018 are included in Part II, Item 8 of this Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended March 31, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended March 31, 2019 and 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
F-1
F-2
F-3
F-4
F-5
F-6
Schedules are omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule or
because the information required is given in the consolidated financial statements or the notes thereto.
(3) Exhibits
ITEM 16.
FORM 10-K SUMMARY.
Exhibit
Number
2
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Not applicable.
Description
EXHIBIT INDEX
Share Exchange Agreement among Kerrisdale Mining Corporation, certain of its stockholders, Renovation Investment (Hong Kong) Co., Ltd.
and its shareholders dated September 17, 2009 (3)
Articles of Incorporation (1)
Certificate of Amendment to Articles of Incorporation filed with the Nevada Secretary of State on July 14, 2008 (2)
Articles of Merger filed with the Nevada Secretary of State on September 22, 2009 (3)
Bylaws (1)
Text of Amendments to the Bylaws (2)
Certificate of Change Pursuant to NRS 78.209 with an effective date of April 9, 2010 (6)
Specimen of Common Stock Certificate (1)
2010 Equity Incentive Plan (8)
Amendment No. 4 to the 2010 Equity Incentive Plan (22)
Amendment No. 5 to 2010 Equity Incentive Plan (23)
Form of Warrant to the investors in July 2015 (17)
Form of Warrant to the investors in April 2019 (26)
Consulting Services Agreement between Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”) and Hangzhou Jiuzhou
Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”) dated August 1, 2009 (3)
Operating Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
Option Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine
(General Partnership) (“Jiuzhou Clinic”) dated August 1, 2009 (3)
Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou
Service”) dated August 1, 2009 (3)
Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
56
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
14.1
21.1
23.1
31.1
31.2
32.1
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
Consulting Services Agreement between Jiuxin Management and Zhejiang Jiuying Grand Pharmacy Co., Ltd. (“Jiuying Pharmacy”) dated May
15, 2012 (10)
Operating Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
Voting Rights Proxy Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
Equity Pledge Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
Option Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
Director Offer Letter with Caroline Wang dated as of March 29, 2017 (21)
Director Offer Letter with Genghua Gu dated December 9, 2013 (13)
Office Lease dated December 18, 2013 (14)
Acquisition Agreement between Jiuzhou Pharmacy and Sanhao Pharmacy dated October 9, 2014 (15)
Form of the Restricted Stock Award Agreement for the Issuance on November 18, 2014 (16)
Form of the Non-statutory Stock Option Agreement (16)
Securities Purchase Agreement between the Company and an Investor dated July 19, 2015 (17)
Engagement Letter between the Company and H.C. Wainwright & Co., LLC dated July 19, 2015 (17)
Form of the Restricted Stock Award Agreement for the issuance on November 27, 2015 (18)
Securities Purchase Agreement by and between the Company and CareRetail Holdings Limited dated January 3, 2017 (19)
Investor Rights Agreement by and among the Company, Jiuzhou Pharmacy, Mr. Lei Liu, Ms. Li Qi and CareRetail Holdings Limited dated
January 3, 2017 (19)
English translation of the Joint Venture Agreement by and between Jiuzhou Pharmacy and CareRetail (HK) dated January 18, 2017 (20)
Offer Letter to Mr. Jiangliang He dated September 4, 2018 (23)
Offer Letter to Mr. Yan Liu dated September 4, 2018 (23)
Director Offer Letter with Ms. Pingfan Wu, dated October 26, 2018 (24)
Offer Letter to Mr. Wei Hu, Chief Operating Officer dated November 7, 2018 (25)
Form of Securities Purchase Agreement dated April 11, 2019 (26)
Engagement Agreement with H.C. Wainwright & Co. dated April 10, 2019 (26)
Code of Business Conduct and Ethics (5)
List of Subsidiaries *
Consent of Independent Publicly Registered Accounting Firm, BDO China Shu Lun Pan Certified Public Accountants LLP *
Section 302 Certification by the Corporation’s Chief Executive Officer *
Section 302 Certification by the Corporation’s Chief Financial Officer *
Section 906 Certification by the Corporation’s Chief Executive Officer and Chief Financial Officer *
57
99.1
Project Agreement between The People’s Government of Qianhong Village, Lin’an, Zhejiang Province (the “Qianhong Local Government”) and
Jiuzhou Pharmacy dated February 27, 2010 (7)
Security Deposit Agreement between the Qianhong Local Government and Jiuzhou Pharmacy dated February 27, 2010 (7)
XBRL Instance Document
99.2
101.INS
101.SCH XBRL Taxonomy Extension Scheme Document
101.CAL
101.DEF
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
Filed herewith
Incorporated by reference from the registrant’s Registration Statement on Form SB-2 filed on November 28, 2007
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on July 15, 2008
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on September 24, 2009
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on October 30, 2009
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on March 16, 2010
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on April 14, 2010
Incorporated by reference from the registrant’s Annual Report on Form 10-K filed on June 29, 2010
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 3, 2010
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed on February 14, 2011
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on May 17, 2012
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 30, 2012
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on January 4, 2013
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on December 12, 2013
Incorporated by reference from the registrant’s Current Report on Form 10-K filed on June 27, 2014
Incorporated by reference from the registrant’s Current Report on Form 10-Q filed on November 13, 2014
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 24, 2014
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on July 21, 2015
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on December 2, 2015
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on January 4, 2017
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed on February 10, 2017
Incorporated by reference from Exhibit 10.33 of the registrant’s Annual Report on Form 10-K filed on June 29, 2017
Incorporated by reference from the registrant’s Exhibit A to the proxy statement on Schedule 14A filed on February 9, 2018
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed on February 14, 2019
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on October 26, 2018
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 9, 2018
Incorporated by reference from the registrant’s Current Report on Form 8-K filed on April 11, 2019
58
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date : July 1, 2019
Date : July 1, 2019
CHINA JO-JO DRUGSTORES, INC.
(Registrant)
By:
By:
/s/ Lei Liu
Lei Liu
Chief Executive Officer
(Principal Executive Officer)
/s/ Ming Zhao
Ming Zhao
Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signature
/s/ Lei Liu
Lei Liu
/s/ Ming Zhao
Ming Zhao
/s/ Li Qi
Li Qi
/s/ Caroline Wang
Caroline Wang
/s/ Jiangliang He
Jiangliang He
/s/ Genghua Gu
Genghua Gu
/s/ Pingfan Wu
Pingfan Wu
Title
Chief Executive Officer and Director
Chief Financial Officer
Director
Director
Director
Director
Director
59
Date
July 1, 2019
July 1, 2019
July 1, 2019
July 1, 2019
July 1, 2019
July 1, 2019
July 1, 2019
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
China Jo-Jo Drugstores, Inc.
Carson City, Nevada
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of China Jo-Jo Drugstores, Inc. (the “Company”) as of March 31, 2019 and 2018, the related
consolidated statements of loss and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes. In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2019 and 2018, and the results of
their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO China Shu Lun Pan Certified Accountants LLP
We have served as the Company’s auditor since year 2015.
Shanghai, People’s Republic of China
July 1, 2019
F-1
ITEM 1.
FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash
Restricted cash
Financial assets available for sale
Notes receivable
Trade accounts receivable
Inventories
Other receivables, net
Advances to suppliers
Other current assets
Total current assets
PROPERTY AND EQUIPMENT, net
OTHER ASSETS
Long-term investment
Farmland assets
Long term deposits
Other noncurrent assets
Intangible assets, net
Total other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable, trade
Notes payable
Other payables
Other payables - related parties
Customer deposits
Taxes payable
Accrued liabilities
Total current liabilities
Financial liability
Purchase option and warrants liability
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock; $0.001 par value; 250,000,000 shares authorized; 28,936,778 and 28,936,778 shares issued and
outstanding as of March 31, 2019 and March 31, 2018
Preferred stock; $0.001 par value; 10,000,000 shares authorized; nil issued and outstanding as of March 31, 2019 and
March 31, 2018
Additional paid-in capital
Statutory reserves
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and stockholders’ equity
March 31,
March 31,
2019
2018
$
9,322,463 $
15,422,739
180,928
177,278
8,692,514
13,955,202
4,438,230
1,950,252
2,063,375
56,202,981
15,132,640
16,319,551
175,140
279,082
8,322,393
13,429,568
3,098,079
3,447,452
2,116,237
62,320,142
8,727,358
2,843,640
24,243
825,259
2,157,275
1,196,197
3,597,323
7,800,297
40,890
796,286
2,501,968
1,253,352
4,056,414
8,648,910
$
72,730,636 $
73,812,692
23,106,230
25,951,673
3,197,221
795,179
771,942
125,859
1,264,182
55,212,286
465,248
81,935
55,759,469
25,259,526
19,180,200
4,272,523
850,342
4,040,867
366,040
841,993
54,811,491
-
138,796
54,950,287
28,937
28,937
-
44,905,664
1,309,109
(30,587,468)
2,508,964
18,165,206
(1,194,039)
16,971,167
72,730,636 $
-
43,599,089
1,309,109
(29,661,190)
3,586,460
18,862,405
-
18,862,405
73,812,692
$
The accompanying notes are an integral part of these consolidated financial statements.
F-2
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
REVENUES, NET
COST OF GOODS SOLD
GROSS PROFIT
SELLING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
IMPAIRMENT OF LONG-LIVED ASSETS
TOTAL OPERATING EXPENSES
LOSS FROM OPERATIONS
INTEREST INCOME
OTHER INCOME, NET
CHANGE IN FAIR VALUE OF PURCHASE OPTION AND WARRANTS LIABILITY
LOSS BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET LOSS
ADD: NET (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
NET (LOSS) ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.
OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments
COMPREHENSIVE LOSS
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic
Diluted
LOSS PER SHARES:
Basic
Diluted
For the years ended
March 31,
2019
107,551,012 $
2018
96,112,706
$
82,442,969
75,987,537
25,108,043
20,125,169
24,265,184
1,718,989
-
25,984,173
18,739,492
17,823,661
1,583,186
38,146,339
(876,130)
(18,021,170)
112,887
(93,311)
(326,452)
478,976
201,096
357,421
(1,183,006)
(16,983,677)
134,763
76,256
(1,317,769)
(17,059,933)
391,491
-
(926,278)
(17,059,933)
(1,077,496)
2,236,398
(2,395,265)
(14,823,535)
28,936,778
28,936,778
25,241,748
25,241,748
$
$
(0.03) $
(0.03) $
(0.68)
(0.68)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
BALANCE, March 31, 2017.
Common Stock
Retained Earnings
Number of
shares
25,214,678 $
Paid-in Statutory
capital
Amount
reserves Unrestricted
25,215 36,581,248 1,309,109 (12,601,257)
income/(loss)
1,350,062
interest
Total
- $ 26,664,377
Accumulated
other
Non-
comprehensive controlling
Stock based compensation
Net loss
3,722,100
-
3,722 7,017,841
-
-
-
-
- (17,059,933)
-
-
-
7,021,563
- (17,059,933)
Foreign currency translation loss
BALANCE, March 31, 2018.
Stock based compensation
Increase in capital of Jiuzhou
Pharmacy
Start-up of Linjia Medical
Sale of 10% of Jiuxin Medicine
Net loss
Foreign currency translation loss
BALANCE, March 31, 2019.
-
28,936,778
-
-
-
-
-
-
28,936,778
-
-
-
28,937 43,599,089 1,309,109 (29,661,190)
-
197,100
-
-
-
7,529
-
-
-
- 1,101,946
-
-
-
-
-
-
-
(926,278)
-
28,937 44,905,664 1,309,109 (30,587,468)
-
-
-
-
-
2,236,398
3,586,460
-
2,236,398
-
- 18,862,405
197,100
-
7,529
-
-
223,629
-
223,629
74,864
- (1,027,082)
(1,317,769)
(391,491)
-
(1,076,591)
905
(1,077,496)
2,508,964 (1,194,039) 16,971,167
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt direct write-off and provision
Depreciation and amortization
Impairment of leasehold improvement
Stock based compensation
Change in fair value of purchase option derivative liability
Change in operating assets:
Accounts receivable, trade
Notes receivable
Inventories and biological assets
Other receivables
Advances to suppliers
Long term deposit
Other current assets
Other noncurrent assets
Change in operating liabilities:
Accounts payable, trade
Other payables and accrued liabilities
Customer deposits
Taxes payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposal of financial assets available for sale
Purchase of financial assets available for sale
Acquisition of equipment and building
Increase intangible assets
Additions to leasehold improvements
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term bank loan
Change in restricted cash
Proceeds from notes payable
Repayment of notes payable
Increase in financial liability
Proceeds from sale of stock and warrants
Repayment of other payables-related parties
Net cash provided by (used in) financing activities
EFFECT OF EXCHANGE RATE ON CASH
For the years ended
March 31,
2019
2018
$
(1,317,769) $
(17,059,933)
(3,357,851)
1,676,413
197,100
326,452
(116,810)
83,910
(1,390,823)
(1,308,437)
3,612,453
183,841
(83,372)
(23,511)
(528,353)
(328,473)
(3,011,194)
(216,792)
(5,603,216)
87,290
(104,360)
(5,450,934)
(29,817)
(1,828,360)
(7,326,181)
4,009,636
1,383,810
1,583,186
7,021,563
(357,421)
(2,072,486)
(1,005)
(2,411,209)
(489,334)
1,121,006
15,103
(377,391)
36,091
3,726,625
1,115,267
1,048,939
(362,513)
(2,070,066)
-
(75,513)
(414,398)
(1,140,102
(1,347,489)
(2,977,502)
-
-
42,030,521
(34,018,811)
81,997
7,529
(22,655)
8,078,581
27,461,423
(22,476,740)
-
-
(91,395)
4,893,288
(1,856,174)
3,810,661
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
(6,706,989)
3,656,381
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year
31,452,191
27,795,810
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of year
$
24,745,202 $
31,452,191
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes
$
56,422 $
27,825
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Note 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19, 2006, originally under the name
“Kerrisdale Mining Corporation”. On September 24, 2009, the Company changed its name to “China Jo-Jo Drugstores, Inc.” in connection with a share
exchange transaction as described below.
On September 17, 2009, the Company completed a share exchange transaction with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”), whereby
7,900,000 shares of common stock were issued to the stockholders of Renovation in exchange for 100% of the capital stock of Renovation. The completion of
the share exchange transaction resulted in a change of control. The share exchange transaction was accounted for as a reverse acquisition and recapitalization
and, as a result, the consolidated financial statements of the Company (the legal acquirer) are, in substance, those of Renovation (the accounting acquirer), with
the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of the share exchange transaction. Renovation has
no substantive operations of its own except for its holdings of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”), Zhejiang Shouantang
Medical Technology Co., Ltd. (“Shouantang Technology”) and Hangzhou Jiutong Medical Technology Co., Ltd (“Jiutong Medical”), Hangzhou Jiuyi Medical
Technology Co. Ltd. (“Jiuyi Technology”), its wholly-owned subsidiaries.
The Company is an online and offline retailer and wholesale distributor of pharmaceutical and other healthcare products in the People’s Republic of China
(“China” or the “PRC”). The Company’s offline retail business is comprised primarily of pharmacies, which are operated by Hangzhou Jiuzhou Grand
Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company that the Company controls through contractual arrangements. On March 31, 2017, Jiuxin
Management established a subsidiary, Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”) to operates drugstores in Lin’an City. As of March 31, 2019,
Jiuzhou Pharmacy has established the following companies, each of which operates a drugstore in Hangzhou City:
Entity Name
Hangzhou Jiuben Pharmacy Co., Ltd (“Jiuben Pharmacy”)
Hangzhou Jiuli Pharmacy Co., Ltd (“Jiuli Pharmacy”)
Hangzhou Jiuxiang Pharmacy Co., Ltd (“Jiuxiang Pharmacy”)
Hangzhou Jiuheng Pharmacy Co., Ltd (“Jiuheng Pharmacy”)
Hangzhou Jiujiu Pharmacy Co., Ltd (“Jiujiu Pharmacy”)
Hangzhou Jiuyi Pharmacy Co., Ltd (“Jiuyi Pharmacy”)
Hangzhou Jiumu Pharmacy Co., Ltd (“Jiumu Pharmacy”)
Hangzhou Jiurui Pharmacy Co., Ltd (“Jiurui Pharmacy”)
Date Established
April 27, 2017
May 22, 2017
May 26, 2017
June 6, 2017
June 8, 2017
June 8, 2017
July 21, 2017
August 4, 2017
The Company’s offline retail business also includes three medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine
(“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”), both of which are also controlled by the Company
through contractual arrangements. On December 18, 2013, Jiuzhou Service established, and held 51% of, Hangzhou Shouantang Health Management Co., Ltd.
(“Shouantang Health”), a PRC company licensed to sell health care products. Shouantang Health was closed in April 2015. In May 2016, Hangzhou
Shouantang Bio-technology Co., Ltd. (“Shouantang Bio”) set up and held 49% of Hangzhou Kahamadi Bio-technology Co., Ltd.(“Kahamadi Bio”), a joint
venture specialized in brand name development for nutritional supplements. In 2018, Jiuzhou Pharmacy invested a total of $741,540 (5,100,000RMB) in and held
51% of Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd (“Linjia Medical”), which is operating two new clinics in Hangzhou as of March
31, 2019. On March 29, 2019, Jiuzhou Pharmacy set up and currently holds 51% of the equity of Zhejiang AyiGe Medical Health Management Co., Ltd.(“Ayi
Health”), which is intended to provide technical support such as IT and customer support to our health management business in the future.
The Company currently conducts its online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online pharmacy license. Prior to
November 2015, the Company primarily conducted its online retail pharmacy business through Zhejiang Quannuo Internet Technology Co., Ltd. In May 2015,
the Company established Zhejiang Jianshun Network Technology Co. Ltd, a joint venture with Shanghai Jianbao Technology Co., Ltd. (“Jianshun Network”), in
order to develop its online pharmaceutical sales from large commercial medical insurance companies. However, as the strategic cooperation with Yikatong
ceased, Jianshun Network was dissolved. On September 10, 2015, Renovation set up a new entity Jiuyi Technology to provide additional technical support such
as webpage development to our online pharmacy business. In November 2015, the Company sold all of the equity interests of Quannou Technology to six
individuals for approximately $17,121 (RMB107,074). After the sale, its technical support function has been transferred back to Jiuzhou Pharmacy, which hosts
our online pharmacy.
The Company’s wholesale business is primarily conducted through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”), which is licensed to distribute
prescription and non-prescription pharmaceutical products throughout China. Jiuzhou Pharmacy acquired Jiuxin Medicine on August 25, 2011. On April 20,
2018, 10% of Jiuxin Medicine shares were sold to Hangzhou Kangzhou Biotech Co. Ltd. for a total proceeds of $79,625 (RMB 507,760).
F-6
The Company’s herb farming business is conducted by Hangzhou Qianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned
subsidiary of Jiuxin Management. Due to the complexity of the cultivation business, Qianhong Agriculture has not grown herbs in fiscal 2019.
The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
Entity Name
Renovation
Background
● Incorporated in Hong Kong SAR on September 2, 2008
Jiuxin Management
● Established in the PRC on October 14, 2008
Ownership
100%
100%
● Deemed a wholly foreign owned enterprise (“WFOE”) under PRC
law
● Registered capital of $14.5 million fully paid
Shouantang Technology
● Established in the PRC on July 16, 2010 by Renovation with
100%
registered capital of $20 million
● Registered capital requirement reduced by the SAIC to $11 million
in July 2012 and is fully paid
● Deemed a WFOE under PRC law
● Invests and finances the working capital of Quannuo Technology
Qianhong Agriculture
● Established in the PRC on August 10, 2010 by Jiuxin Management
100%
● Registered capital of RMB 10 million fully paid
● Carries out herb farming business
Jiuzhou Pharmacy (1)
● Established in the PRC on September 9, 2003
VIE by contractual arrangements (2)
● Registered capital of RMB 5 million fully paid
● Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou
Jiuzhou Clinic (1)
● Established in the PRC as a general partnership on October 10,
VIE by contractual arrangements (2)
2003
● Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s
stores
Jiuzhou Service (1)
● Established in the PRC on November 2, 2005
VIE by contractual arrangements (2)
● Registered capital of RMB 500,000 fully paid
● Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s
stores
Jiuxin Medicine
● Established in PRC on December 31, 2003
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Acquired by Jiuzhou Pharmacy in August 2011
● Registered capital of RMB 10 million fully paid
● Carries out pharmaceutical distribution services
F-7
Entity Name
Jiutong Medical
Background
● Established in the PRC on December 20, 2011 by Renovation
Ownership
100%
● Registered capital of $2.6 million fully paid
● Currently has no operation
Jiuben Pharmacy
● Established in the PRC on April 27, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiuli Pharmacy
● Established in the PRC on May 22, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiuxiang Pharmacy
● Established in the PRC on May 26, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiuheng Pharmacy
● Established in the PRC on June 6, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiujiu Pharmacy
● Established in the PRC on June 8, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiuyi Pharmacy
● Established in the PRC on June 8, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiumu Pharmacy
● Established in the PRC on July 21, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
Jiurui Pharmacy
● Established in the PRC on August, 2017 by Jiuzhou Pharmacy
VIE by contractual arrangements as a wholly-
owned subsidiary of Jiuzhou Pharmacy (2)
● Registered capital of $15,920 fully paid
● Operates a pharmacy in Hangzhou
F-8
Entity Name
Shouantang Bio
Background
● Established in the PRC in October, 2014 by Shouantang
Ownership
100%
Technology
● 100% held by Shouantang Technology
● Registered capital of RMB 1,000,000 fully paid
● Sells nutritional supplements under its own brand name
Jiuyi Technology
● Established in the PRC on September 10, 2015
100%
● 100% held by Renovation
● Technical support to online pharmacy
Kahamadi Bio
● Established in the PRC in May 2016
49%
● 49% held by Shouantang Bio
● Registered capital of RMB 10 million
● Develop brand name for nutritional supplements
Lin’An Jiuzhou
● Established in the PRC in March 31, 2017
100%
● 100% held by Jiuxin Management
● Registered capital of RMB 5 million
● Explore retail pharmacy market in Lin’An City
Linjia Medical
● Established in the PRC in September27, 2017
VIE by contractual arrangements as a controlled
subsidiary of Jiuzhou Pharmacy (2)
● 51% held by Jiuzhou Pharmacy
● Registered capital of RMB 20 million
● Operates local clinics
Ayi Health
● Established in the PRC in March 29, 2019
VIE by contractual arrangements as a controlled
subsidiary of Jiuzhou Pharmacy (2)
● 51% held by Jiuzhou Pharmacy
● Registered capital of RMB 10 million
● Provide technical Support for medial service
(1)
(2)
Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service had been under the common control of Mr. Lei Liu, Mr. Chong’an Jin and Ms. Li Qi, the three
shareholders (the “Owners”) since their respective establishment dates, pursuant to agreements among the Owners to vote their interests in concert
as memorialized in a voting rights agreement. Based on such voting agreement, the Company has determined that common control exists among these
three companies. The Owners have operated these three companies in conjunction with one another since each company’s respective establishment
date. Jiuxin Medicine is also deemed under the common control of the Owners as a subsidiary of Jiuzhou Pharmacy.
To comply with certain foreign ownership restrictions of pharmacy and medical clinic operators, Jiuxin Management entered into a series of
contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service on August 1, 2009. These contractual arrangements are
comprised of five agreements: a consulting services agreement, operating agreement, equity pledge agreement, voting rights agreement and option
agreement. Because such agreements obligate Jiuxin Management to absorb all of the risks of loss from the activities of Jiuzhou Pharmacy, Jiuzhou
Clinic and Jiuzhou Service, and enable the Company (through Jiuxin Management) to receive all of their expected residual returns, the Company
accounts for each of the three companies (as well as subsidiaries of Jiuzhou Pharmacy) as a variable interest entity (“VIE”) under the accounting
standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Jiuzhou Pharmacy, Jiuzhou Clinic and
Jiuzhou Service, as well as the subsidiary under the control of Jiuzhou Pharmacy, Jiuxin Medicine and Shouantang Bio are consolidated into the
financial statements of the Company.
F-9
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“US GAAP”). The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries and VIEs. All significant
inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation.
Consolidation of variable interest entities
In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance
their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the
Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to
consolidate the VIE for financial reporting purposes.
The Company has concluded, based on the contractual arrangements, that Jiuzhou Pharmacy (including its subsidiaries and controlled entities), Jiuzhou Clinic
and Jiuzhou Service are each a VIE and that the Company’s wholly-owned subsidiary, Jiuxin Management, absorbs a majority of the risk of loss from the
activities of these companies, thereby enabling the Company, through Jiuxin Management, to receive a majority of their respective expected residual returns.
Control and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members who hold more than 50
percent of the voting ownership interest of each entity.” Because the Owners collectively own 100% of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service,
and have agreed to vote their interests in concert since the establishment of each of these three companies as memorialized in the voting rights agreement, the
Company believes that the Owners collectively have control and common control of the three companies. Accordingly, the Company believes that Jiuzhou
Pharmacy, Jiuzhou Clinic and Jiuzhou Service were constructively held under common control by Jiuxin Management as of the time the Contractual
Agreements were entered into, establishing Jiuxin Management as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation, which is
owned by the Company.
Risks and Uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced
by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are
subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely
affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and
believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future
results.
The Company has significant cash deposits with suppliers in order to obtain and maintain inventory. The Company’s ability to obtain products and maintain
inventory at existing and new locations is dependent upon its ability to post and maintain significant cash deposits with its suppliers. In the PRC, many vendors
are unwilling to extend credit terms for product sales that require cash deposits to be made. The Company does not generally receive interest on any of its
supplier deposits, and such deposits are subject to loss as a result of the creditworthiness or bankruptcy of the party who holds such funds, as well as the risk
from illegal acts such as conversion, fraud, theft or dishonesty associated with the third party. If these circumstances were to arise, the Company would find it
difficult or impossible, due to the unpredictability of legal proceedings in China, to recover all or a portion of the amount on deposit with its suppliers.
F-10
Members of the current management team own controlling interests in the Company and are also the Owners of the VIEs in the PRC. The Company only
controls the VIEs through contractual arrangements which obligate it to absorb the risk of loss and to receive the residual expected returns. As such, the
controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the agreement terms, as a result of
which the Company would not retain control of the VIEs.
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the accompanying unaudited
condensed consolidated financial statements relate to the assessment of the carrying values of accounts receivable, advances to suppliers and related
allowance for doubtful accounts, useful lives of property and equipment, inventory reserve and fair value of its purchase option derivative liability. Because of
the use of estimates inherent in the financial reporting process, actual results could materially differ from those estimates.
Fair value measurements
The Company establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to
measure fair value and include the following:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The Company’s financial assets and liabilities, which include financial instruments as defined by FASB ASC 820, include cash and cash equivalents, restricted
cash, accounts receivable, accounts payable, long-term debt and derivatives. The carrying amounts of cash and cash equivalents, financial assets available for
sales, accounts receivable, notes receivables, and accounts payable are a reasonable approximation of fair value due to the short maturities of these instruments
(Level 1). The carrying amount of notes payable approximates fair value based on borrowing rates of similar bank loan currently available to the Company
(Level 2) (See Note 13). The carrying amount of the Company’s derivative instruments is recorded at fair value and is determined based on observable inputs
that are corroborated by market data (Level 2). The carrying amount of the Financial assets available for sale is recorded at fair value and is determined based
on unobservable inputs (Level 3)(SeeNote 3). As of March 31 2019, the fair values of our derivative instruments were carried at fair value (See Note 17). As
of March 31 2019, the fair values of our Financial liability were carried at fair value (See Note 18)
Cash and restricted cash
Financial assets available for sale
Notes payable
Financial liability
Warrants liability
Total
Revenue recognition
Active Market
for Identical
Assets
(Level 1)
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
$
24,745,202
-
-
-
-
25,951,673
-
465,248
-
180,928
-
81,935
-
Total
Carrying
Value
24,745,202
180,928
25,951,673
81,935
465,248
$
24,745,202
26,416,921
262,863
51,424,986
Revenue from sales of prescription medicine at 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 drugstores is recognized at the point of sale, which is when a customer pays for and receives the merchandise.
Usually the majority of our merchandise, such as prescription and OTC drugs, are not allowed to be returned after the customers leave the counter. Return of
other products, such as sundry products, are minimal. Sales of drugs reimbursed by the local government medical insurance agency and receivables from the
agency are recognized when a customer pays for the drugs at a store. Based on historical experience, a reserve for potential loss from denial of reimbursement
on certain unqualified drugs is made to the receivables from the government agency. Retail sales price adjustments after sales are rare.
Revenue from medical services is recognized after the service has been rendered to a customer.
F-11
Revenue from online pharmacy sales is recognized when merchandise is shipped to customers. While most deliveries take one day, certain deliveries may take
longer depending on a customer’s location. Any loss caused in a shipment will be reimbursed by the Company’s courier company. Our sales policy allows for
the return of certain merchandises without reason within seven days after customer’s receipt of the applicable merchandise. A proper sales reserve is made to
account for the potential loss from returns from customers. Historically, sales returns seven days after merchandise receipts have been minimal.
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) control of the merchandise is transferred
to customers, (3) the sales price is fixed or determinable; and (4) collectability is probable. Historically, sales returns have been minimal. As we usually offer
low prices as an incentive for wholesale customers to buy from us, we do no give price concession to our customers later on ,
The Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to the sales of merchandise. VAT collected
from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is paid to the relevant PRC
tax authorities.
Certain contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has
received consideration, for example, membership points. The consideration received remains a contract liability until goods or services have been provided to
the retail customer. The estimated amount based on accrued membership points was deducted from sales revenue.
Restricted cash
The Company’s restricted cash consists of cash and long-term deposits in a bank as security for its notes payable. The Company has notes payable outstanding
with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in
nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset.
Accounts receivable
Accounts receivable represents the following: (1) amounts due from banks relating to retail sales that are paid or settled by the customers’ debit or credit cards,
(2) amounts due from government social security bureaus and commercial health insurance programs relating to retail sales of drugs, prescription medicine, and
medical services that are paid or settled by the customers’ medical insurance cards, (3) amounts due from non-bank third party payment instruments such as
Alipay and certain e-commerce platforms and (4) amounts due from non-retail customers for sales of merchandise.
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary. In the
Company’s retail business, accounts receivable mainly consist of reimbursements due from the government insurance bureaus and commercial health insurance
programs and are usually collected within two or three months. The Company directly writes off delinquent account balances, which it determines to be
uncollectible after confirming with the appropriate bureau or program each month. Additionally, the Company also makes estimated reserves on related
outstanding accounts receivable based on historical trends.
In the Company’s online pharmacy business, accounts receivable primarily consist of amounts due from non-bank third party payment instruments such as
Alipay and certain e-commerce platforms. To purchase pharmaceutical products from an e-commerce platforms such as Tmall, customers are required to
submit payment to certain non-bank third party payment instruments, such as Alipay, which, in turn, reimburse the Company within seven days to a month.
Except for customer returns of sold products, the receivables from these payments instruments are rarely uncollectible.
In its wholesale business, the Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances. Under the aging
method, bad debt percentages are determined by management, based on historical experience and the current economic climate, are applied to customers’
balances categorized by the number of months the underlying invoices have remained outstanding. At each reporting period, the allowance balance is adjusted
to reflect the amount computed as a result of the aging method. When facts subsequently become available to indicate that the allowance provided requires an
adjustment, a corresponding adjustment is made to the allowance account as a change in estimate.
Advances to suppliers
Advances to suppliers consist of prepayments to our vendors, such as pharmaceutical manufacturers and other distributors. Since the acquisition of Jiuxin
Medicine, we have transferred almost all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou Pharmacy only directly purchases certain non-
medical products, such as certain nutritional supplements. As a result, almost all advances to suppliers are made by Jiuxin Medicine.
Advances to suppliers for our drug wholesale business consist of prepayments to our vendors, such as pharmaceutical manufacturers and other
distributors. We typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery from, and
payments to, our vendors while maintaining a provision for estimated credit losses based upon historical experience and any specific supplier issues, such as
discontinuing of inventory supply, that have been identified. If we have difficulty receiving products from a vendor, we take the following steps: cease
purchasing products from such vendor, ask for return of our prepayment promptly, and if necessary, take legal action. If all of these steps are unsuccessful,
management then determines whether the prepayments should be reserved or written off.
F-12
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the first in first out (FIFO) method. Market value is the lower of
replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. Herbs
that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, labor costs that are spent in growing herbs on
the leased farmland, and indirect costs such as amortization of farmland development cost. All costs are accumulated until the time of harvest and then
allocated to harvested herbs costs when the herbs are sold. The Company periodically reviews its inventory and records write-downs to inventories for
shrinkage losses and damaged merchandise that are identified. The Company provides a reserve for estimated inventory obsolescence or excess quantities on
hand equal to the difference, if any, between the cost of the inventory and its estimated realizable value.
Farmland assets
Herbs that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, and labor costs that are spent in growing
herbs on the leased farmland, and indirect costs such as amortization of farmland development costs. Since April 2014, amortization of farmland development
costs has been expensed instead of allocated into inventory due to unpredictable future market value of planted gingko trees.
All related costs described in the above are accumulated until the time of harvest and then allocated to harvested herbs when they are sold.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements are amortized over the shorter of
lease term or remaining lease period of the underlying assets. Following are the estimated useful lives of the Company’s property and equipment:
Leasehold improvements
Motor vehicles
Office equipment & furniture
Buildings
Estimated
Useful Life
3-10 years
3-5 years
3-5 years
35 years
Maintenance, repairs and minor renewals are charged to expenses as incurred. Major additions and betterment to property and equipment are capitalized.
Intangible assets
Intangible assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost of a group of assets acquired in
a transaction is allocated to the individual assets based on their relative fair values.
The estimated useful lives of the Company’s intangible assets are as follows:
Land use rights
Software
Estimated
Useful Life
50 years
3 years
The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired.
Impairment of long lived assets
The Company evaluates 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 assets’ 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. There was $1,337,529 leasehold improvements impaired in the year ended March 31, 2019. There
were $825,259 farmland assets and $1,196,197 prepayment of lease use rights, impaired in the year ended March 31, 2019(See Notes 9 and 11).
Notes payable
During the normal course of business, the Company regularly issues bank acceptance bills as a payment method to settle outstanding accounts payables with
various material suppliers. The Company records such bank acceptance bills as notes payable. Such notes payable are generally short term in nature due to
their short maturity period of six to nine months.
F-13
Income taxes
The Company follows FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The accounting standards clarify the accounting and disclosure requirements for uncertain tax positions and prescribe a recognition threshold and measurement
attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also provide guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. No significant penalties, uncertain tax provisions or
interest relating to income taxes were incurred during the periods ended March 31, 2019 and 2018.
Value added tax
Sales revenue represents the invoiced value of goods, net of VAT. All of the Company’s products are sold in the PRC and are subject to a VAT on the gross
sales price. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be offset by VAT paid by the Company on raw materials
and other materials included in the cost of producing or acquiring its finished products. The Company recorded a VAT payable net of payments in the
accompanying financial statements.
Stock based compensation
The Company follows the provisions of FASB ASC 718, “Compensation — Stock Compensation,” which establishes accounting standards for non-employee
and employee stock-based awards. Under the provisions of FASB ASC 718, the fair value of stock issued is used to measure the fair value of services
received as the Company believes such approach is a more reliable method of measuring the fair value of the services. For non-employee stock-based awards,
fair value is measured based on the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been
reached or the counterparty’s performance is complete. The fair value of the equity instrument is calculated and then recognized as compensation expense
over the requisite performance period. For employee stock-based awards, share-based compensation cost is measured at the grant date based on the fair value
of the award and is recognized as expense with graded vesting on a straight–line basis over the requisite service period for the entire award.
Advertising and promotion costs
Advertising and promotion costs are expensed as incurred and amounted to $1,023,461 and $641,328 for the years ended March 31, 2019 and 2018,
respectively. Such costs consist primarily of print and promotional materials such as flyers to local communities.
Operating leases
The Company leases premises for retail drugstores, offices and wholesale warehouse under non-cancellable operating leases. Operating lease payments are
expensed over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 10 year term with a renewal option upon the expiration of the
lease; the wholesale warehouse lease has a 10-year term with a renewal option upon the expiration of the lease. The Company has historically been able to
renew a majority of its drugstores leases. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the
end of the lease. In addition, land leased from the government is amortized on a straight-line basis over a 30-year term.
Foreign currency translation
The Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their
books and records in their functional currency the Renminbi (“RMB”), the currency of the PRC.
F-14
In general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting
period. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding
balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the
subsidiaries and VIEs are recorded as accumulated other comprehensive income.
The balance sheet amounts, with the exception of equity, at March 31, 2019 and 2018 were translated at 1 RMB to 0.1490 USD and at 1 RMB to 0.1592 USD,
respectively. The average translation rates applied to income and cash flow statement amounts for years ended March 31, 2019 and 2018 were at 1 RMB to
0.1491 USD and at 1 RMB to 0.1510 USD, respectively.
Concentrations and credit risk
Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company has cash balances
at financial institutions located in Hong Kong and PRC. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit
Protection Board’s insured limits. Since March 31, 2015, balances at financial institutions and state-owned banks within the PRC are covered by insurance up
to RMB 500,000 (USD 79,600) per bank. As of March 31, 2019 and March 31, 2018, the Company had deposits totaling $24,730,736 and $31,433,969 that
were covered by such limited insurance, respectively. Any balance over RMB 500,000 (USD 79,600) per bank in PRC will not be covered. To date, the
Company has not experienced any losses in such accounts.
For the fiscal year ended March 31, 2019, two vendors collectively accounted for 40.3% of the Company’s total purchases and two suppliers accounted for
more than 10% of total advances to suppliers. For the fiscal year ended March 31, 2018, one vendor accounted for 19% of the Company’s total purchases and
another vendor accounted for more than 10% of total advances to suppliers.
For the fiscal year ended March 31, 2019, no customer accounted for more than 10% of the Company’s total sales and more than 10% of total accounts
receivable. For the fiscal year ended March 31, 2018, no customer accounted for more than 10% of the Company’s total sales or more than 10% of total
accounts receivable.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees will be required to recognize a right-of-use asset and a lease liability for
virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of future lease
payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, a dual model was
retained, requiring leases to be classified as either operating or finance leases. Operating leases will result in straight-line expense (similar to current operating
leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Lessor accounting is similar to the current model, but
updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue
recognition standard. The Company adopted this new accounting guidance on January 1, 2019 on a modified retrospective basis. The adoption of this new
guidance resulted in an increase in both assets and liabilities of approximately $15 million as of April 1, 2019. The adoption of this new guidance is not expected
to have a material impact on the Company’s results of operations or cash flows.
F-15
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,”
providing financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the
amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may
adopt the amendments in this update earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We
are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments,”
addressing eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this update are effective for
public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal
year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update
should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of
the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The impact of adoption on its Condensed
Consolidated Financial Statements for any period presented is not material.
In July 2017, the FASB issued Accounting Standards update (“ASU”) No. 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity
(Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features.
Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending
content in the FASB Accounting Standards Codification®. We are currently evaluating the impact of the adoption of ASU 2017-11 on our consolidated
financial statements.
In January 2017, the FASB issued Accounting Standards update (“ASU”) No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record
the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to
the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities
and Exchange Commission filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-4
has no impact on our consolidated financial statements.
Adoption of New Revenue Recognition Standard
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2014-09, Revenue from Contracts with
Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-
08,“Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal versus-agent implementation guidance and in
April 2016 the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which amends the guidance in those areas in the new
revenue recognition standard. On April 1, 2018, we adopted the guidance in ASC 606 and all the related amendments and applied the new revenue standard to
all contracts using the modified retrospective method. Based on the new standard our revenue recognition policies related to membership rewards programs
will change. But the impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings.
We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis.
F-16
The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:
Pharmacy retail sales
The physical pharmacies sell prescription drugs, OTC drugs, traditional Chinese medicine, nutritional supplements, medical devices and sundry products.
Revenue from sales of prescription medicine at 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 drugstores is recognized at the point of sale, which is when a customer pays for and receives the merchandise.
Usually the majority of our merchandise, such as prescription and OTC drugs, are not allowed to be returned after the customers leave the counter. Return of
other products, such as sundry products, are minimal. Sales of drugs reimbursed by the local government medical insurance agency and receivables from the
agency are recognized when a customer pays for the drugs at a store. Based on historical experience, a reserve for potential loss from denial of reimbursement
on certain unqualified drugs is made to the receivables from the government agency. Revenue from medical services is recognized after the service has been
rendered to a customer. As revenue from medical services are minimal compared to pharmacy retail sales, it is included as part of the pharmacy retail sales.
Online pharmacy sales
The online pharmacy sells various health products except for prescription drugs. Revenue from online pharmacy sales is recognized when merchandise is
shipped to customers. While most deliveries take one day, certain deliveries may take longer depending on a customer’s location. Any loss caused in a
shipment will be reimbursed by the Company’s courier company. Our sales policy allows for the return of certain merchandises without reason within seven
days after customer’s receipt of the applicable merchandise. Historically, sales returns seven days after merchandise receipts have been minimal.
Wholesale
Jiuxin Medicine purchases medicine in quantity and distributes products primarily to local pharmacies and medical products dealers. 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) control of the merchandise is transferred to customers; (3) the sales
price is fixed or determinable; and (4) collectability is probable. Historically, sales returns have been minimal.
The Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to the sales of merchandise. VAT collected
from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is paid to the relevant PRC
tax authorities.
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source in each segment for the year ended March 31, 2019:
For the year ended March 31
Retail drugstores
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total retail revenue
Online pharmacy
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total online revenue
Drug wholesale
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total wholesale revenue
Total revenue
2019
2018
$
$
$
$
$
$
$
23,516,046 $
31,401,328
6,354,108
6,529,790
941,491
3,591,646
72,334,409 $
- $
3,127,976
737,315
74,262
2,736,070
2,108,836
8,784,459 $
16,745,862 $
8,964,587
290,534
271,280
24,846
135,035
26,432,144 $
107,551,012 $
20,553,179
28,368,059
4,179,139
1,660,301
6,254,286
962,619
61,977,583
-
5,193,051
29,717
3,932,607
1,880,707
1,096,849
12,132,931
12,314,829
9,381,932
182,903
73,645
48,852
32
22,002,193
96,112,706
F-17
Contract Balances
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received
consideration, for example membership points. The consideration received remains a contract liability until goods or services have been provided to the retail
customer.
The following table provides information about receivables and contract liabilities from contracts with customers:
Trade receivable(included in accounts receivable, net)
Contract liabilities (included in accrued expenses)
Impact of New Revenue Recognition Standard on Financial Statement Line Items
March 31,
2018
8,692,514 $
1,689,099
March 31,
2018
8,322,393
4,461,136
$
The Company adopted ASU 2014-09 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts was
recorded as an adjustment to retained earnings as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue
guidance, the following adjustments were made to accounts on the condensed statement of operation for the year ended March 31, 2019:
In thousands
Condensed Consolidated Statement of Operations:
Net revenues
Cost of revenues
Gross profit
SELLING EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
Operating profit
Income (loss) before income tax provision
Income tax provision
Income (loss) from continuing operations
Net income (loss)
Impact of Change in Accounting Policy
As Reported
Balances
For the
The year
Ended
March 31,
2019
Balance
without
Adoption of
Topic 606
Adjustments
107,551
82,443
25,108
24,265
1,719
(876)
(1,183)
135
(1,318)
(1,318)
(302)
-
(302)
302
-
-
-
-
-
-
107,249
82,443
24,806
24,567
1,719
(1,480)
(1,787)
135
(1,922)
(1,922)
The adoption of ASU 2014-09 has no effect on consolidated balance sheet and statement of cash flow.
Adoption of Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends Accounting Standard Codification (“ASC”) Topic 230. This ASU
requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When
cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires
a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their
restricted cash and restricted cash equivalent balances. The guidance is required to be applied retrospectively. The Company adopted this new accounting
guidance. The following represents a reconciliation of cash and cash equivalents in the condensed consolidated balance sheet to total cash, cash equivalents
and restricted cash in the condensed consolidated statement of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash in the statement of cash flows
March 31,
March 31,
2019
9,322,463
15,422,739
24,745,202
2018
15,132,640
16,319,551
31,452,191
Restricted cash in the condensed consolidated balance sheets primarily represents deposits required by a bank as security for its notes payable. The Company
has notes payable outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. All restricted cash is
invested in time deposits and money markets, which are classified within Level 1 of the fair value hierarchy.
F-18
Restricted cash activity was previously reported in “Change in restricted cash” within financing activities cash flows on the Company’s condensed consolidated
statement of cash flows. The following is a reconciliation of the effect on the relevant line items on the statement of cash flows for the year ended March 31,
2018 as a result of adopting this new accounting guidance:
Year Ended March 31, 2018
Change in restricted cash
Net cash provided by financing activities
Effects of exchange rate on cash
Net decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash at the beginning of the period
Cash, cash equivalents, and restricted cash at the end of the period
NOTE 3 – FINANCIAL ASSETS AVAILABLE FOR SALE
As
Previously
Reported
Adjustments
As
Revised
(5,664,224)
(770,936)
2,586,720
(3,231,784)
18,364,424
15,132,640
5,664,224
5,664,224
1,223,941
6,888,165
9,431,386
16,319,551
-
4,893,288
3,810,661
3,656,381
27,795,810
31,452,191
As of March 31, 2019 and March 31, 2018, financial assets available for sale amounted to $180,928 (RMB 1,214,500) and $175,140 (RMB 1,100,000),
respectively. In the year ended March 31, 2018, the Company invested a total of $159,915 as a limited partner (LP) in a private equity fund (PE fund), which is
intended to invest in retail pharmaceutical business. However, as the PE fund has not been able to use its proceeds, it agreed to refund $85,118 (RMB585,000)
as of December 31, 2018 Additionally, the Company has signed an investment agreement with Inter Mongolia Songlu Pharmaceutical Co.(“Songlu
Pharmaceutical”) and invested a total of $87,225 (RMB600,000), which accounts for 0.5% shares of Songlu Pharmaceutical. The Company has also invested a
total of $14,538 (RMB100,000) in a mutual fund, which can be liquidated by giving notice.
NOTE 4 – TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consisted of the following:
Accounts receivable
Less: allowance for doubtful accounts
Trade accounts receivable, net
March 31,
2019
11,939,364 $
(3,246,850)
8,692,514 $
March 31,
2018
12,883,707
(4,561,314)
8,322,393
$
$
For the years ended March 31, 2019 and 2018, $146,593 and $203,095 in accounts receivable were directly written off, respectively. As of March 31, 2019 and
2018, no trade accounts receivables were pledged as collateral for borrowings from financial institutions.
Note 5 – OTHER CURRENT ASSETS
Other current assets consisted of the following:
Prepaid rental expenses (1)
Prepaid and other current assets
Total
(1) Represents store and office rental expenses that were usually prepaid and amortized over the prepayment period.
F-19
March 31,
2019
1,979,852 $
83,523
2,063,375 $
March 31,
2018
1,984,856
131,381
2,116,237
$
$
Note 6 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Building*
Leasehold improvements
Farmland development cost
Office equipment and furniture
Motor vehicles
Total
Less: Accumulated depreciation
Impairment**
Property and equipment, net
March 31,
2019
6,436,297 $
8,944,025
1,781,627
5,470,084
551,927
23,183,960
(12,111,409)
(2,345,193)
8,727,358 $
March 31,
2018
1,707,145
7,606,496
1,904,151
5,581,554
456,442
17,255,788
(11,905,893)
(2,506,255)
2,843,640
$
$
*
The increase in property and equipment from March 31, 2018 to December 31, 2018 is primarily due to the purchase of Yueming shop, a new building
which cost $4,842,670 (RMB32,482,394). The new shop is located downtown south Hangzhou and adjacent to a super shopping mall. The Company plans
to create a new flagship store.
** The variance of impairment from March 31, 2019 to March 31, 2018 is solely caused by exchange rate variance.
Total depreciation expense for property and equipment was $1,221,520 and $1,268,282 for the year ended March 31, 2019 and 2018, respectively.
Note 7 – ADVANCES TO SUPPLIERS
Advances to suppliers consist of deposits, with or advances to, outside vendors for future inventory purchases. Most of the Company’s suppliers require a
certain amount of money to be deposited with them as a guarantee that the Company will receive its purchase on a timely basis. This amount is refundable and
bears no interest. As of March 31, 2019 and March 31, 2018, advance to suppliers consist of the following:
Advance to suppliers
Less: allowance for doubtful accounts
Advance to suppliers, net
March 31,
2019
2,477,226* $
(526,974)*
$
1,950,252
March 31,
2018
6,505,545*
(3,058,092)*
3,447,452
$
$
*
In fiscal 2019, in order to use our cash more efficiently, Jiuxin Medicine accelerated the collection of advance to suppliers. Specifically, we focused on the
collection of aged accounts of advances to suppliers. As we have collected these amounts, our allowance on doubtful accounts decreased.
Note 8 – INVENTORY
Inventory consisted of finished goods, valued at $13,955,202 and $13,429,568 as of March 31, 2019 and March 31, 2018, respectively. The Company constantly
monitors its potential obsolete products and is allowed to return products close to their expiration date to its suppliers. Any loss on damaged items is immaterial
and will be recognized immediately. As a result, no reserves were made for inventory as of March 31, 2019 and March 31, 2018.
Note 9 – FARMLAND ASSETS
Farmland assets consist of ginkgo trees planted in 2012 and expected to be harvested and sold in several years. As of March 31, 2019 and March 31,
2018,farmland assets are valued as follows:
Farmland assets
Less: Impairment*
Farmland assets, net
March 31,
March 31,
2019
2,341,537 $
(1,516,278)
825,259 $
2018
2,416,839
(1,620,554)
796,286
$
$
* As of March 31, 2018, the book value of the Ginkgo trees planted in Qianhong Agriculture’s farmland, including their cultivation cost and land lease
amortization expense, is approximately $2,416,839. Based on an independent appraisal report, the value of the Ginkgo trees is approximately $796,286. As
a result, the Company recorded an agricultural inventory impairment of $1,620,554. There are no leasehold impairment expense in fiscal 2019.
F-20
Note 10 – LONG TERM DEPOSITS, LANDLORDS
As of March 31, 2019 and March 31, 2018, long term deposits amounted to $2,157,275 and $2,501,968, respectively. Long term deposits are sums deposited
with, or advanced to, landlords for the purpose of securing retail store leases that the Company does not anticipate applying or being returned within the next
twelve months. Most of the Company’s landlords require a minimum payment of nine months’ rent, paid upfront, plus additional deposits.
Note 11 – OTHER NONCURRENT ASSETS
Other noncurrent assets consisted of the following:
Forest land use rights*
Others
Total
March 31,
2019
1,103,235 $
92,962
1,196,197 $
March 31,
2018
1,235,253
18,099
1,253,352
$
$
*
The prepayment for lease of forest land use rights is made to a local government in connection with an operating land lease agreement. The land is
currently used to cultivate Ginkgo trees. The forest rights certificate from the local village extends the life of the lease to January 31, 2060.
The amortization of the prepayment for the lease of land use right was approximately $28,071 and $28,377 for the years ended March 31, 2019 and 2018,
respectively.
The Company’s amortizations of the prepayment for lease of land use right for the next five years and thereafter are as follows:
Years ending March 31,
2020
2021
2022
2023
2024
Thereafter
Note 12 – INTANGIBLE ASSETS
Net intangible assets consisted of the following at:
License (1)
SAP software
Land use rights (2)
Total intangible assets
Less: accumulated amortization
Intangible assets, net
$
Amount
28,071
28,071
28,071
28,071
28,071
929,519
March 31,
2019
1,909,700 $
676,336
1,452,718
4,038,754
(441,431)
3,597,323 $
March 31,
2018
1,967,934
764,104
1,552,622
4,284,660
(228,246)
4,056,414
$
$
Amortization expense of intangibles amounted to $228,046 and $115,528 for the years ended March 31, 2019 and 2018, respectively.
(1) This represents the fair value of the licenses of insurance applicable drugstores acquired from Sanhao Pharmacy, a drugstore chain Jiuzhou Pharmacy
acquired in 2014. The licenses allow patients to pay by using insurance cards at stores. The stores are reimbursed from the Human Resource and Social
Security Department of Hangzhou City. In September 2017, the Company acquired several new stores for the purpose of the Municipal Social Medical
Reimbursement Qualification Certificates. The owners of these acquired drugstores agreed to cease their stores’ business and liquidate all of the stores’
accounts before Jiuzhou Pharmacy acquired them. As a result, Jiuzhou Pharmacy has not obtained any assets or liabilities from the stores, but was able to
transfer the certificates to our new stores opened at the same time.
In July 2013, the Company purchased the land use rights of a plot of land in Lin’an, Hangzhou, intended for the establishment of an herb processing plant
in the future. However, as our farming business in Lin’an has not grown, the Company does not expect completion of the plant in the near future.
(2)
F-21
Note 13 – NOTES PAYABLE
The Company has credit facilities with Hangzhou United Bank (“HUB”), Zhejiang Tailong Commercial Bank (“ZTCB”), Bank of Hangzhou (“BOH”), and
China Merchant Bank (“CMB”) that provided working capital in the form of the following bank acceptance notes at March 31, 2019 and March 31, 2018:
Beneficiary
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuxin Medicine(2)
Jiuxin Medicine(2)
Jiuxin Medicine(2)
Jiuxin Medicine(2)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuzhou Pharmacy(1)
Jiuxin Medicine(1)
Jiuxin Medicine(1)
Total
Endorser
HUB
HUB
HUB
HUB
HUB
HUB
HUB
HUB
HUB
HUB
CMB
CMB
CMB
CMB
HUB
HUB
HUB
HUB
HUB
HUB
HUB
HUB
Origination
date
10/10/17
11/24/17
12/05/17
12/29/17
12/29/17
02/05/18
03/05/18
11/06/17
12/05/17
12/29/17
02/02/18
02/07/18
03/07/18
03/15/18
11/06/18
12/12/18
12/20/18
12/29/18
02/14/18
03/06/18
10/11/18
11/06/18
Maturity
date
04/10/18
05/24/18
06/05/18
06/29/18
06/29/18
08/05/18
09/05/18
05/06/18
06/05/18
06/29/18
08/02/18
08/07/18
09/07/18
09/15/18
05/06/19
06/12/19
06/20/19
06/29/19
08/14/19
09/06/19
04/11/19
05/06/19
March 31,
March 31,
2019
-
-
-
-
-
-
-
-
-
-
-
-
500,857
2,236,559
1,072,606
5,504,943
2,587,331
6,600,727
4,461,531
2,987,119
25,951,673 $
$
2018
2,522,769
21,972
377,347
1,194,135
1,443,554
2,618,500
3,072,637
3,553,014
1,937,683
1,687,711
71,648
95,531
538,857
44,842
-
-
-
-
-
-
-
-
19,180,200
(1) As of March 31, 2018, the Company had $18,429,322 (RMB 115,748,985) of notes payable from HUB. The Company is required to hold restricted cash in
the amount of $13,565,300 (RMB 85,199,540) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $7,269,509
three-year deposit (RMB 45,657,584) deposited into HUB as a collateral for current and future notes payable from HUB. As of March 31, 2019, the
Company had $25,951,673 (RMB 174,203,868) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $15,114,740
(RMB 101,459,590) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $10,446,381 three-year deposit (RMB
70,122,647) deposited into HUB as a collateral for current and future notes payable from HUB.
(2) As of March 31, 2018, the Company had $750,878 (RMB 4,716,037) of notes payable from CMB, with restricted cash in the amount of $750,878 (RMB
4,716,037) held at the bank.
As of March 31, 2019, the Company had a credit line of approximately $13.26 million in the aggregate from HUB. By putting up a three-year deposit of $10.45
million and the restricted cash of $4.67 million deposited in the banks, the total credit line was $28.38 million. As of March 31, 2019, the Company had
approximately $25.95 million of bank notes payable and approximately $2.43 million bank credit line was still available for further borrowing. The bank notes
are secured by three shops of Jiuzhou Pharmacy and guaranteed by the Company’s major shareholders.
F-22
Note 14 – TAXES
Income tax
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and
tax credit carry forwards. Deferred tax assets and liabilities are calculated using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are provided against deferred income tax assets for amounts which are not considered “more
likely than not” to be realized.
The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Entity
Jo-Jo Drugstores
Renovation
All other entities
Income Tax Jurisdiction
United States
Hong Kong, PRC
Mainland, PRC
For the years ended March 31, 2019 and 2018, the components of income tax expense consist of the following:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Provision for income taxes
A reconciliation of the income tax provision at the federal statutory rate and the effective rate is as follows:
U.S. Statutory rates
Foreign income not recognized in the U.S.
China income taxes
Change in valuation allowance (1)
Non-deductible expenses-permanent difference (2)
Effective tax rate
For the year ended
March 31,
2019
2018
-
-
134,763
134,763
-
-
-
-
134,763
-
-
76,256
76,256
-
-
-
-
76,256
For the year
Ended March 31,
2019
2018
21.0%
(21.0)
25.0
(25.0)
(11.4)
(11.4)%
21.0%
(21.0)
25.0
(25.0)
(0.4)
(0.4)%
(1) Represents a non-taxable expense reversal due to overall decrease in allowance for accounts receivable and advances to suppliers.
(2) The (11.4)% and (0.4)% rate adjustments for the years ended March 31, 2019 and 2018 represent expenses that primarily include stock option expenses
and other expenses incurred by the Company that are not deductible for PRC income tax.
F-23
The components of the Company’s net deferred tax assets are as follows:
Allowance
Long-lived assets impairment
Depreciation and Amortization
Accrued expense
Net operating loss carry forward
Foreign Tax Credit Carryover
Total deferred tax assets (liabilities):
Valuation allowance
Net deferred tax assets (liabilities)
As of
3/31/2019
As of
3/31/2018
986,665
586,298
-
1,569,683
1,164,735
195,000
4,502,381
1,214,946
395,797
345,952
245,056
654,282
195,000
3,051,033
(4,502,381)
-
(3,051,033)
-
The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion
of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including earnings history and results of recent operations,
scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Assumptions used to forecast future taxable income
often require significant judgment. More weight is given to objectively verifiable evidence. In the event we determine that we would not be able to realize all or
part of our net deferred tax assets in the future, a valuation allowance will be established against deferred tax assets in the period in which we make such
determination. The need to establish a valuation allowance against deferred tax assets may cause greater volatility in our effective tax rate.
As of March 31, 2019 and March 31, 2018, the estimated net operating loss carry forwards for U.S. income tax purposes amounted to $816,908, which may be
available to reduce future years’ taxable income. These carry forwards will expire if not utilized by 2032. In addition, the Company carries a Foreign tax credit
of $195,000. As of March 31, 2019 and March 31, 2018, the estimated net operating loss carry forwards for Hong Kong income tax purposes amounted to
$1,960,933 and $1,882,276, which may be available to reduce future years’ taxable income. As of March 31, 2018 and March 31, 2017, the estimated net
operating loss carry forwards for China income tax purposes amounted to $2,678,523 and $688,622, which may be available to reduce future years’ taxable
income. These carry forwards will expire if not utilized in the next five years.
On December 22, 2017, the U.S. federal government enacted the 2017 Tax Act. The 2017 Tax Act includes a number of changes in existing tax law impacting
businesses, including the transition tax, a one-time deemed repatriation of cumulative undistributed foreign earnings and a permanent reduction in the U.S.
federal statutory rate from 35% to 21%, effective on January 1, 2018. ASC 740 requires companies to recognize the effect of tax law changes in the period of
enactment, accordingly, the effects must be recognized on companies’ calendar year-end financial statements, even though the effective date for most
provisions is January 1, 2018. As a result, we re-measured our net U.S. deferred tax assets at the 21% future tax rate. As of December 31, 2017, for
estimating our foreign undistributed earnings according to the 2017 Tax Act, we estimated an aggregate deficit in “accumulated earnings and profits,” which is
how foreign undistributed earnings are determined for the one-time transition tax and for U.S. income tax purposes. As a result, the one-time transition tax did
not have a significant impact on the Company’s FY18 tax provision and there was no undistributed accumulated earnings and profits as of March 31, 2019.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided a measurement period of up to one year from the
enactment date of the 2017 Tax Act for us to complete the accounting for the 2017 Tax Act and its related impacts. The income tax effects of the 2017 Tax
Act for which the accounting is incomplete include: the impact of the transition tax, the revaluation of deferred tax assets and liabilities to reflect the 21%
corporate tax rate, and the impact to the aforementioned items on state income taxes. We have made reasonable provisional estimates for each of these items,
however, these estimates may be affected by other analyses related to the 2017 Tax Act, including but not limited to, any deferred adjustments related to the
filing of our fiscal 2019 federal and state income tax returns and further guidance yet to be issued.
The Company recorded net unrecognized tax benefits of $0.0 million as of January 31, 2019. It is our policy to classify accrued interest and penalties related to
unrecognized tax benefits in the provision for income taxes.
Audit periods remain open for review until the statute of limitations has passed, which in the PRC is usually 5 years as the Company’s most significant tax
jurisdiction. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s
liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part,
upon the results of operations for the given period.
F-24
Note 15 – POSTRETIREMENT BENEFITS
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees. The contribution for each
employee is based on a percentage of the employee’s current compensation as required by the local government. The Company contributed $1,423,449 and
$1,257,362 in employment benefits and pension for the years ended March 31, 2019 and 2018, respectively.
Note 16 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts payable to related parties are summarized as follows:
Due to a director and CEO (1) :
March 31,
2019
March 31,
2018
795,179
850,342
(1) Due to foreign exchange restrictions, the Company’s director and CEO, Mr. Lei Liu personally lent U.S. dollars to the Company to facilitate its payments
of expenses in the United States.
As of March 31, 2019 and March 31, 2018, notes payable totaling $0 and $3,253,630 were secured by the personal properties of certain of the Company’s
shareholders, respectively.
The Company leases a retail space from Mr. Lei Liu. The lease expires in September 2020. Rent expenses totaled $27,605 and $18,120 for the twelve months
ended March 31, 2019 and 2018, respectively. The amounts owed under the lease for the twelve months ended December 31, 2019 and 2018 were not paid to
Mr. Liu as of March 31, 2019.
On April 28, 2018, 10% of Jiuxin Medicine was sold to Hangzhou Kangzhou Biotech Co. Ltd. for a total proceeds of approximately $75,643 (RMB507,760).
Mr. Lei Liu owns 51% of Hangzhou Kangzhou Biotech Co. Ltd.
Note 17 – WARRANTS
In connection with the registered direct offering closed on July 19, 2015, the Company issued to an investor a warrant to purchase up to 600,000 shares of
common stock at an exercise price of $3.10 per share. The warrant became exercisable on January 19, 2016 and will expire on January 18, 2021. In
connection with the offering, the Company also issued a warrant to its placement agent of this offering, pursuant to which the agent may purchase up to 6% of
the aggregate number of shares of common stock sold in the offering, i.e. 72,000 shares. Such warrant has the same terms as the warrant issued to investor in
the offering.
The fair value of the warrants issued to purchase 672,000 shares as described above was estimated by using the binominal pricing model with the following
assumptions:
Stock price
Exercise price
Annual dividend yield
Expected term (years)
Risk-free interest rate
Expected volatility
Common Stock
Warrants
March 31,
2019(1)
Common Stock
Warrants
March 31,
2018
$
$
2.62
3.10
$
$
-%
1.80
2.27%
67.69%
1.35
3.10
-%
2.80
1.98%
68.73%
(1) As of March 31, 2019, the warrants had not been exercised.
Upon evaluation, the warrants meet the definition of a derivative under FASB ASC 815, as the Company cannot avoid a net cash settlement under certain
circumstances. Accordingly, the fair value of the warrants was classified as a liability of $138,796 as of March 31, 2018. For the year ended March 31, 2019,
the Company recognized a loss of $326,452 for the investor warrant and placement agent warrant, from the change in fair value of the warrant liability,
respectively. As a result, the warrant liability is carried on the consolidated balance sheets at the fair value of $465,248 for the investor warrant and placement
agent warrant, collectively, as of March 31, 2019.
F-25
Note 18 – Financial Liability
To encourage operating team, which consists of doctors and nurses, to devote their efforts to run clinics, Linjia Medical allows them to put deposits in the clinic
where doctors and nurses work, and take shares in any profit of the clinic. The principal amounts of these deposits are refundable in the event the doctors and
nurses leave the clinic. In order to properly reflect Linjia Medical’s liabilities, the Company reclassified the deposit of $81,935 (RMB550,000) as financial
liability as of March 31, 2019.
Note 19 – STOCKHOLDER’S EQUITY
Common stock
On January 23, 2017, the Company closed a private offering with one institutional investor (the “Investor”) pursuant to which the Company sold to the Investor,
and the Investor purchased from the Company, an aggregate of 4,840,000 shares of the common stock, par value $0.001 per share, of the Company, at a
purchase price of $2.20 per share, for aggregate gross proceeds to the Company of $10,648,000 (the “Private Placement”).
On April 11,2019, the Company closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds of
$10,000,020 from an effective shelf registration statement on Form S-3.
Stock-based compensation
The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair
values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards
are attributed to expenses using the straight-line method over the vesting period. The Company determines the value of each option award that contains a
market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as
permitted under FASB ASC 718 “Compensation - Stock Compensation.” The assumptions used in calculating the fair value of share-based payment awards
represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based
compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option
modifications, estimates of forfeitures, and the related income tax impact.
On March 30, 2018, the Company granted a total of 3,947,100 shares of restricted common stock to its key employees in its retail drugstores and online
pharmacy under the Company’s 2010 Equity Incentive Plan, as amended (the “Plan”). The stock awards vested on the grant date. On June 28, 2018, the
compensation committee of the Company canceled 225,000 shares granted to the CEO in order to conform aggregate issuances to the 675,000 share limitation
set forth in the Plan. The Tax Cuts and Jobs Act of 2017 removed the 162(m) qualified performance based compensation exemption to the $1 million cap on
deductions for compensation to covered executives. Section 1.3.2 was in the Plan to permit grants under the Plan to fit within that exemption. As that
exemption no longer applies for grants made in 2018 or thereafter, the Plan has been amended to remove the provisions intended to comply with that
exemption, including the one in Section 1.3.2 of the Plan. All $5,328,585 of such expense has been recorded as a service compensation expense in the year
ended March 31, 2018.
Stock option
On November 18, 2014, the Company granted a total of 967,000 shares of stock options under the Plan to a group of a total of 46 grantees including directors,
officers and employees. The exercise price of the stock option is $2.50. The option vests on November 18, 2017, provided that the grantees are still employed
by the Company on such a date. The options will be exercisable for five years from the vesting date, or November 18, 2017 until November 17, 2022. For the
years ended March 31, 2019 and 2018, $0 and $313,651 were recorded as compensation expenses. As of March 31, 2019, all compensation costs related to
stock option compensation arrangements granted have been recognized.
F-26
Statutory reserves
Statutory reserves represent restricted retained earnings. Based on their legal formation, the Company is required to set aside 10% of its net income as
reported in their statutory accounts on an annual basis to the Statutory Surplus Reserve Fund (the “Reserve Fund”). Once the total amount set aside in the
Reserve Fund reaches 50% of the entity’s registered capital, further appropriations become discretionary. The Reserve Fund can be used to increase the
entity’s registered capital upon approval by relevant government authorities or eliminate its future losses under PRC GAAP upon a resolution by its board of
directors. The Reserve Fund is not distributable to shareholders, as cash dividends or otherwise, except in the event of liquidation.
Appropriations to the Reserve Fund are accounted for as a transfer from unrestricted earnings to statutory reserves. During the years ended March 31, 2019
and 2018, the Company did not make appropriations to statutory reserves.
There are no legal requirements in the PRC to fund the Reserve Fund by transfer of cash to any restricted accounts, and the Company does not do so.
Note 20 – LOSS PER SHARE
The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of
basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share
excludes dilution, but includes vested restricted stocks and is computed by dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock.
The following is a reconciliation of the basic and diluted earnings per share computation:
Net income attributable to controlling interest
Weighted average shares used in basic computation
Diluted effect of stock options and warrants
Weighted average shares used in diluted computation
Income per share – Basic:
Net income before noncontrolling interest
Add: Net loss attributable to noncontrolling interest
Net income attributable to controlling interest
Loss per share – Diluted:
Net income before noncontrolling interest
Add: Net income attributable to noncontrolling interest
Net income attributable to controlling interest
The year ended
March 31,
2019
$
(926,278) $
28,936,778
28,936,778
2018
(17,059,933)
25,241,748
-
25,241,748
$
$
$
$
$
$
(0.03) $
- $
(0.03) $
(0.03) $
- $
(0.03) $
(0.68)
-
(0.68)
(0.68)
-
(0.68)
For the year ended March 31, 2019, 967,000 shares underlying employee stock options and 600,000 shares underlying outstanding purchase options to an
investor, and 72,000 shares underlying outstanding purchase option to an investment placement agent were excluded from the calculation of diluted loss per
share as the options were anti-dilutive.
Note 21 – SEGMENTS
The Company operates within four main reportable segments: retail drugstores, online pharmacy, drug wholesale and herb farming. The retail drugstores
segment sells prescription and over-the-counter (“OTC”) medicines, TCM, dietary supplements, medical devices, and sundry items to retail customers. The
online pharmacy sells OTC drugs, dietary supplements, medical devices and sundry items to customers through several third-party platforms such as Alibaba’s
Tmall, JD.com and Amazon.com, and the Company’s own platform all over China. The drug wholesale segment includes supplying the Company’s own
retail drugstores with prescription and OTC medicines, TCM, dietary supplement, medical devices and sundry items (which sales have been eliminated as
intercompany transactions), and also selling them to other drug vendors and hospitals. The Company’s herb farming segment cultivates selected herbs for sales
to other drug vendors. The Company is also involved in online sales and clinic services that do not meet the quantitative thresholds for reportable segments and
are included in the retail drugstores segment. The segments’ accounting policies are the same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or loss from operations before interest and income taxes not including nonrecurring gains and
losses.
The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately
because they require different operations and markets to distinct classes of customers.
F-27
The following table presents summarized information by segment of the continuing operations for the year ended March 31, 2019:
Revenue
Cost of goods
Gross profit
Selling expenses
General and administrative expenses
Impairment of long-lived assets
Loss from operations
Depreciation and amortization
Total capital expenditures
Retail
drugstores
Online
Pharmacy
Drug wholesale
Herb
farming
$
$
$
$
$
72,334,409 $
51,246,983
21,087,426 $
18,930,118
4,072,500
-
(1,915,192) $
1,476,903 $
7,267,847 $
8,784,459 $
7,748,519
1,035,940 $
1,735,966
347,516
-
(1,047,542) $
- $
- $
26,432,144 $
23,447,467
2,984,677 $
3,599,100
(2,701,027)
2,086,604 $
7,644 $
1,434 $
- $
-
- $
-
-
$
- $
- $
Total
107,551,012
82,442,969
25,108,043
24,265,184
1,718,989*
(876,130)
1,484,547
7,269,281
*
includes additional accounts receivable and advance to suppliers allowance of $(3,845,582)
The following table presents summarized information by segment of the continuing operations for the year ended March 31, 2018:
Revenue
Cost of goods
Gross profit
Selling expenses
General and administrative expenses
Impairment of long-lived assets
Loss from operations
Depreciation and amortization
Total capital expenditures
Retail
drugstores
Online
Pharmacy
Drug wholesale
Herb
farming
$
$
$
$
$
61,977,582 $
45,918,540
16,059,042 $
13,037,239
14,730,152
-
(11,708,349) $
837,195 $
878,121 $
12,132,930 $
10,858,160
1,274,770 $
2,014,414
427,772
-
(1,167,416) $
- $
- $
22,002,194 $
19,210,837
2,791,357 $
3,687,839
2,630,278
1,583,186
(5,109,946) $
377,912 $
10,915 $
- $
-
- $
-
35,459
-
(35,459) $
- $
- $
Total
96,112,706
75,987,537
20,125,169
18,739,492
17,823,661*
1,583,186
(18,021,170)
1,215,107
889,036
*
includes additional accounts receivable and advance to suppliers allowance of $4,701,647
F-28
The Company does not have long-lived assets located outside the PRC. In accordance with the enterprise-wide disclosure requirements of FASB’s accounting
standard, the Company’s net revenue from external customers through its retail drugstores by main product category for the years ended March 31, 2019 and
2018 were as follows:
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total
The Company’s net revenue from external customers through online pharmacy by main product category is as follows:
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total
The Company’s net revenue from external customers through wholesale by main product category is as follows:
Prescription drugs
OTC drugs
Nutritional supplements
TCM
Sundry products
Medical devices
Total
F-29
For the year ended
March 31,
2019
23,516,046 $
31,401,328
6,354,108
6,529,790
941,491
3,591,646
72,334,409 $
2018
20,553,179
28,368,059
4,179,139
1,660,301
6,254,286
962,619
61,977,583
For the year ended
March 31,
2019
2018
- $
3,127,976
737,315
74,262
2,736,070
2,108,836
8,784,459 $
5,193,051
29,717
3,932,607
1,880,707
1,096,849
12,132,931
For the years ended
March 31,
2019
16,745,862 $
8,964,587
290,534
271,280
24,846
135,035
26,432,144 $
2018
12,314,829
9,381,932
182,903
73,645
48,852
32
22,002,193
$
$
$
$
$
$
Note 22 – COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company recognizes lease expenses on a straight line basis over the term of its leases in accordance with the relevant accounting standards. The
Company has entered into various tenancy agreements for its store premises and for the land leased from a local government to farm herbs.
The Company’s commitments for minimum rental payments under its leases for the next five years and thereafter are as follows:
Periods ending March 31,
2020
2021
2022
2023
2024
Thereafter
Retail
drugstores
Online
pharmacy
Drug
wholesale
Herb
farming
Total
Amount
$
4,952,693 $
4,041,356
3,236,573
2,317,018
1,735,252
2,039,618
- $
-
-
-
-
-
- $
-
-
-
-
-
- $
-
-
-
-
-
4,952,693
4,041,356
3,236,573
2,317,018
1,735,252
2,039,618
On March 31, 2018, the Company started outsourcing its logistic service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd, Jiuxin Medicine’s
warehouse lease has been canceled. Instead, Astro Boy Cloud provides both storage and logistic service. Total rent expenses amounted to $4,744,200 and
$4,160,748 for the years ended March 31, 2019 and 2018, respectively.
Note 23 – SUBSEQUENT EVENTS
On April 15, 2019, the Company closed a registered direct offering of 4,000,008 shares of common stock at $2.50 per share with gross proceeds of $10,000,020
from its effective shelf registration statement on Form S-3 pursuant to a Securities Purchase Agreement dated April 11, 2019 (the “2019 Securities Purchase
Agreement”), by and among the Company and the investors named therein. Concurrently, the Company issued unregistered warrants to the investors in a
private placement to purchase up to an aggregate of 3,000,006 shares of common stock at an exercise price of $3.00 per share (the “2019 Warrants”). The
2019 Warrants shall be initially exercisable six months following issuance and expire five and one-half years from the issuance date of the 2019 Warrants. H.C.
Wainwright & Co., LLC (the “Placement Agent”) (or its designees) shall also receive warrants to purchase such number of shares of common stock as is
equal to 6% of the aggregate number of shares of common stock sold in the offering, or 240,000 warrants, with substantially the same terms as the 2019
Warrants being issued to the investors, except that the Placement Agent’s warrants will expire on April 11, 2024 and the warrants’ exercise price shall be
$3.125.
F-30
List of Subsidiaries
Exhibit 21.1
Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”) is a Hong Kong company and is wholly-owned by the Company.
Hangzhou Jiutong Medical Technology Co., Ltd. (“Jiutong Medical”) is a Chinese company and is wholly-owned by Renovation.
Zhejiang Shouantang Pharmaceutical Technology Co., Ltd. (“Shouantang Technology”) is a Chinese company and is wholly-owned by
Renovation.
Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”) is a Chinese company and is wholly-owned by Renovation.
Hangzhou JiuxinQianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”) is a Chinese company and is wholly-owned by Jiuxin
Management.
Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”) is a Chinese company controlled by Jiuxin Management through
contractual arrangements. The following nine companies are wholly-owned by Jiuzhou Pharmacy:
Hangzhou Jiuben Pharmacy Co., Ltd (“Jiuben Pharmacy”)
Hangzhou Jiuli Pharmacy Co., Ltd (“Jiuli Pharmacy”)
Hangzhou Jiuxiang Pharmacy Co., Ltd (“Jiuxiang Pharmacy”)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Hangzhou Jiuheng Pharmacy Co., Ltd (“Jiuheng Pharmacy”)
11. Hangzhou Jiujiu Pharmacy Co., Ltd (“Jiujiu Pharmacy”)
12. Hangzhou Jiuyi Pharmacy Co., Ltd (“Jiuyi Pharmacy”)
13. Hangzhou Jiumu Pharmacy Co., Ltd (“Jiumu Pharmacy”)
14. Hangzhou Jiurui Pharmacy Co., Ltd (“Jiurui Pharmacy”)
15. Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) is (“Jiuzhou Clinic”) a Chinese partnership
controlled by Jiuxin Management through contractual arrangements.
16. Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”) is a Chinese company controlled by Jiuxin Management through
contractual arrangements.
17.
Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”) is a Chinese company and is 90% owned by Jiuzhou Pharmacy.
18. Hangzhou Jiuyi Medical Technology Co. Ltd. (“Jiuyi Technology”) is a Chinese company and is wholly owned by Renovation
19.
Lin’an Jiuzhou Grand Pharmacy Co. Ltd, (“Lin’anJiuzhou”) is a Chinese company and is wholly owned by Jiuxin Management.
20.
Zhejiang AyiGe Medical Health Management Co., Ltd. is a Chinese company and is 51% owned by Jiuzhou Pharmacy.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S¬3 (File No. 333-231070 and No. 333-230686), Form S-1 (File
No. 333-231702), and Form S¬8 (File No. 333-208212 and No. 333-217424) of China Jo-Jo Drugstores, Inc. of our report dated July 1, 2019, relating to the
consolidated financial statements which appears in this annual report on Form 10-K for the fiscal year ended March 31, 2019 filed with the Securities and
Exchange Commission.
BDO CHINA SHU LUN PAN Certified Public Accountants LLP
July 1, 2019
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lei Liu, certify that:
(1) I have reviewed this annual report on Form 10-K of China Jo-Jo Drugstores, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred the registrant’s fourth fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: July 1, 2019
/s/ Lei Liu
Lei Liu
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ming Zhao, certify that:
(1) I have reviewed this annual report on Form 10-K of China Jo-Jo Drugstores, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: July 1, 2019
/s/ Ming Zhao
Ming Zhao
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the annual report of China Jo-Jo Drugstores, Inc. (the “Company”) on Form 10-K for the year ending March 31, 2019 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), Each of the undersigned hereby certifies, in his capacity of an officer of the
Company, as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company at
the dates and for the periods indicated.
/s/ Lei Liu
Lei Liu
Chief Executive Officer
(Principal Executive Officer)
/s/ Ming Zhao
Ming Zhao
Chief Financial Officer
(Principal Financial and Accounting Officer)
July 1, 2019
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350 and is not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made
before or after the date hereof, regardless of any general incorporation language in such filing.