CHINA JO-JO DRUGSTORES, INC. The following management's discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "may," "will," "could," "expect," "anticipate," "intend," "believe," "estimate," "plan," "predict," and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of our annual report on Form 10-K for the year endedMarch 31, 2020 and filed with theSEC onJuly 10, 2020 (the "Annual Report for FY2020"). We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur
in the future. Our financial statements are prepared inU.S. Dollars and in accordance with accounting principles generally accepted inthe United States . See "Exchange Rates" below for information concerning the exchanges rates at which Renminbi ("RMB") were translated intoU.S. Dollars ("USD" or "$") at various pertinent dates and for pertinent periods. Overview We currently operate in four business segments inChina : (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"). 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 ofSeptember 30, 2020 , we had 115 pharmacies inHangzhou city and its adjacent town Lin'an under the store brand of "Jiuzhou Grand Pharmacy " and 4 independent pharmacies controlled byJiuzhou Pharmacy . During the six months endedSeptember 30, 2020 , we dissolved three pharmacies. SinceMay 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 asAlibaba's Tmall, JD.com, Amazon.com and the Company's own platform all overChina . Our sales through our own platform are primarily generated by customers who use their private commercial medical insurances packages. We operate a wholesale business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those carried by our pharmacies) primarily to trading companies throughoutChina . We also planted gingkgo trees but have not incurred sales in the three months endedSeptember 30, 2020 . Amidst the COVID-19 outbreak, we experienced a decline in the number of customer visits. To avoid face-to-face contact, customers tend to shop online. In order to keep pace with customers' change in their ways of shopping, we strengthened our O2O service team, which takes orderts online, i.e. via mobile phone app, and delivers products to local community from our stores. The spread of the disease has been effectively controlled inChina in the past few months. The number of the new infected daily has become limited. People tend to work and live as usual. As a result, we believe the negative impacts on our operations are temporary. However, the extent to which the COVID-19 impacts our operations will depend on its future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or minimize its harm, among others. 32
Critical Accounting Policies and Estimates
In preparing our audited consolidated financial statements in accordance with accounting principles generally accepted inthe 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 the Annual Report for FY2020. Revenue recognition InMay 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 afterDecember 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. OnApril 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 has changed. Membership rewards, usually membership points, are accumulated by customers based on their historical spending levels. The Company has determined that there is an additional performance obligation to those customers at the time of the initial transaction. The customers can then redeem these points against the prices of merchandises they purchase in the future. At the end of each period, unredeemed membership rewards are reflected as a contract liability. The adoption of the new revenue standard was not material and is not expected to be material 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. 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. There were no material impairment losses for definite-lived intangible assets recognized in the three and six months endedSeptember 30, 2020 and 2019. 33 Results of Operations
Comparison of the three months ended
The following table summarizes our results of operations for the three months
ended
Three months ended September 30,
2020 2019
Percentage Percentage
of total of total
Amount revenue Amount revenue
Revenue $ 30,842,545 100.0 % $ 28,353,779 100.0 %
Gross profit $ 7,012,752 22.7 % $ 6,693,364 23.6 %
Selling expenses $ 6,475,512 21.0 % $ 6,485,848 22.9 %
General and administrative expenses $ 2,061,559 6.7 % $ 1,823,935 6.4 %
Loss from operations $ (1,524,319 ) (4.9 )% $ (1,616,419 ) (5.7 )%
Other Income(expense), net $ (54,521 ) (0.2 )% $ 268,289 0.9 %
Change in fair value of derivative liability $ 32,674 0.1 % $ 6,865 0.0 %
Income tax expense $ (18,975 ) (0.1 )% $ 5,702 0.0 %
Net loss $ (1,527,191 ) (5.0 )% $ (1,346,967 ) (4.8 )%
Revenue
Due to the growth in our online pharmacy, revenue increased by $2,488,766 or
8.8% for the three months ended September 30, 2020 , as compared to the three
months ended September 30, 2019 .
Revenue by Segment
The following table breaks down the revenue of our four business segments for
the three months ended
For the three months ended September 30,
2020 2019
% of total % of total Variance % of
Amount revenue Amount revenue by amount change
Revenue from retail
drugstores $ 17,930,496 58.2 % $ 18,001,273 63.5 % $ (70,777 ) (0.4 )%
Revenue from online
sales 5,347,012 17.3 % 2,351,264 8.3 % 2,995,748 127.4 %
Revenue from
wholesale business 7,565,037 24.5 % 8,001,242 28.2 % (436,205 ) (5.5 )%
Revenue from farming
business - - % - - % - - %
Total revenue $ 30,842,545 100.0 % $ 28,353,779 100.0 % $ 2,488,766 8.8 %
34
Retail drugstores sales, which accounted for approximately 58.1% of total
revenue for the three months ended September 30, 2020 , decreased by $70,777 , or
0.4% compared to the three months ended September 30, 2019 , to $17,930,496 .
Same-store sales decreased by approximately $1,020,093 , or 5.9%, while new
stores contributed approximately $745,753 in revenue in the three months ended
September 30, 2020 .
The slight decrease in our retail drugstore sales is primarily due to our
strategical abandoning of the sales of certain low-profit margin products
reimbursed by National Healthcare Security Administration ("NHSA" hereafter) due
to its overall budget, elimination of a variety of drugs off the list of drugs
reimbursed by the local NHSA since September 1, 2020 , and the negative effect on
the overall economy from COVID-19.
In the first half of Calendar 2020, to boost our sales, we promoted sale of DTP
(Direct-to-Patient) drugs. DTP drugs are usually new medicines not sold at
hospitals with low profit margin. 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 local 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 especially in the
first half of Calendar 2020. However, sales of quite a few DTP drugs are
reimbursed by local NHSA and counted into our stores reimbursement budget. If we
continue to sell large quantity of products reimbursed by the NHSA, the agency
may refuse to pay us eventually. As a result, we chose to actively control sales
of certain low-profit margin products covered by NHSA.
In order to further balance its budget, the local NHSA announced to eliminate a
variety of medicines, including nutritional supplements, off its list of
reimbursed drugs beginning from September 1, 2020 . Certain eliminated items are
quite popular at the market. As these products are not reimbursed by their
insurance program, customers usually choose to order less on these products. As
a result, our overall sales were affected. However, as we quickly searched for
substitute products favored by our customers, we expect to recover our sales in
the future.
Although local economy has quickly recovered from COVID-19, the economy growth
has slowed down in general. Local people have become more conservative in
consumption. However, as the spread of COVID-19 has been effectively controlled,
we expect the local consumption will surge again in the future.
Our online pharmacy sales increased by approximately $2,995,748 , or 127.4% for
the three months ended September 30, 2020 , as compared to the three months ended
September 30, 2019 . The increase was primarily caused by an increase in sales of
prescription drugs via e-commerce platforms such as Tmall. Prescription drugs
used to be prohibited from sales online due to safety concern. However, because
the nation has lifted the ban order, online prescription drug sales become
popular. As a result, the sale of prescription drugs was $1,758,516 in the three
months ended September 30, 2020 as compared to none in the three month ended
September 30, 2019 . Additionally, we maintained a membership care program
targeted at chronic disease customers. We have closely interacted with our
members via WeChat by providing healthcare knowledge and reminding our customers
to refill medicine. By implementing a personalized customer care program, we
were able to promote our sales.
Wholesale revenue decreased by $436,205 or 5.5%. The sale of our wholesale
business may vary based on customer's need. Usually we 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. In the three months ended September 30,
2020 , a key salesperson was sick and slowed certain business with customers. As
a result, overall business decreased slight. On the other side, 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 three months ended September 30, 2020 and 2019, we have not generated
revenue from our farming business. We planted ginkgo and maidenhair trees during
the year ended March 31, 2013 , more than seven years ago. A ginkgo tree may have
a growth period of up to twenty-three months before it is mature enough for
harvest. Usually, the longer a ginkgo tree grows the more valuable it becomes.
Therefore, we have not yet harvested our ginkgo trees. We plan to continue
cultivating the trees in order to maximize their market value in the future. We
will continue to grow ginkgo trees in the future.
35
Gross Profit
Gross profit increased by$319,388 or 4.8% period over period primarily as a result of an increase in gross profit provided by retail pharmacy business, which increased significantly in the three months endedSeptember 30, 2020 . At the same time, gross margin decreased slightly from 23.6% to 22.7% due to lower online pharmacy profit margins. The average gross margins for each of our four business segments are as follows: For the three months endedSeptember 30, 2020 2019
Average gross margin for retail drugstores 31.3 % 30.7 % Average gross margin for online sales 11.3 % 13.6 % Average gross margin for wholesale business 10.7 % 10.6 % Average gross margin for farming business N/A
N/A
Retail gross margins increased primarily because of the control on sale of low profit margin products reimbursed by NHSA, introducing certain popular products with high profit margin, and renegotiating prices with our suppliers continuously. As described above, in order to meet the NHSA budget, we chose to actively control sales of certain low-profit margin products covered by NHSA. In order to promote our sales and profits, we specifically selected a series of popular products such as radix bupleuri, which we believe are suitable to local community. As a result, we were able to keep up with our sales profit margin. Additionally, we continuously renegotiate with our vendors and press price down to acceptable levels. For example, we explore more suppliers to search for lower prices. We also try to directly purchase from manufacturers instead of local vendors to cut off middle-man expenses. We expect to keep our profit margin at a reasonable level in the future. Gross margin of online pharmacy sales decreased primarily due to intense market competition. 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 online prices of healthcare products are transparent as customers can easily compare prices from websites. In order to promote our sales through e-commerce platforms, we have to lower our prices leading to lower profit margin. As a way to retain new customers from insurance companies, we also kept low prices on our official online pharmacy websites. As a result, our profit margin for online sales decreased. Wholesale gross margin increased primarily due to various products with different profit margin we carried and sold to certain pharmaceutical vendors. 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
Selling and marketing expenses decreased by$10,336 , or 0.2%, as compared to the same period of last fiscal year, primarily due to the control of in-store advertising expense, offset by the increase in fee charged by various platforms as a result of sale increase in our online pharmacy. In responses to the cut on sales of products reimbursed by NHSA, we scrutinized and strictly controlled unnecessary expense such as in-store ads expense. On the other side, our online pharmacy sales more than doubled in the three months endedSeptember 30, 2020 as compared to the same period last year. We incurred service fee from third-party platforms such as Tmall and JD.com, which usually charge their fee based on a proportion of our sales via their platforms. The service fee increased by$177,526 period over period. Overall, such expenses as a percentage of our revenue were 21.0% and 22.9% respectively, in the three months endedSeptember 30, 2020 and 2019.
General and Administrative Expenses
General and administrative expenses increased by$237,624 , or 13.0%, as compared to the same period of last year. Such expenses as a percentage of revenue increased to 6.7% from 6.4% for the same period of last year. In the three months endedSeptember 30, 2020 , we reversed bad debt allowance of$304,397 as compared to an increase in bad debt allowance of$9,018 in the same period of last year. Excluding such effect, the general and administrative expenses increased by$551,039 period over period, which reflects the increase in staff and administration expense. 36 Loss from Operations
As a result of the above, we had loss from operations of
Income Taxes
Our income tax expense decreased by
Net Loss As a result of the foregoing, net loss is$1,527,191 in the three months endedSeptember 30, 2020 as compared to a net loss of$1,346,967 in the three months endedSeptember 30, 2019 .
Comparison of the six months ended
The following table summarizes our results of operations for the six months
ended
Six months ended September 30,
2020 2019
Percentage Percentage
of total of total
Amount revenue Amount revenue
Revenue $ 61,896,857 100.0 % $ 53,634,563 100.0 %
Gross profit $ 14,992,971 24.2 % $ 12,754,802 23.8 %
Selling expenses $ 12,747,919 20.6 % $ 12,454,399 23.2 %
General and administrative expenses $ 4,181,725 6.8 % $ 4,675,547 8.7 %
Loss from operations $ (1,936,673 ) (3.1 )% $ (4,375,144 ) (8.2 )%
Other Income(expense), net $ 31,701 0.1 % $ 253,677 0.5 %
Change in fair value of derivative liability $ 27,784 0.0 % $ 410,420 0.8 %
Income tax expense $ 38,595 0.1 % $ 14,090 0.0 %
Net loss $ (1,915,783 ) (3.1 )% $ (3,725,137 ) (6.9 )%
Revenue
Due to the growth in our retail drugstores business, online pharmacy and
wholesale business, revenue increased by
Revenue by Segment
The following table breaks down the revenue of our four business segments for
the six months ended
For the six months ended September 30,
2020 2019
% of total % of total Variance % of
Amount revenue Amount revenue by amount change
Revenue from retail
drugstores $ 36,740,970 59.4 % $ 34,736,261 64.8 % $ 2,004,709 5.8 %
Revenue from online
sales 10,259,846 16.6 % 4,794,869 8.9 % 5,464,977 114.0 %
Revenue from
wholesale business 14,896,041 24.0 % 14,103,433 26.3 % 792,608 5.6 %
Revenue from farming
business - - % - - % - - %
Total revenue $ 61,896,857 100.0 % $ 53,634,563 100.0 % $ 8,262,294 15.4 %
37
Retail drugstores sales, which accounted for approximately 59.4% of total
revenue for the six months ended September 30, 2020 , increased by $2,004,709 , or
5.8% compared to the six months ended September 30, 2019 , to $34,736,261 .
Same-store sales increased by approximately $590,758 , or 1.8%, while new stores
contributed approximately $1,204,827 in revenue in the six months ended
September 30, 2020 .
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 business caused by continuous hospital medical reform,
partially offset by the decline in sale reimbursed by NHSA in the second quarter
of fiscal 2021, 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.
Chronic diseases such as high blood pressure, diabetes and hyperlipidemia become
more and more prevalent nationwide. These types of patients usually visit
doctors who prescribe chronic disease drugs every couple weeks. In order to
attract these patients to continuously purchase products at our stores, we
created chronic disease management program. Once a patient visits our store, we
will record their information, type in our electronic system and then closely
monitor these patients. After they become members in our chronic disease
management program, we send regular reminders and health tips to them. Usually
these patient are old people, which have more spare time than the young people.
We provide in-store spaces for them to take free tests such as blood pressure
test, talk to our doctors and listen to specialists. As a result, more chronic
diseases patients became our loyal members and spent more in purchasing our
products.
DTP drugs are usually new medicines not sold at hospitals with low profit
margin. 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 in the first quarter of fiscal 2021. However, in the second
quarter of fiscal 2021, we controlled the sales of products reimbursed by NHSA
as described in the above.
Furthermore, from fiscal years 2018 to 2020, we have accelerated our expansion
of new stores, which have generated more retail drugstore revenues. Among the
new stores, forty seven stores have become qualified for municipal government
insurance reimbursement after operation of a year or more. 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 115 at September 30, 2020 and 114 at September 30, 2019 .
Our online pharmacy sales increased by approximately $5,464,977 , or 114.0% for
the six months ended September 30, 2020 , as compared to the six months ended
September 30, 2019 . The increase was primarily caused by an increase in sales of
prescription drugs via e-commerce platforms such as Tmall. Prescription drugs
used to be prohibited from sales online due to safety concern. However, because
the nation has lifted the ban order, online prescription drug sales become
popular. As a result, the sale of prescription drugs was $3,628,159 in the six
months ended September 30, 2020 as compared to none in the six month ended
September 30, 2019 . Additionally, we maintained a membership care program
targeted at chronic disease customers. We have closely interacted with our
members via WeChat by providing healthcare knowledge and reminding our customers
to refill medicine. By implementing a personalized customer care program, we
were able to promote our sales.
Wholesale revenue increased by $792,608 or 5.6% 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. Although in August and September,
the sales slowed down due to the absence of a key salesperson caused by the
personal health condition, we believe the sales volume will recover in the
future. 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 six months endedSeptember 30, 2020 and 2019, we have not generated revenue from our farming business. We planted ginkgo and maidenhair trees during the year endedMarch 31, 2013 , more than seven years ago. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the longer a ginkgo tree grows the more valuable it becomes. Therefore, we have not yet harvested our ginkgo trees. We plan to continue cultivating the trees in order to maximize their market value in the future. We will continue to grow ginkgo trees in the future. 38 Gross Profit
Gross profit increased by$2,238,169 or 17.5% period over period primarily as a result of an increase in gross profit provided by retail pharmacy business, which increased significantly in the six months endedSeptember 30, 2020 . At the same time, gross margin increased slightly from 23.8% to 24.2% due to higher retail pharmacy profit margins. The average gross margins for each of our four business segments are as follows: For the six months endedSeptember 30, 2020 2019
Average gross margin for retail drugstores 32.7 % 30.5 %
Average gross margin for online sales 12.5 % 13.9 %
Average gross margin for wholesale business 11.4 % 10.7 %
Average gross margin for farming business N/A N/A
Retail gross margins increased primarily because of introducing certain popular
products with high profit margin, and renegotiating prices with our suppliers
continuously. In order to promote our sales and profits, we specifically
selected a series of popular products such as radix bupleuri, which we believe
are suitable to local community. As a result, we were able to keep up with our
sales profit margin. Additionally, we continuously renegotiate with our vendors
and press price down to acceptable levels. For example, we explore more
suppliers to search for lower prices. We also try to directly purchase from
manufacturers instead of local vendors to cut off middle-man expenses. We expect
to keep our profit margin at a reasonable level in the future.
Gross margin of online pharmacy sales decreased primarily due to intense market
competition. 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 online prices of healthcare products are transparent as
customers can easily compare prices from websites. In order to promote our sales
through e-commerce platforms, we have to lower our prices leading to lower
profit margin. As a way to retain new customers from insurance companies, we
also kept low prices on our official online pharmacy websites. As a result, our
profit margin for online sales decreased.
Wholesale gross margin increased primarily due to various products with
different profit margin we carried and sold to certain pharmaceutical vendors.
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.
39
Selling and Marketing Expenses
Selling and marketing expenses increased by$293,520 , or 2.4%, as compared to the same period of last fiscal year, primarily due to increase in fee charged by various platforms as a result of sale increase in our online pharmacy. As our online pharmacy sales more than doubled in the six months endedSeptember 30, 2020 as compared to the same period last year. We incurred service fee from third-party platforms such as Tmall and JD.com, which usually charge their fee based on a proportion of our sales via their platforms. The service fee increased by$399,069 period over period. Overall, such expenses as a percentage of our revenue were 20.6% and 23.2% respectively, in the six months endedSeptember 30, 2020 and 2019.
General and Administrative Expenses
General and administrative expenses decreased by$493,822 , or 10.6%, as compared to the same period of last year. Such expenses as a percentage of revenue decreased to 6.8% from 8.7% for the same period of last year. In the six months endedSeptember 30, 2020 , we reversed bad debt allowance of$286,076 as compared to an increase in bad debt allowance of$767,249 in the same period of last year. Excluding such an effect, the general and administrative expenses increased by$559,503 period over period, which reflects the increases in staff and administration expense as our online business grew. Loss from Operations
As a result of the above, we had loss from operations of$1,936,673 in the quarter endedSeptember 30, 2020 , as compared to loss from operations of$4,375,144 a year ago. Our operating margin for the six months endedSeptember 30, 2020 and 2019 was (3.1) % and (8.2) %, respectively. The decrease in loss from operations was mainly because of introducing certain popular products with high profit margin and renegotiating prices with our suppliers continuously in the six months endedSeptember 30, 2020 . Income Taxes
Our income tax expense increased by
Net Loss As a result of the foregoing, net loss is$1,915,783 in the six months endedSeptember 30, 2020 as compared to a net loss of$3,725,137 in the six months endedSeptember 30, 2019 . Accounts receivable Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses. To prepare for potential loss in such accounts, we made corresponding reserves. Our accounts receivable aging was as follows for the periods described below: Retail Online Drug Herb Total From date of invoice to customer drugstores Pharmacy wholesale farming amount 1- 3 months$ 7,522,572 $ 386,473 $ 374,722 $ -$ 8,283,767 4- 6 months 232,995 132,078 769,058 - 1,134,131 7- 12 months 68,937 6,884 446,664 - 522,485 Over one year 1,873,563 - 401,780 2,275,343 Allowance for doubtful accounts (1,950,006 ) (13,222 ) (260,356 ) (2,223,584 ) Total accounts receivable$ 7,748,061 $ 512,213 $ 1,731,868 $ -$ 9,992,142 Accounts receivable from our retail business mainly consist of reimbursements from government health insurance bureaus and commercial health insurance programs. In the six months endedSeptember 30, 2020 , we wrote off an approximately$55,423 collectible from provincial andHangzhou City government insurance, as such amount has been determined by the health insurance bureaus to be unqualified for reimbursement. 40 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 range 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 inZhejiang 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. However, as our wholesale business kept growing in a steady rate, receivable from wholesale customers increased accordingly. We usually put reserve on new accounts based on historical collection experience. As a result, the overall reserve on wholesale accounts receivables increased slightly. Subsequent toSeptember 30, 2020 and throughOctober 31, 2020 , we collected approximately$3.2 million in receivables relating to our drugstore business, approximately$0.3 million in receivables relating to our online pharmacy business, approximately$1.1 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 Retail Online Drug
Herb Total
suppliers drugstores Pharmacy wholesale farming amount
1- 3 months $ 418,409 $ - $ 570,833 $ - $ 989,242
4- 6 months 89,578 - 761,333 - 850,911
7- 12 months 23,614 - 81,690 - 105,304
Over one year 190,015 - 703,274 - 893,289
Allowance for doubtful accounts (129,749 ) - (779,724 ) - (909,473 )
Total advances to suppliers $ 591,867 $ - $ 1,337,406 $ - $ 1,929,273
Since the acquisition of Jiuxin Medicine, we have gradually transferred almost
all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou
Pharmacy only makes purchases of certain non-medical products. As a result, our
retail chain had little advances to suppliers as of September 30, 2020 . In the
six months ended September 30, 2020 , we had outstanding advances to suppliers
with which we have ceased doing business. These advances have been fully
reserved.
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: ceasing
purchasing products from the vendor, asking for return of our prepayment
promptly, and if necessary, taking legal actions. If all of these steps are
unsuccessful, management then determines whether or not the prepayments should
be reserved or written off.
Liquidity and Capital Resources
Our cash flows for the periods indicated are as follows:
For the six months ended
September 30,
2020 2019
Net cash used in/provided by operating activities
$ (1,758,045 ) $ (1,445,265 ) Net cash provided by financing activities$ 4,552,181 $ 6,380,681 41 For the six months endedSeptember 30, 2020 , cash used in operating activities amounted to$(348,834) , as compared to$973,509 for the same period a year ago. The change is primarily attributable to a decrease in cash provided by inventories and biological assets of$1,423,743 , a decrease in cash provided by accounts receivable of$513,565 , a decrease in cash provided by bad debt direct write-off and provision of$1,053,326 offset by an increase of$424,323 in accounts payable, and an increase in change in fair value of purchase option derivative liability of$382,636 . For the six months endedSeptember 30, 2020 , net cash used in investing activities amounted to$(1,758,045) , as compared to$(1,445,265) provided by investing activities for the same period a year ago. The change is primarily attributable to a decrease in cash provided by investment in a joint venture of$1,422,193 , offset by an increase in additions to leasehold improvements and increase intangible assets.
For the six months endedSeptember 30, 2020 , net cash provided by financing activities amounted to$4,552,181 , as compared to$6,380,681 net cash used in financing activities for the same period a year ago. The change is primarily due to repayment of notes payable and proceeds from equity financing. Additionally, we borrowed a one-year loan of$714,160 fromBeijing Bank .
As of
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations:
Contractual obligations Payments due by period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Short-term loan payable $ 2,204,820 2,204,820 - - -
Notes payable 23,327,972 23,327,972 - - -
Long-term loan payable 3,089,373 - 3,089,373 - -
Long-Term Debt Obligations - - - - -
Capital Lease Obligations - - - - -
Operating Lease Obligations 17,556,680 1,056,181 9,576,753 4,652,138 2,271,608
Purchase Obligations - - - - -
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP* 36,306 - 36,306 - -
Total $ 46,215,151 26,588,973 12,702,432 4,652,138 2,271,608
* This refers to warrants to purchase shares of common stock issued to an
institutional investor and a placement agent (See Note 19).
42
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:
September 30 , March 31,
2020 2020Balance sheet items, except for the registered and paid-up capital, as of end of period
USD1: RMB
0.1470 USD1:
Amounts included in the statement of Operations and statement of cash flows for the period ended
USD1: RMB 0.1428 USD1: RMB 0.1446
Inflation
We believe that inflation has not had a material effect on our operations to date.
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