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 ofDecember 31, 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 nine months endedDecember 31, 2020 , we dissolved four 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 nine months endedDecember 31, 2020 . Amidst 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 orders 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 daily cases has become limited. People now work and live as usual. As a result, we believe the negative impacts on our operations are temporary. However, the impact of COVID-19 on our operations depends on its future developments, which are highly uncertain and cannot be predicted. Major factors include the duration of the outbreak, new information concerning the severity of the coronavirus, and actions to contain 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 determined if there is an additional performance obligation to the customers at the time of the initial transaction. The customers can then redeem these points during they future purchase. At the end of each quarter and fiscal year, 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 nine months endedDecember 31, 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 December 31,
2020 2019
Percentage Percentage
of total of total
Amount revenue Amount revenue
Revenue $ 35,538,759 100.0 % $ 33,363,282 100.0 %
Gross profit $ 8,087,250 22.8 % $ 7,283,372 21.8. %
Selling expenses $ 8,262,590 23.2 % $ 5,676,400 17.0 %
General and administrative expenses $ 6,192,294 17.4 % $ 1,054,060 3.2 %
Loss(gain) from operations $ (6,367,634 ) (17.9 )% $ 552,912 1.7 %
Other Income(expense), net $ 39,786 0.1 % $ (29,635 ) (0.1 )%
Change in fair value of derivative liability $ 36,306 0.1 % $ (65,172 ) (0.2 )%
Income tax expense $ 1,976 (0.0 )% $ 2,184 0.0 %
Net loss(gain) $ (6,293,518 ) (17.7 )% $ 455,921 1.4 %
Revenue
Due to the growth in our online pharmacy, revenue increased by
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 December 31,
2020 2019
% of total % of total Variance % of
Amount revenue Amount revenue by amount change
Revenue from retail
drugstores $ 20,066,840 56.5 % $ 21,575,965 64.7 % $ (1,509,125 ) (7.0 )%
Revenue from online
sales 6,599,138 18.5 % 3,965,023 11.9 % 2,634,115 66.4 %
Revenue from
wholesale business 8,872,781 25.0 % 7,822,294 23.4 % 1,050,487 13.4 %
Revenue from farming
business - - % - - % - - %
Total revenue $ 35,538,759 100.0 % $ 33,363,282 100.0 % $ 2,175,477 6.5 %
34
Retail drugstores sales, which accounted for approximately 56.5% of total
revenue for the three months ended December 31, 2020 , decreased by $1,509,125 ,
or 7.0% compared to the three months ended December 31, 2019 , to $20,066,840 .
After removing the impact of exchange rate fluctuation, the retail drugstores
sales decreased by 12.6%. Same-store sales decreased by approximately
$2,382,523 , or 11.4%, while new stores contributed approximately $859,525 in
revenue in the three months ended December 31, 2020 .
The decrease in our retail drugstore sales is primarily due the negative effect
on the overall economy from COVID-19, and also to our strategic decision to
cease selling certain low-profit margin products that are eligible for
reimbursement by National Healthcare Security Administration ("NHSA" hereafter)
since September 1, 2020 .
In the first half of 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 public hospitals to reduce their revenue
percentage from drug sales. In order to achieve such goal, public hospitals
first cease to sell low-profit-margin DTP products. As the biggest local
drugstore network in Hangzhou City, Jiuzhou Pharmacy has a few stores located
adjacent to local hospitals. Additionally, we have actively contacted local
vendors for 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, our sales have increased especially in the
first half of Calendar 2020. However, sales of a few DTP drugs are reimbursed by
local NHSA. If we continue to sell large quantity of products reimbursed by the
NHSA, the agency may refuse to pay us due to its limited budget. 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, from 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. It appears that COVID-19 has become more contagious in the winter.
Once the spread of COVID-19 is effectively controlled, we expect the local
consumption will surge again in the future.
Our online pharmacy sales increased by approximately $2,634,115 , or 66.4% for
the three months ended December 31, 2020 , as compared to the three months ended
December 31, 2019 . The increase was primarily caused by an increase in sales of
prescription drugs via e-commerce platforms such as Tmall. In the past,
prescription drugs cannot be sold 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 $2,227,332 in the three
months ended December 31, 2020 as compared to none in the three month ended
December 31, 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 $1,050,487 or 13.4%. 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 on these merchandises. As a result,
vendors who were unable to obtain a better price than ours, turned to us for
these products. On the other hand, 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 December 31, 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 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.
35
Gross Profit
Gross profit increased by$803,878 or 11.0% period over period primarily as a result of an increase in gross profit provided by retail pharmacy business and online pharmacy sales, which increased significantly in the three months endedDecember 31, 2020 . At the same time, gross margin increased slightly from 21.8% to 22.8% 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 endedDecember 31, 2020 2019
Average gross margin for retail drugstores 32.6 % 28.7 % Average gross margin for online sales 8.1 % 8.2 % Average gross margin for wholesale business 11.4 % 9.9 % 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, 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 increased by$2,586,190 , or 45.6%, as compared to the same period of last fiscal year, primarily due to increase in annual employee compensation and online sales service fee as a result of sale increase in our online pharmacy. To cope with intense competition in retail pharmacy business, it is important to retain key operation staff such as store managers and marketing and merchandise analysts. In addition, our fast growing online pharmacy business requires more experienced staff. To retain these staff, we incurred$1.6 million more labor expenses. On the other side, our online pharmacy sales increased more than 60% in the three months endedDecember 31, 2020 as compared to the same period last year. As a result, we incurred additional service fee of$0.5 million 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. Overall, such expenses as a percentage of our revenue were 23.2% and 17.0% respectively, in the three months endedDecember 31, 2020 and 2019.
General and Administrative Expenses
General and administrative expenses increased by$5,138,234 , or 487.5%, as compared to the same period of last year. Such expenses as a percentage of revenue increased to 17.4% from 3.2% for the same period of last year. OnDecember 21, 2020 , we issued 3,790,000 shares of common stock according to our employee stock reward incentive plan and recorded stock-based compensation of$3,941,600 . Additionally, For the three months endedDecember 31, 2020 , bad debt direct write-off and provision amounted to$293,141 , an increase of$1,089,429 , as compared to reversal of bad debt allowance of$796,288 for the same period a year ago. Excluding such effect, the general and administrative expenses increased by$109,016 period over period, which reflects the increase in staff and administration expense. 36 Loss(income) from Operations
As a result of the above, we had loss from operations of
Income Taxes
Our income tax expense decreased by
Net Loss(income) As a result of the foregoing, net loss is$6,293,518 in the three months endedDecember 31, 2020 as compared to a net income of$455,921 in the three months endedDecember 31, 2019 .
Comparison of the nine months ended
The following table summarizes our results of operations for the nine months
ended
Nine months ended December 31,
2020 2019
Percentage Percentage
of total of total
Amount revenue Amount revenue
Revenue $ 97,435,616 100.0 % $ 86,997,845 100.0 %
Gross profit $ 23,080,221 23.7 % $ 20,038,174 23.0 %
Selling expenses $ 21,010,509 21.6 % $ 18,130,799 20.8 %
General and administrative expenses $ 10,374,019 10.6 % $ 5,729,607 6.6 %
Loss from operations $ (8,304,307 ) (8.5 )% $ (3,822,232 ) (4.4 )%
Other Income, net $ 71,487 0.1 % $ 224,042 0.3 %
Change in fair value of derivative liability $ 64,090 0.1 % $ 345,248 0.4 %
Income tax expense $ 40,571 0.0 % $ 16,274 0.0 %
Net loss $ (8,209,301 ) (8.4 )% $ (3,269,216 ) (3.8 )%
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 nine months ended
For the nine months ended December 31,
2020 2019
% of total % of total Variance % of
Amount revenue Amount revenue by amount change
Revenue from retail
drugstores $ 56,807,810 58.3 % $ 56,312,226 64.7 % $ 495,584 0.9 %
Revenue from online
sales 16,858,984 17.3 % 8,759,892 10.1 % 8,099,092 92.5 %
Revenue from
wholesale business 23,768,822 24.4 % 21,925,727
25.2 % 1,843,095 8.4 %
Revenue from farming
business - - % - - % - - %
37
Retail drugstores sales, which accounted for approximately 58.3% of total
revenue for the nine months ended December 31, 2020 , increased by $495,584 , or
0.9% compared to the nine months ended December 31, 2019 , to $56,312,226 .
However, after removing the impact of exchange rate fluctuation, the actual
retail drugstores sales decreased 0.8%. Same-store sales decreased by
approximately $1,791,766 , or 3.3%, while new stores contributed approximately
$2,064,353 in revenue in the nine months ended December 31, 2020 .
The actual decrease in our retail drugstore sales is primarily due to the
negative effect on the overall economy from COVID-19, and also to our strategic
decision to cease selling certain low-profit margin products that are eligible
for reimbursement by NHSA since September 1, 2020 .
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 local hospitals to reduce the revenue
percentage from drug sales. In order to achieve such goal, the public hospitals
first chose to case to sell low-profit-margin DTP products. As the biggest local
drugstore network in Hangzhou City, Jiuzhou Pharmacy has a few 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 a few DTP drugs
are reimbursed by local NHSA. If we continue to sell large quantity of products
reimbursed by the NHSA, the agency may refuse to pay us due to its limited
budget. 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, from 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. It appears that COVID-19 has become more contagious in the winter.
Once the spread of COVID-19 is effectively controlled, we expect the local
consumption will surge again in the future.
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-six 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 compared to the previous year. Our store count is
115 at December 31, 2020 and 114 at December 31, 2019 .
Our online pharmacy sales increased by approximately $8,099,092 , or 92.5% for
the nine months ended December 31, 2020 , as compared to the nine months ended
December 31, 2019 . The increase was primarily caused by an increase in sales of
prescription drugs via e-commerce platforms such as Tmall. In the past,
prescription drugs cannot be sold 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 $5,855,491 in the nine
months ended December 31, 2020 as compared to none in the nine month ended
December 31, 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 $1,843,095 or 8.4% 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, 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 nine months ended December 31, 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 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$3,042,047 or 15.2% period over period primarily as a result of an increase in gross profit provided by retail pharmacy business, which increased significantly in the nine months endedDecember 31, 2020 . At the same time, gross margin increased slightly from 23.0% to 23.7% due to higher retail pharmacy profit margins. The average gross margins for each of our four business segments are as follows: For the nine months ended December 31, 2020 2019 Average gross margin for retail drugstores 32.7 % 29.8 % Average gross margin for online sales 10.8 % 11.3 % Average gross margin for wholesale business 11.4 % 10.4 % 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$2,879,710 , or 15.9%, 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. To cope with intense competition in retail pharmacy business, it is important to retain key operation staff such as store managers and marketing & merchandise analysts. In addition, our fast-growing online pharmacy business requires more experienced staff. To retain these staff, we incurred$1.0 million more labor expense. On the other hand, our online pharmacy sales increased more than 60% in the three months endedDecember 31, 2020 as compared to the same period last year. As a result, we incurred additional service fee of$1 million 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. Overall, such expenses as a percentage of our revenue were 21.6% and 20.8% respectively, in the nine months endedDecember 31, 2020 and 2019.
General and Administrative Expenses
General and administrative expenses increased by$4,644,412 , or 81.1%, as compared to the same period of last year. Such expenses as a percentage of revenue decreased to 10.6% from 6.6% for the same period of last year. OnDecember 21, 2020 , we issued 3,790,000 shares of common stock according to our employee stock reward incentive plan and recorded stock-based compensation of$3,941,600 . Excluding such an effect, the general and administrative expenses increased by$702,812 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
Income Taxes
Our income tax expense increased by
Net Loss As a result of the foregoing, net loss is$8,209,301 in the nine months endedDecember 31, 2020 as compared to a net loss of$3,269,216 in the nine months endedDecember 31, 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 $ 9,872,323 $ 680,476 $ 483,786 $ - $ 11,036,585
4- 6 months 78,816 7,189 343,413 - 429,418
7- 12 months 13,440 61 195,948 - 209,449
Over one year 1,890,196 66,080 383,760 2,340,036
Allowance for doubtful accounts (1,935,724 ) (73,628 ) (484,148 ) (2,493,500 )
Total accounts receivable $ 9,919,051 $ 680,178 $ 922,759 $ - $ 11,521,988
Accounts receivable from our retail business mainly consist of reimbursements
from government health insurance bureaus and commercial health insurance
programs. In the nine months ended December 31, 2020 , we wrote off an
approximately $71,856 collectible from provincial and Hangzhou 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
in Zhejiang Province . In fiscal 2019, we accelerated collection of certain aged
accounts from customers who we no longer or rarely sold products to. By doing
so, we are able to improve our cash flow. 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 to December 31, 2020 and through January 31, 2021 , we collected
approximately $3.1 million in receivables relating to our drugstore business,
approximately $0.4 million in receivables relating to our online pharmacy
business, approximately $0.8 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 Retail Online Drug
Herb Total
suppliers drugstores Pharmacy wholesale farming amount
1- 3 months $ 600,873 $ - $ 3,973,097 $ - $ 4,573,970
4- 6 months 26,872 - 316,291 - 343,163
7- 12 months 100,320 - 235,579 - 335,899
Over one year 36,343 - 305,816 - 342,159
Allowance for doubtful accounts (165,025 ) - (918,345 ) - (1,083,370 )
Total advances to suppliers $ 599,383 $ - $ 3,912,438 $ - $ 4,511,821
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 December 31, 2020 . In the
nine months ended December 31, 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 prompt return of our prepayment,
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. The increase in advance to suppliers is primarily due to deposits
made to purchase Ejiao. Ejiao is a tradtional chinese nutritional supplement,
which is popular in the local market. In order to retain the sufficient quantity
for our stores, we advanced approximately $3.06 million purchase deposits.Liquidity and Capital Resources
Our cash flows for the periods indicated are as follows:
For the nine months ended
December 31,
2020 2019Net cash used in operating activities$ (12,448,468 ) $ (11,274,690 ) Net cash used in investing activities$ (1,824,601 ) $ (1,714,176 ) Net cash provided by financing activities$ 5,422,085 $ 12,698,032
41
For the nine months ended December 31, 2020 , cash used in operating activities
amounted to $(12,448,468) , as compared to $(11,274,690) for the same period a
year ago. The change is primarily attributable to a decrease in net loss of
$4,940,085 , a decrease in cash provided by inventories and biological assets of
$4,042,571 , a decrease in cash provided by advances to suppliers of $2,827,970
offset by an increase of $3,907,040 in stock compensation, an increase of
$1,978,751 in other receivables, and an increase in other current assets of
$1,678,682 .
For the nine months ended December 31, 2020 , net cash used in investing
activities amounted to $(1,824,601) , as compared to $(1,714,176) 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
$1,458,633 , offset by an increase in additions to leasehold improvements and
increase intangible assets.
For the nine months endedDecember 31, 2020 , net cash provided by financing activities amounted to$5,422,085 , as compared to$12,698,032 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$727,855 from theBeijing 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 $ 2,296,155 2,296,155 - - -
Notes payable 25,736,161 25,736,161 - - -
Long-term loan payable 5,069,907 2,480,264 2,589,643 - -
Long-Term Debt Obligations - - - - -
Capital Lease Obligations - - - - -
Operating Lease Obligations 19,643,599 1,650,085 10,443,287 5,073,077 2,477,150
Purchase Obligations - - - - -
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP* - - - - -
Total $ 52,745,822 32,162,665 13,032,930 5,073,077 2,477,150
* 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:
December 31 , March 31,
2020 2020Balance sheet items, except for the registered and paid-up capital, as of end of period
USD1: RMB 0.1531 USD1:
Amounts included in the statement of Operations and statement of cash flows for the period ended
USD1: RMB 0.1456 USD1: RMB 0.1436
Inflation
We believe that inflation has not had a material effect on our operations to date.
© Edgar Online, source
