UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2021

 

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		98-0557852
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
Hai Wai Hai Tongxin Mansion Floor 6 Gong Shu District, Hangzhou City Zhejiang Province P. R. China		310008
(Address of principal executive offices)		(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		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.001 par value		CJJD		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 ☒

 

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 ☒

 

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 ☒   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 ☒   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	☐	Accelerated Filer	☐
	Non-accelerated filer	☒	Smaller reporting company	☒
			Emerging growth company	☐

 

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 ☒

 

As of September 30, 2020, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $26.7 million, based on the closing price of $0.97 per share of common stock as reported on the NASDAQ Capital Market on such date.

 

As of June 29, 2021, the registrant had 41,751,790 shares of common stock outstanding.

 

 

TABLE OF CONTENTS

 

TO ANNUAL REPORT ON FORM 10-K

 

FOR YEAR ENDED MARCH 31, 2021

 

		Page
PART I.
Item 1.	Business.	1
Item 1A.	Risk Factors.	9
Item 1B.	Unresolved Staff Comments.	32
Item 2.	Properties.	32
Item 3.	Legal Proceedings.	33
Item 4.	Mine Safety Disclosures.	33
PART II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	34
Item 6.	[Reserved.]	35
Item 7.	Management’s Discussion and Analysis of Financial Conditions and Results of Operation.	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	43
Item 8.	Financial Statements and Supplementary Data.	43
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	43
Item 9A.	Controls and Procedures.	44
Item 9B.	Other Information.	45
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	45
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance.	46
Item 11.	Executive Compensation.	49
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	53
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	54
Item 14.	Principal Accounting Fees and Services.	55
PART IV.
Item 15.	Exhibits and Financial Statement Schedules.	56
Item 16.	Form 10-K Summary	56
Signatures.		60

 

 

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.

 

 

PART I

 

ITEM 1. BUSINESS.

 

Overview

 

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 nine (109 store locations under the store brand “Jiuzhou Grand Pharmacy” in Hangzhou city. We acquired four single drugstores in fiscal 2021. After the acquisition, we liquidated them and then opened four new stores with the four licenses of local government medical insurance reimbursement program. During the year ended March 31, 2021, the Company sold its Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”), which runs ten stores in Linan City, to local investors for a total proceeds of $129,586. On the other side, we have been concentrating on new stores within Hangzhou metropolitan area and opened eleven stores in the fiscal year 2021. Amidst the COVID-19 outbreak, we experienced a decline in the number of customer visits during the first three months of calendar 2020 due to the implementation of the lockdown policy in China. However, as China has been able to control the spread of COVID-19, the negative impacts have become limited.

 

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”). All of the above business are performed in China with no other international sales.

 

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. Four (4) 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.

 

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, 2021, retail revenue, including pharmacies, medical clinics accounted for approximately 57.2% of our total revenue, while online pharmacy revenue accounted for 16.8% 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, 2021, wholesale revenue accounted for approximately 26.0% 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, 2021, 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

 

Corporate History

 

Information relating to our corporate history is incorporated by reference from our Annual Report on Form 10-K for the fiscal year March 31, 2020 filed with the SEC on July 10, 2020 (“2020 Annual Report”) under the caption “Our Corporate History and Structure.” The updates relating to our corporate history during the fiscal year of 2021 is as follows:

 

On December 31, 2020, the Company granted a total of 3,790,000 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. All $3,941,600 of such expense has been recorded as a service compensation expense in the quarter ended December 31, 2020.

 

On May 14, 2021, the Company and China Jo-Jo Drugstores Holdings, Inc., an exempted company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of the Company (“CJJD Cayman”) entered into a definitive agreement and plan of merger (the “Merger Agreement”) related to a proposed merger transaction. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into CJJD Cayman (the “Redomicile Merger”), with CJJD Cayman surviving and changing its name to China Jo-Jo Drugstores, Inc. Following the Redomicile Merger, CJJD Cayman, together with its subsidiaries, will own and continue to conduct the Company’s business in substantially the same manner as is currently being conducted by the Company and its subsidiaries. The Redomicile Merger is subject to the Company’s shareholders’ approval at the special shareholders meeting to be held on July 19, 2021.

 

Corporate Structure

 

Information relating to our corporate history is incorporated by reference from our 2020 Annual Report under the caption “Our Corporate History and Structure.” The updates relating to our structure during the fiscal year of 2021 is as follows:

 

On November 19, 2020, Zhejiang AyiGe Medical Health Management Co., Ltd. was dissolved.

 

On January 2021, Lin’An Jiuzhou Pharmacy Co., Ltd was sold to two individuals for total proceeds of $121,963 (RMB800,000).

 

As of March 31, 2021, we have closed all clinics under Linjia Medical Investment and Management Co. Ltd. and ceased its operation.

 

Contractual Arrangements with HJ Group and the Key Personnel

 

Information relating to the contractual arrangements with HJ Group and the key personnel is incorporated by reference from our 2020 Annual Report under the caption “Contractual Arrangements with HJ Group and the Key Personnel.”

 

 

Our Current Corporate Structure

 

The following diagram illustrates our current corporate structure as of June 29, 2021:

 

 

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		Entity Type		Registered Capital		Registered Capital Paid		Due Date for Unpaid Registered Capital
Jiutong Medical		Subsidiary		USD 2,600,000		USD 2,600,000		N/A
Jiuzhou Clinic		VIE		N/A		N/A		N/A
Jiuzhou Pharmacy		VIE		USD 733,500		USD 733,500		N/A
Jiuzhou Service		VIE		USD 73,350		USD 73,350		N/A
Jiuxin Management		Subsidiary		USD 24,500,000		USD 23,500,000		N/A
Jiuxin Medicine		VIE		USD 1,564,000		USD 1,564,000		N/A
Qianhong Agriculture		Subsidiary		USD 1,497,000		USD 1,497,000		N/A
Shouantang Technology		Subsidiary		USD 11,000,000		USD 11,000,000		N/A
Shouantang Bio		Subsidiary		USD 162,900		USD 162,900		N/A
Jiuyi Technology		Subsidiary		USD 5,000,000		USD 2,500,000		September 25, 2026
Linjia Medical		VIE		USD 2,979,460		USD 1,489,730		N/A

 

 

Our Business

 

Pharmacies

 

As of March 31, 2021, we currently have one hundred and nine (109) pharmacies throughout Hangzhou, the provincial capital of Zhejiang and neighborhood cities. Pharmacy sales accounted for approximately 77.2% of our retail revenue, and 57.2% of our total revenue, for the fiscal year ended March 31, 2021. We offer primarily third-party products at our pharmacies, including:

 

●

Approximately 1,232 prescription drugs (226 of which require a physician’s prescription and the remainder requiring customer personal information registration only), sales of which accounted for approximately 35.7% of our retail revenue for the fiscal year ended March 31, 2021;

 

●

Approximately 1,480 OTC drugs, sales of which accounted for approximately 40.1% of our retail revenue for the fiscal year ended March 31, 2021;

 

●

Approximately 294 nutritional supplements, including a variety of healthcare supplements, vitamin, mineral and dietary products, sales of which accounted for approximately 9.0% of our retail revenue for the fiscal year ended March 31, 2021;

 

●

TCM, including drinkable herbal remedies and pre-packaged herbal mixtures for making soup, sales of which accounted for approximately 6.0% of our retail revenue for the fiscal year ended March 31, 2021;

 

●

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 1.8% of our retail revenue for the fiscal year ended March 31, 2021; 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 7.4% of our retail revenue for the fiscal year ended March 31,2021.

 

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 twenty-five (25) 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 nine (109) of our drugstores are located in Hangzhou city.

 

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, Xiasha and Yueming 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 four (4) Jiuzhou Clinics and Jiuzhou Service, follow nationally established clinical practice guidelines from China’s Ministry of Health. We currently have sixty-four (64) physicians and fifty-three (53) 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 National Medical Products Administration (the “NMPA”) 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 16.8% of our total revenue, for the fiscal year ended March 31, 2021. Online sales accounted for approximately 11.6% of our total revenue, for the fiscal year ended March 31, 2020.

 

Wholesale

 

Since acquiring Jiuxin Medicine in August 2011, we have been distributing third-party products primarily to drug distributors throughout China, including:

 

●

Approximately 1,352 prescription drugs, the sales of which accounted for approximately 79.5% of our wholesale revenue for the fiscal year ended March 31, 2021 as compared to approximately 1,455 prescription drugs, the sales of which accounted for approximately 83.7% of our wholesale revenue for the fiscal year ended March 31, 2020;

 

●

Approximately 1,572 OTC drugs, the sales of which accounted for approximately 18.1% of our wholesale revenue for the fiscal year ended March 31, 2021 as compared to approximately 1,662 OTC drugs, the sales of which accounted for approximately 14.1% of our wholesale revenue for the fiscal year ended March 31, 2020;

 

●

Approximately 270 nutritional supplements, the sales of which accounted for approximately 0.4% of our wholesale revenue for the fiscal year ended March 31, 2021 as compared to approximately 350 nutritional supplements, the sales of which accounted for approximately 0.7% of our wholesale revenue for the fiscal year ended March 31, 2020;

 

●

TCM products, the sales of which accounted for approximately 0.6% of our wholesale revenue for the fiscal year ended March 31, 2021, as compared to TCM products, the sales of which accounted for approximately 1.1% of our wholesale revenue for the fiscal year ended March 31, 2020;

 

●

Sundry products, the sales of which accounted for approximately 0.1% of our wholesale revenue for the fiscal year ended March 31, 2021 as compared to Sundry products, the sales of which accounted for approximately 0.1% of our wholesale revenue for the fiscal year ended March 31, 2020; and

 

●

Medical devices, the sales of which accounted for approximately 1.2% and 0.3%, of our wholesale revenue for the fiscal year ended March 31, 2021 and 2020, 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 kept 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, 2021.

 

Our Customers

 

Retail Customers

 

For the fiscal year ended March 31, 2021, our pharmacies collectively served an average of 15,509 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, 2021, approximately 18% of our pharmacy revenue came from cash sales, 44% from Hangzhou’s medical insurance cards (where most of our pharmacies are located), and 38% from debit and credit cards, Zhejiang’s medical insurance cards, Alipay and other charge cards.

 

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, ninety six (96) of our one hundred and nine (109) “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, 2021, 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, 2021, we had not harvested or sold any herbs.

 

Marketing and Promotion

 

Information relating to our marketing and promotion activities is incorporated by reference from our 2020 Annual Report under the caption “Marketing and Promotion.” The updates relating to our marketing and promotion during the fiscal year of 2021 is as follows:

 

For the fiscal year ended March 31, 2021, approximately 65.0% of our customers used their rewards cards to make purchases.

 

Logistics

 

Information relating to our logistics is incorporated by reference from our 2020 Annual Report under the caption “Logistics.”

 

Suppliers

 

We currently source retail products from approximately 110 suppliers, including trading companies and direct manufacturers. We source wholesale products from approximately 400 suppliers, including many of those that provide our retail products. For the fiscal year ended March 31, 2021, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for more than twenty-one and eight percent (21.8%) and eighteen (18.0%) 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, 2020, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for more than twenty-eight and half percent (28.5%) and twenty-six and point two percent (26.2%) 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

 

Information relating to our quality control is incorporated by reference from our 2020 Annual Report under the caption “Quality Control.”

 

Competition

 

Information relating to the competition we face is incorporated by reference from our 2020 Annual Report under the caption “Competition.”

 

Intellectual Property

 

Information relating to the our intellectual property is incorporated by reference from our 2020 Annual Report under the caption “Intellectual Property.” The updates relating to our intellectual property during the fiscal year of 2021 is as follows:

 

We own and operate the following websites: www.dada360.com (for online sales), http://www.chinajzyy.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.

 

 

Employees

 

As of March 31, 2021, we had 1,047 employees combined in our retail and wholesale operations, consisting of 1,001 full-time and 46 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:

 

		As of March 31, 2021
		Employees				Percentage
Non-pharmacist store staff			475				45.3	%
Pharmacists			256				24.5	%
Management - non-pharmacists			100				9.6	%
Physicians			64				6.1	%
Non-physician clinic staff			53				5.1	%
Wholesale - non-warehouse			38				3.6	%
Online pharmacy - technicians			2				0.2	%
Online pharmacy - non-technicians			59				5.6	%
Total			1,047				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

 

Information relating to the relevant PRC Regulations is incorporated by reference from our 2020 Annual Report under the caption “Relevant PRC Regulations.” The updates under this caption during the fiscal year of 2021 is as follows:

 

Dividend Distribution

 

As of March 31, 2021 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 $22.14 million.

 

Environmental Matters

 

Information relating to the environmental matters is incorporated by reference from our 2020 Annual Report under the caption “Environmental Matters.”

 

Principal Executive Office

 

Our principal executive office is located at 6^th Floor, Hai Wai Hai Tongxin Mansion, Gong Shu District, Hangzhou City, Zhejiang Province, and China. Our main telephone number is +86-571-88219579, and fax number is +86-571-8821-9579.

 

 

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.

 

Summary of Risk Factors

 

Risks Relating to Our Business in General

 

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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.

 

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We have significant cash deposits with our suppliers and landlords, which we may not be able to recover in the event of bankruptcy by our suppliers or landlords or other events beyond our control.

 

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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.

 

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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.

 

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Our retail and wholesale operations require a number of permits and licenses in order to carry on their business.

 

Risks Relating to Our Pharmacy Operations

 

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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.

 

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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.

 

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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.

 

Risks Relating to Our Medical Services

 

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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.

 

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As a provider of medical services, we are exposed to inherent risks relating to malpractice claims.

 

Risks Related to Our Herb Farming

 

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Our herb farming business is subject to the volatility of prices for raw TCM herbs.

 

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Unforeseen and severe weather can reduce cultivation activities and lead to a decrease in anticipated harvest.

 

Risks Related to Our Online Sales

 

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The operation results of our online business fluctuates and we cannot assure our efforts for alternative vendors will result in the stable increase in revenues from online pharmacy in the coming years

 

 

Risks Related to Our Corporate Structure

 

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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.

 

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We may be adversely affected by complexity, uncertainties and changes in Chinese regulation of drugstores and the practice of medicine.

 

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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.

 

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Since we rely on contractual arrangements to control HJ Group and for substantially all of our revenue, the termination of our contractual arrangements to control HJ Group will severely and detrimentally affect our continuing business viability under our current corporate structure.

 

Risks Related to Doing Business in China

 

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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.

 

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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.

 

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We may need to obtain additional governmental approvals to open new drugstores.

 

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The advent of recent healthcare reform directives from China’s central government may increase both competition and our cost of doing business.

 

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Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are subject to restrictions on making payments to us.

 

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Dividends we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax.

 

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We face risks related to disease epidemics and other outbreaks.

 

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Our auditor is not permitted to be subject to inspection by Public Company Accounting Oversight Board.

 

Risks Related to an Investment in Our Securities

 

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The market price of our common stock has fluctuated and may continue to fluctuate in the future, and we may not pay dividends on our common stock.

 

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Our officers and directors own a substantial portion of our outstanding common stock, which will enable them to influence many significant corporate actions.

 

Other General Risk Factors

 

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Changes in economic conditions and consumer confidence in China may influence the drugstore industry, consumer preferences and spending patterns.

 

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Uncertainties with respect to the Chinese legal system could adversely affect us.

 

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Techniques employed by manipulative short sellers in Chinese small-cap stocks may drive down the market price of our common stock.

 

Risk Related to our Contemplated Reincorporation Merger

 

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Please refer to the risk factors listed under the heading of “Risks Relating to the Redomicile Merger” contained in our proxy statement for our special stockholder meeting to be held on July 19, 2021 that was filed with the SEC on June 2, 2021, which are incorporated by reference herein.

 

 

Risks Relating to Our Business in General

 

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 larger 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.

  

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.

 

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.

 

 

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, 2021, we had approximately $0.4 million deposited with suppliers and approximately $3.0 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.

 

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. ”

 

 

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.

 

Risks Relating to Our Pharmacy 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.

 

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.

 

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.

 

 

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

 

The operation results of our online business fluctuates and we cannot assure our efforts for alternative vendors will result in the stable increase in revenues from online pharmacy in the coming years

 

Our online pharmacy sales increased by approximately $8,944,704, or 66.1% for the year ended March 31, 2021, as compared to the year ended March 31, 2020. 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 $8,243,099 in the year ended March 31, 2021 as compared to $1,447,469 in the year ended March 31, 2020. 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.

 

 

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 nine (109) stores as of March 31, 2021.

 

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.

 

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.

 

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, 2021, our restricted reserves totaled $1,309,109(RMB9, 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.

 

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.

 

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. 

 

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. 

 

Our management will have broad discretion over the use of the proceeds we receive from our financing activities and might not apply the proceeds in ways that increase the value of your investment.

 

Our management will have broad discretion to use the net proceeds from any offerings we may conduct from time to time, and the shareholders will be relying on the judgment of our management regarding the application of these proceeds. Except as described in our offering books, the net proceeds received by us from our offerings will be added to our general funds and will be used for general corporate purposes. Our management might not apply the net proceeds from offerings of our securities in ways that increase the value of your investment and might not be able to yield a significant return, if any, on any investment of such net proceeds. You may not have the opportunity to influence our decisions on how to use such proceeds.

 

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, and 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 a widespread outbreak of contagious disease, including the current outbreak of respiratory illness caused by the novel coronavirus. Any outbreak of contagious diseases, and other adverse public health developments, particularly in China, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to distribute our products, as well as temporary closures of our facilities or the facilities of our suppliers or customers. Any disruption or delay of our suppliers, manufacturers or customers would likely impact our sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of China and many other countries, resulting in an economic downturn that could affect demand for our products and significantly impact our operating results. Amidst the COVID-19 outbreak, we experienced a decline in the number of customer visits in calendar 2020 due to the implementation of the lockdown policy in China. In addition, because some of our employees could not come to the workplace, we were short of staff which slowed down our logistic service and impacted our customer service at stores. However, as China has controlled the spread of COVID-19, the negative impacts have been limited. On the other side, currently we are unable to accurately predict the future impact of COVID-19 due to the developing circumstances and uncertainty surrounding this current pandemic, including the ultimate geographic spread of COVID-19, the severity of the disease, the duration of the outbreak, and effectiveness of the actions that may be taken by governmental authorities. The management has been closely monitoring the impact caused by COVID-19 and we will continue to operate our business as steadily and safely as we can. 

 

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 independent registered public accounting firm issued an audit opinion on the financial statements included in our annual reports filed with the SEC. Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual reports is located in China, and audit procedures take place within China’s borders. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, work papers located in China are not currently inspected by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the PRC authorities.

 

Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. However, the PCAOB is currently unable to inspect an auditor’s audit work related to a company’s operations in China and where such documentation of the audit work is located in China. As a result, our investors may be deprived of the benefits of the PCAOB’s oversight of auditors that are located in China through such inspections.

 

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations outside United States, especially in China. On April 21, 2020, the SEC and the PCAOB issued another joint statement highlighting the significant disclosure, financial reporting and other risks associated with emerging market investments, including the PCAOB’s continued inability to inspect audit work papers in China. These joint statements reflect a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the SEC and the PCAOB will take to address the problem and its impact on Chinese companies listed in the United States.

 

The inability of the PCAOB to conduct inspections of an auditor’s work papers in China makes it more difficult to evaluate the effectiveness of any of our auditor’s audit procedures or quality control procedures that may be located in China as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

In June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, and passed requiring the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, which in effect would prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if registrant’s financial statements have, for a period of three years, been audited by an accounting firm branch or office that is not subject to PCAOB inspection. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law. These recent developments would add uncertainties to our securities and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statementsl. 

 

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.

 

On October 16, 2020，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 April 14, 2021, to demonstrate compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum of ten (10) consecutive trading days.

 

On December 17, 2020, 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. In the year ended March 31, 2021, our stock prices range from $0.90 to $3.35. 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.

 

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 $0.90 to a high of $3.35. 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 29, 2021, our directors and executive officers collectively controlled approximately 9,433,482 or 22.6% 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. 

 

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.

 

Other General Risk Factors

 

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.

 

 

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.

 

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. 

 

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.

 

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.

 

 

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.

 

 

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.

 

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.

 

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.

 

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.

 

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 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.

 

 

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.

 

 

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.

 

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 $0.90 to a high of $3.35. 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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not applicable to a smaller reporting company like us.

 

ITEM 2. PROPERTIES

 

We are headquartered in Hangzhou, China. We own three properties. Additionally, our current leased properties are as follows:

 

Description		Location		Size (square meters)		Lease expiration date
Principal executive office		Hai Wai Hai Tongxin Mansion Floor 5&6 Gong Shu District, Hangzhou City Zhejiang Province, China		4,000		December 27, 2021
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)		Lin’An District, 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 109 pharmacies. See Note 10, “Long Term Deposits”. 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 13, “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.

 

 

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 41,751,790 shares of common stock issued and outstanding as of June 29, 2021.

 

Holders

 

Based on the records of our transfer agent, there were 23 stockholders of record of our common stock as of June 29, 2021 (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.

 

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.

 

 

On June 3, 2020, we issued unregistered warrants to the investors in a concurrent private placement to a registered direct offering pursuant to a Securities Purchase Agreement dated June 1, 2020 (the “2020 Securities Purchase Agreement”), by and among the Company and the purchasers named therein, to purchase up to an aggregate of 3,750,003 shares of common stock at an exercise price of $2.60 per share (the “2020 Warrants”). The 2020 Warrants shall be initially exercisable six months following issuance and expire five and one-half years from the issuance date. H.C. Wainwright & Co., LLC (the “Placement Agent”) (or its designees) received warrants to purchase up to 300,000 shares of our common stock (the “2020 PA Warrants”), with substantially the same terms as the 2020 Warrants being issued to the investors, except, among other things, that the Placement Agent’s warrants will expire on June 1, 2025 and the warrants exercise price shall be $2.57.

 

On July 14, 2021, the Company filed a registration statement on Form S-1 providing for the resale by the investors of Common Stock issuable upon exercise of the 2020 Warrants and the 2020 PA Warrants. The registration statement was declared effective by the SEC on August 24, 2020.

 

ITEM 6. [RESERVED.]

 

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, 2021 and 2020 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”).

 

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, 2021, we had 109 pharmacies in Hangzhou city under the store brand of “Jiuzhou Grand Pharmacy”. During the year ended March 31, 2021, the Company sold its Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”), which runs ten stores in Linan City, to local investors for a total proceeds of $. On the other side, we have been concentrating on new stores within Hangzhou metropolitan area and opened five in the fiscal year 2021.

 

 

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 2020, 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, 2021. 

 

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 in China in the past few months. The number of the new daily cases has become limited. People now work and live as normal. 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.

 

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 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.

 

In the year ended March 31, 2020, we evaluated the use rights of the forest land, which 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.Based on the evaluation of the forest land use rights, the Company recorded an impairment of $228,506.

 

Results of Operations

 

Comparison of years ended March 31, 2021 and 2020 

 

The following table summarizes our results of operations for the years ended March 31, 2021 and 2020:

 

		Years ended December 31,
		2021								2020
		Amount				Percentage of total revenue				Amount				Percentage of total revenue
Revenue		$	133,134,633				100.0	%		$	117,327,689				100.0	%
Cost of goods sold		$	103,890,824				78.0	%			91,801,259				78.2	%
Gross profit		$	29,243,809				22.0	%		$	25,526,430				21.8	%
Selling expenses		$	26,954,914				20.2	%		$	23,793,603				20.3	%
General and administrative expenses		$	10,897,629				8.2	%		$	8,108,377				6.9	%
Impairment of long-lived assets		$	228,506				0.2	%		$	628,192				0.5	%
Loss from operations		$	(8,837,240	)			(6.6	)%		$	(7,003,742	)			(6.0	)%
Other Expense, net		$	429,210				0.3	%		$	562,323				0.5	%
Change in fair value of derivative liability		$	64,090				0.0	%		$	401,158				0.3	%
Income tax expense		$	31,638				0.0	%		$	16,258				0.0	%
Net loss		$	(8,375,578	)			(6.3	)%		$	(6,457,677	)			(5.5	)%

 

Revenue

 

Primarily due to the rise in our online pharmacy and wholesale business, revenue increased by $15,806,944 or 13.5% for the year ended March 31, 2021, as compared to the year ended March 31, 2020. 

 

 

Revenue by Segment

 

The following table breaks down the revenue for our four business segments for the year ended March 31, 2021 and 2020:

 

		For the year ended March 31,
		2021								2020
		Amount				% of total revenue				Amount				% of total revenue				Variance by amount				% of change
Revenue from retail drugstores		$	76,098,975				57.2	%		$	74,081,237				63.1	%		$	2,017,738				2.7	%
Revenue from online sales			22,485,919				16.8	%			13,541,215				11.6	%			8,944,704				66.1	%
Revenue from wholesale business			34,549,739				26.0	%			29,705,237				25.3	%			4,844,502				16.3	%
Revenue from farming business			-				-	%			-				-	%			-				-	%
Total revenue		$	133,134,633				100.0	%		$	117,327,689				100.0	%		$	15,806,944				13.5	%

 

Retail drugstores sales, which accounted for approximately 57.2% of total revenue for the year ended March 31, 2021, increased by $2,017,738 or 2.7% compared to the year ended March 31, 2020, to $76,098,975. However, after removing the impact of exchange rate fluctuation, the actual retail drugstores sales decreased 1.5%. Same-store sales decreased by approximately $949,110, or 1.3%, while new stores contributed approximately $548,403 in revenue in the year ended March 31, 2021.

 

The actual decrease in our retail drugstore sales is primarily due to the negative effect on the overall economy from COVID-19 and 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, 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 sell 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. Once the spread of COVID-19 is effectively controlled, we expect the local consumption will surge again in the future. Our store count is 118 at March, 2020 and 109 at March 31, 2021.

 

Our online pharmacy sales increased by approximately $8,944,704, or 66.1% for the year ended March 31, 2021, as compared to the year ended March 31, 2020. 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 $8,243,099 in the year ended March 31, 2021 as compared to $1,447,469 in the year ended March 31, 2020. 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.

 

 

The sales via our official website were primarily made by certain pharmacy benefit management providers and insurance companies. For example, we have signed a service contract with Yingda Taihe Life Insurance Co. Ltd. (“Yingda”), a national insurance company. Certain companies bought private health insurances from Yingda for their employees. By linking our online pharmacy platform with Yingda and educating these employees, they are able to buy health products on our online stores. The sales from these customers contributed significantly to our official website sales. Additionally, in the first quarter of calendar 2021, at the outbreak of COVID-19, we sold a large quantity of health protective products such as masks. Our official website sales decreased by 74,238 or 2.5% year over year.

 

Wholesale revenue increased by $4,844,502 or 16.3%, 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. 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, 2021 and 2020, 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.

 

Gross Profit

 

Gross profit increased by $3,717,379 or 14.6% period over period primarily as a result of an increase in gross profit provided by both wholesale business and retail drugstores, which increased significantly in the year ended March 31, 2021. At the same time, gross margin increased from 21.8% to 22.0% due to higher retail drugstores profit margins. The average gross margins for each of our four business segments are as follows:

 

		Year ended March 31,
		2021				2020
Average gross margin for retail drugstores			30.2	%			28.1	%
Average gross margin for online sales			10.4	%			10.6	%
Average gross margin for wholesale business			11.3	%			11.0	%
Average gross margin for farming business			N/A				N/A

 

Retail gross margins increased primarily because we introduced certain popular products with high profit margin and renegotiated 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 similar 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

 

Sales and marketing expenses increased by $3,161,311 or 13.3% year over year, primarily due to increase in salary and rent. Retaining key employees such as store manager and pharmacists is critical to our success in the local market. To retain our employees and keep competitive in compensation, we raised our sales staff salary by approximately $1.1 million. In addition, the rent expense increased by approximately $1.3 million as a result of local real estate boom. Excluding the effect from the salary and rent, the sales and marketing expenses increased by approximately $0.8 million, which primarily reflects the increase in fee charged by distribution channels Such as Tmall and JD as a percentage of online pharmacy sales. Overall, such expenses as a percentage of our revenue were 20.2% and 20.3% respectively, in the year ended March 31, 2021 and 2020.

 

General and Administrative Expenses

 

General and administrative expenses increased by $2,789,252 or 34.4% period over period primarily due to the increase in stock-based compensation, offset by the decrease in bad debt expense. Such expenses as a percentage of revenue increased to 8.2% from 6.9% for the same period a year ago. In December 2020, we issued a total of 3,790,000 shares of common stock and recorded stock-based compensation of approximately $3.9 million. In the year ended March 31, 2021, we recorded the reduction in the allowance for bad debts of $1.0 million as compared to increase in bad debt expense in of $0.1 million in FY2020. Excluding the above effects, general and administrative expenses decreased by approximately $0.06 million.

 

Impairment of Long-lived Assets

 

We recorded an impairment of long-lived assets of $228,506 and $628,192 for the year ended March 31, 2021 and 2020. In the year ended March 31, 2021, we evaluated the forest land use rights and recorded an impairment of $228,506. In the year ended March 31, 2020, we evaluated the licenses of insurance applicable drugstores acquired in the past based on their discounted positive cash value.

 

Loss from Operations

 

As a result of the above, we had loss from operations of $8,837,240, as compared to loss from operations of $7,003,742 a year ago. Our operating margin for the year ended March 31, 2021 and 2020 was (6.6) % and (6.0) %, respectively.

 

Income Taxes

 

Our income tax expense increased by $15,380 period over period due to an increase in the effective rate resulting from an increase in profits in several business lines.

 

Net Loss

 

As a result of the foregoing, net loss is $8,375,578 in the year ended March 31, 2021 as compared to a net loss of $6,457,677 in the year ended March 31, 2020.

 

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		Retail drugstores				Online Pharmacy				Drug wholesale				Herb farming				Total amount
1- 3 months		$	8,574,015			$	1,365,251			$	3,440,787			$	-			$	13,380,053
4- 6 months			602,296				42,560				46,219				-				691,075
7- 12 months			65,186				26,425				21,605				-				113,216
Over one year			2,097,656				7,709				14,533				-				2,119,898
Allowance for doubtful accounts			(2,214,061	)			(34,060	)			(632,393	)			-				(2,880,514	)
Total accounts receivable		$	9,125,092			$	1,407,885			$	2,890,751			$	-			$	13,423,728

 

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, 2021, we wrote off an approximately $118,349 collectible from provincial and Hangzhou City government insurance, as such amounts have been determined by the health insurance bureaus to be unqualified for reimbursement.

 

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 2021, 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, 2021 and through June 29, 2021, we collected approximately $6.8 million in receivables relating to our drugstore business, approximately $0.9 million in receivables relating to our online pharmacy business, approximately $2.1 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 suppliers		Retail drugstores				Online Pharmacy				Drug wholesale				Herb farming				Total amount
1- 3 months		$	29,586			$	-			$	94,455			$	-			$	124,041
4- 6 months			14,575				-				18,625				-				33,200
7- 12 months			122,958				-				19,182				-				142,140
Over one year			105,751				-				16,831				-				122,582
Total advances to suppliers		$	272,870			$	-			$	149,093			$	-			$	421,963

 

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, 2021. At the end of 2021 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: 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 2021, 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:

 

		For the year ended March 31,
		2021				2020
Net cash used in operating activities		$	(62,292	)		$	(6,907,945	)
Net cash used in investing activities		$	(1,998,325	)		$	(4,836,613	)
Net cash provided by financing activities		$	3,079,853			$	19,013,706

 

For the year ended March 31, 2021 cash used in operating activities amounted to $(62,292), as compared to $(6,907,945) a year ago. The change is primarily attributable to a decrease in cash provided by inventories and biological assets of $4,594,952, a decrease in cash provided by accounts receivable of $1,740,172, a decrease in cash provided by bad debt direct write-off and provision of $1,153,216 offset by an increase of $6,697,870 in accounts payable, an increase in cash provided by Stock compensation of $3,907,040 and an increase in cash provided by other current assets of $2,283,281.

 

For the year ended March 31, 2021, net cash used in investing activities amounted to $(1,998,325), as compared to $(4,836,613) provided by investing activities a year ago. The change is primarily attributable to an increase in cash provided by investment in a joint venture of $1,096,964 and an increase of $773,343 in purchases of intangible assets.

 

For the year ended March 31, 2021, net cash provided by financing activities amounted to $3,079,853, as compared to $19,013,706 a year ago. The change is primarily due to repayment of notes payable and proceeds from third parties loan.On June 3, 2020, the Company closed a registered direct offering of 5,000,004 shares of common stock at $2.00 per share with gross proceeds of $10,000,008 from its effective shelf registration statement.

 

As of March 31, 2021, we had cash of approximately $22,045,628. Our total current assets as of March 31, 2021, were $72,234,243 and total current liabilities were $64,897,934, which resulted in a working capital of $7,336,309.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

The following table summarizes our contractual obligations:

 

		Payments due by period
Contractual obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Short-term loan payable		$	762,270				762,270				-				-				-
Notes payable			25,663,633				25,663,633				-				-				-
Long-term loan payable			4,449,903				2,557,634				1,892,269				-				-
Total		$	30,875,806				28,983,537				1,892,269				-				-

 

 

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:

 

		March 31, 2021			March 31, 2020
Balance sheet items, except for the registered and paid-up capital, as of end of period/year		USD1: RMB 0.1525			USD1: RMB 0.1410
Amounts included in the statement of Operations and statement of cash flows for the period/ year ended		USD1: RMB 0.1477			USD1: RMB 0.1436

 

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.

 

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, 2021, 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, 2021, 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, 2021. 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, 2021 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, 2021 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, 2021.

 

 

Remediation of Material Weakness for the year ended March 31, 2021

 

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 weaknesses. 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, and were in place in connection with the preparation of our financial statements for the year ended March 31, 2021. As such, we believe that the remediation initiative outlined above will be sufficient to remediate as the changes become operational for future years the material weakness in internal control over financial reporting as discussed.

 

Changes in Internal Control over Financial Reporting

 

In the quarter ended March 31, 2021, we linked our SAP system, a leading ERP system from Germany that was installed in 2017 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. Furthermore, we have been training our staff in implementing the management system continually. 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 quarter ended March 31, 2021, 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.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

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		Age(1)		Position		Date of Appointment
Lei Liu		56		Chief Executive Officer and Chairman of the Board of Directors		September 17, 2009
Ming Zhao		45		Chief Financial Officer		August 1, 2011
Li Qi		49		Director		October 23, 2009
Caroline Wang (2) (3) (4)		34		Director		March 29, 2017
Jiangliang He (2) (3) (4)		58		Director		September 4, 2018
Genghua Gu (2) (3) (4)		70		Director		March 28, 2014
Pingfan Wu (4)		56		Director		October 26, 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 to September 4, 2018, 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. 

 

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.

 

Family Relationships

 

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, 2021, 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, 2021, 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.

 

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, 2021, our Board of Directors and its committees held the following number of meetings and took the following number of actions by unanimous written consent:

 

		Meetings				Unanimous written consents
Board of Directors			1				4
Audit Committee			1				1
Compensation Committee			1				0
Nominating Committee			1				0

 

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”.

 

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, 2021.

 

Summary Compensation Table
Name and Principal Position		Fiscal Year ended March 31,			Salary ($)				Bonus ($)				Stock Awards ($)(1)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Lei Liu,		2021				90,000				-0-				-				-0-				-0-				-0-				-0-				90,000
CEO (2)		2020				68,910				-0-				-				-0-				-0-				-0-				-0-				68,910
Ming Zhao,		2021				88,000				-0-				-				-0-				-0-				-0-				-0-				88,000
CFO		2020				88,000				-0-				-				-0-				-0-				-0-				-0-				88,000

 

(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 6.9656 to $1.00 on March 31, 2020 and RMB 6.5594 to $1.00 on March 31, 2021.

 

 

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. 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.

 

Outstanding Equity Awards at Fiscal Year Ended March 31, 2021

 

Option Awards																					Stock Awards
Name		Number of securities underlying unexercised options exercisable				Equity incentive plan awards: number of securities underlying unexercised options unexercisable				Equity incentive plan awards: number of securities underlying unexercised unearned options				Option exercise price ($)				Option expiration date			Number of shares or units of stock that have not vested				Market value of shares or units of stock that have not vested ($)				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 ($)
Lei Liu			-				-				180,000				2.50				Nov.18, 2022			-				-				-			$	-
Ming Zhao			-				-				30,000				2.50				Nov.18, 2022			-				-				-			$	-
Li Qi			-				-				125,000				2.50				Nov.18, 2022			-				-				-			$	-

 

 

Equity Compensation Plan Information

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders			967,000				2.50				4,520,000
Equity compensation plans not approved by security holders			-				-				-
TOTAL			967,000				2.50				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. On March 26, 2018, the shareholders of the Company approved the Amendment No. 4 to the Plan which increased the total shares of common stock available for issuance thereunder to 12,196,468. On June 30, 2018, the Compensation Committee of the Board approved the Amendment No. 5 to the Plan as 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 had been amended to remove the provisions intended to comply with that exemption, including the one in Section 1.3.2. of the Plan. On March 5, 2020, the shareholders of the Company approved the Amended and Restated 2010 Equity Incentive Plan, which in addition to the incorporation of the Amendment No. 4 and Amendment No. 5 to the Plan, clarified the term of the Plan in order to render the Plan being available for incentive stock options grants in the future and approved the proposal of adding a ten-year term to the Plan. The Plan, effective since November 2, 2010, shall terminate automatically on January 14, 2030 (the tenth anniversary of the Board’s approval of this Plan), unless terminated earlier by the Board, except with respect to Awards then outstanding. The Plan, as amended and restated, has authorized, with the stockholders’ approval previously obtained, to reserve a total of 12,196,468 shares of our common stock for issuance under the Plan. As of March 31, 2021, there were 2,550,546 shares of our common stock available for future issuance under the Plan. 

 

 

Director Compensation

 

The following table provides compensation information for our directors during the fiscal year ended March 31, 2021:

 

Director Compensation Table
Name		Fiscal Year ended March 31,			Fees Earned or Paid in Cash ($)				Stock Awards ($)(1)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Lei Liu (2)		2021				90,000				--				-0-				-0-				-0-				-0-				68,910
Li Qi (2)		2021				68,000				-0-				-0-				-0-				-0-				-0-				51,682
Caroline Wang		2021				11,813				-0-				-0-				-0-				-0-				-0-				11,485
Genghua Gu		2021				6,000				-0-				-0-				-0-				-0-				-0-				6,000
Jiangliang He		2021				5,361				-0-				-0-				-0-				-0-				-0-				5,168
Pingfan Wu		2021				8,614				-0-				-0-				-0-				-0-				-0-				8,614

 

(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 $11,813 (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 $5,316 (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 $8,860 (RMB60,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 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 29, 2021 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)		Number of Shares beneficially owned (2)				Percentage of class beneficially owned (3)
Lei Liu, Chief Executive Officer and Chairman of the Board of Directors (4)			8,825,482				23.2	%
Ming Zhao, Chief Financial Officer			199,000				*	%
Li Qi, Director (4)			6,409,000				16.9	%
Caroline Wang, Director (5)			-				*	%
Genghua Gu, Director (6)			30,000				*	%
Jiangliang, He, Director			-				*	%
Pingfan Wu, Director			-				*	%
All directors and executive officers as a group (8 persons)			9,433,482				22.6	%
5% Shareholders: (1)
CareRetail Holdings Limited (7)			4,840,000				11.6	%
Super Marvel Limited (4)			6,030,000				14.4	%

 

*	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 41,751,790 shares outstanding as of June 29, 2021.
(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 (56.7%), Li Qi (43.3%). 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 and Ms. Qi, 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, and 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, and 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.

 

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 and Mr. Li Qi (the “Key Personnel”), 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

 

		March 31, 2021				March 31, 2020
Due to a director and CEO (1):			445,305				490,218

 

(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.

 

The Company leases a retail space from Mr. Lei Liu. The lease will expire in September 2022. The rent for the year ended March 31, 2021 has not been paid to Mr. Liu as of March 31, 2021.

 

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). On January 29, 2021, The Company acquired back the 10% of Jiuxin Medicine for a total price of $77,410(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 2021 and 2020 fiscal years:

 

		For the Fiscal Years ended March 31,
		2021				2020
Audit Fees (1)		$	250,000			$	245,000
Audit-Related Fees (2)			-				-
Tax Fees (3)			-				-
All Other Fees (4)			-				-
Total		$	250,000			$	245,000

 

(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 of the audit or review of our financial statements and are not reported above under “Audit Fees.”
(3)	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.

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(1) Financial Statements

 

The following consolidated financial statements for the years ended March 31, 2021 and 2020 are included in Part II, Item 8 of this Report: 

 

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets at March 31, 2021 and 2020	F-4
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended March 31, 2021 and 2020	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended March 31, 2021 and 2020	F-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 2021 and 2020	F-7
Notes to Consolidated Financial Statements	F-8

 

(2) Financial Statement Schedules

 

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.

 

Not applicable.

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
2		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)
3.1		Articles of Incorporation (1)
3.2		Certificate of Amendment to Articles of Incorporation filed with the Nevada Secretary of State on July 14, 2008 (2)
3.3		Articles of Merger filed with the Nevada Secretary of State on September 22, 2009 (3)
3.4		Bylaws (1)
3.5		Text of Amendments to the Bylaws (2)
3.6		Certificate of Change Pursuant to NRS 78.209 with an effective date of April 9, 2010 (6)
4.1		Specimen of Common Stock Certificate (1)
4.2		Amended and Restated 2010 Equity Incentive Plan (20)
4.3		Form of Warrant to the investors in July 2015 (17)
4.4		Form of Warrant to the investors in April 2019 (14)
4.5		Form of Warrant to the investors in June 2020 (8)
4.6		Form of Warrant to the placement agent in June 2020 (8)
10.1		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)
10.2		Operating Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.3		Equity Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.4		Option Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.5		Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.6		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)
10.7		Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.8		Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.9		Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.10		Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.11		Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”) dated August 1, 2009 (3)
10.12		Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.13		Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.14		Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.15		Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)

 

 

10.16		Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.17		Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.18		Amendment to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.19		Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.20		Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.21		Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.22		Amendment to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.23		Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.24		Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.25		Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.26		Amendment to Option Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.27		Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.28		Consulting Services Agreement between Jiuxin Management and Zhejiang Jiuying Grand Pharmacy Co., Ltd. (“Jiuying Pharmacy”) dated May 15, 2012 (10)
10.29		Operating Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
10.30		Voting Rights Proxy Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
10.31		Equity Pledge Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
10.32		Option Agreement between Jiuxin Management and Jiuying Pharmacy dated May 15, 2012 (10)
10.33		Director Offer Letter with Caroline Wang dated as of March 29, 2017 (21)
10.34		Director Offer Letter with Genghua Gu dated December 9, 2013 (13)
10.35		Form of the Non-statutory Stock Option Agreement (16)
10.36		Securities Purchase Agreement between the Company and an Investor dated July 19, 2015 (17)
10.37		Engagement Letter between the Company and H.C. Wainwright & Co., LLC dated July 19, 2015 (17)
10.38		Form of the Restricted Stock Award Agreement for the issuance on November 27, 2015 (18)
10.39		Securities Purchase Agreement by and between the Company and CareRetail Holdings Limited dated January 3, 2017 (19)
10.40		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)
10.41		Offer Letter to Mr. Jiangliang He dated September 4, 2018 (22)
10.42		Offer Letter to Mr. Yan Liu dated September 4, 2018 (22)
10.41		Director Offer Letter with Ms. Pingfan Wu, dated October 26, 2018 (15)
10.42		Form of Securities Purchase Agreement dated April 11, 2019 (14)
10.43		Engagement Agreement with H.C. Wainwright & Co. dated April 10, 2019 (14)
10.44		Form of Securities Purchase Agreement dated June 1, 2020 (8)
10.45		Engagement Agreement with H.C. Wainwright & Co. dated May 31, 2020 (8)
10.46		Agreement and Plan of Merger by and between China Jo-Jo Drugstores, Inc. and China Jo-Jo Drugstores Holdings, Inc., dated May 14, 2021 (23)
14.1		Code of Business Conduct and Ethics (5)
21.1		List of Subsidiaries *
23.1		Consent of Independent Publicly Registered Accounting Firm, BDO China Shu Lun Pan Certified Public Accountants LLP *
31.1		Section 302 Certification by the Corporation’s Chief Executive Officer *
31.2		Section 302 Certification by the Corporation’s Chief Financial Officer *
32.1		Section 906 Certification by the Corporation’s Chief Executive Officer and Chief Financial Officer *

 

 

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)
99.2		Security Deposit Agreement between the Qianhong Local Government and Jiuzhou Pharmacy dated February 27, 2010 (7)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Scheme Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*	Filed herewith
(1)	Incorporated by reference from the registrant’s Registration Statement on Form SB-2 filed on November 28, 2007
(2)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on July 15, 2008
(3)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on September 24, 2009
(4)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on October 30, 2009
(5)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on March 16, 2010
(6)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on April 14, 2010
(7)	Incorporated by reference from the registrant’s Annual Report on Form 10-K filed on June 29, 2010
(8)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on June 2, 2020
(9)	Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q filed on February 14, 2011
(10)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on May 17, 2012
(11)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 30, 2012
(12)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on January 4, 2013
(13)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on December 12, 2013
(14)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on April 11, 2019
(15)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on October 26, 2018
(16)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on November 24, 2014
(17)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on July 21, 2015
(18)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on December 2, 2015
(19)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on January 4, 2017
(20)	Incorporated by reference from the registrant’s Exhibit A to the proxy statement on Schedule 14A filed on January 21, 2020
(21)	Incorporated by reference from Exhibit 10.33 of the registrant’s Annual Report on Form 10-K filed on June 29, 2017
(22)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on September 6, 2018
(23)	Incorporated by reference from the registrant’s Current Report on Form 8-K filed on May 14, 2021

 

 

SIGNATURES

 

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.

 

	CHINA JO-JO DRUGSTORES, INC.
	(Registrant)
Date : June 29, 2021	By:	/s/ Lei Liu
		Lei Liu
		Chief Executive Officer
		(Principal Executive Officer)
Date : June 29, 2021	By:	/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		Title		Date
/s/ Lei Liu		Chief Executive Officer and Director		June 29, 2021
Lei Liu
/s/ Ming Zhao		Chief Financial Officer		June 29, 2021
Ming Zhao
/s/ Li Qi		Director		June 29, 2021
Li Qi
/s/ Caroline Wang		Director		June 29, 2021
Caroline Wang
/s/ Jiangliang He		Director		June 29, 2021
Jiangliang He
/s/ Genghua Gu		Director		June 29, 2021
Genghua Gu
/s/ Pingfan Wu		Director		June 29, 2021
Pingfan Wu

 

 

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, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2021 and 2020, and the results of its operations and its 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.

 

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 

 

		Revenue recognition
Description of the Matter		As described in Note 25 to the consolidated financial statements, the Company recognized (1) retail drugstores sales $ 76,098,975, (2) online pharmacy sales $ 22,485,919, and (3) wholesale sales $34,549,739 for the year ended March 31, 2021.   Since revenue is one of CJJD’s key performance indicators, there probably is an inherent risk that management can achieve specific goals or expectations through operating revenue recognition. In addition, Pharmacies’ business revenue is fragmented and the number of customer orders is large, which may lead to high inherent risk of misstatement. Therefore, we recognize revenue as a critical audit matter.
How We Addressed the Matter in Our Audit		The primary procedures we performed to address this critical audit matter included:   (1) Understood the key internal controls related to revenue recognition, and evaluated the design of these controls, determined whether they were implemented, and tested the effectiveness of the relevant internal controls;   (2) Cross-checked data from retail drugstores operation management system, and sub-flows paths of SAP information system;   (3) Implemented substantive analysis procedures, including analysis on the fluctuations of monthly revenue, costs, and gross profit margins, and comparison of the Company’s gross profit margins with the industry figures;   (4) Sent and collected paper confirmations on both year-end receivable balances from big customers (primarily from wholesale customers) and annual revenue from big wholesale customers, and vouched the subsequent collections of these balances;   (5) Analyzed the rationality of retail drugstores sales and online pharmacy sales, including average order volume and amount per customer and overall disbursements of top 100 customers;   (6) Examined the cash flow transactions, the bank statements, and the bank reconciliations;   (7) Selected top 10 customers and traced their sales ledgers to their sales contracts, sales invoices, sales lists (including the customer information, product names, etc.), sales vouchers and etc.;   (8) Performed cut-off tests to evaluate whether revenue were recognized in the appropriate periods.   (9) Verified whether the information related to revenue has been properly presented in the financial reports.

 

 

 

		Leases
Description of the Matter		As described in Note 14 to the consolidated financial statements ，the right-of-use assets and operating lease liabilities as of March 31, 2021 is $16.8 million and $15.9 million, respectively. As the Company leases most of its retail stores and corporate offices under operating leases, whether right-of-use assets and lease liabilities are correctly computed and recorded may have significant effect on the Company’s P&L.   Additionally, auditing certain aspects of the adoption of ASC 842 was complex and challenging to audit. Therefore, we recognize right-of-use assets and lease liabilities as a critical audit matter.
How We Addressed the Matter in Our Audit		The primary procedures we performed to address this critical audit matter included:   (1) Understood the internal control on lease accounting, including the management’s recognition of the lease classification and payment, apportion and reconciliation of rental expense, and assessed the design of internal control, and the effectiveness of execution of these controls and other related internal controls.   (2) Examined the lease contracts, and assessed whether management’s judgments on lease classification are consistent with GAAP.   (3) Sent and Collected paper confirmations to the landlords, and verified reply information on the confirmations with the Company’s accounting records.   (4) Obtained and double-checked the recognition and amortization of lease expenses, and assessed the correctness and completeness of P&L recognition in current periods.   (5) Examined whether right-of-use assets and lease liabilities have been appropriately disclosed in the financial reports.

 

/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

 

June 29, 2021

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		March 31,				March 31,
		2021				2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	22,045,628			$	16,176,318
Restricted cash			12,627,016				14,806,288
Financial assets available for sale			91,472				157,159
Notes receivable			39,392				57,005
Trade accounts receivable			13,423,728				9,770,656
Inventories			16,972,965				12,247,004
Other receivables, net			5,051,960				5,069,442
Advances to suppliers			421,963				1,174,800
Other current assets			1,560,119				1,528,540
Total current assets			72,234,243				60,987,212
PROPERTY AND EQUIPMENT, net			6,549,035				7,633,740
OTHER ASSETS
Long-term investment			3,981,986				2,544,451
Farmland assets			835,427				742,347
Long term deposits			1,546,764				1,456,384
Other noncurrent assets			856,391				1,046,763
Operating lease right-of-use assets			16,778,729				21,711,376
Intangible assets, net			3,528,056				3,393,960
Total other assets			27,527,353				30,895,281
Total assets		$	106,310,631			$	99,516,233
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term bank loan			762,270				1,410,130
Accounts payable, trade			29,895,830				21,559,494
Notes payable			25,663,633				26,605,971
Other payables			2,940,000				2,522,330
Other payables - related parties			445,305				490,218
Customer deposits			1,146,247				708,140
Taxes payable			197,733				119,247
Accrued liabilities			501,111				753,612
Long-term loan payable-current portion			2,557,634				2,287,742
Current portion of operating lease liabilities			788,171				981,090
Total current liabilities			64,897,934				57,437,974
Long-term loan payable			1,892,269				4,115,958
Long term operating lease liabilities			15,118,083				19,049,575
Employee Deposits			-				70,507
Purchase option and warrants liability			-				64,090
Total liabilities			81,908,286				80,738,104
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock; $0.001 par value; 250,000,000 shares authorized; 41,751,790 and 32,936,786 shares issued and outstanding as of March 31, 2021 and March 31, 2020			41,752				32,937
Preferred stock; $0.001 par value; 10,000,000 shares authorized; nil issued and outstanding as of March 31, 2021 and March 31, 2020			-				-
Additional paid-in capital			66,516,033				54,209,301
Statutory reserves			1,309,109				1,309,109
Accumulated deficit			(44,942,374	)			(36,400,837	)
Accumulated other comprehensive income			2,818,185				1,440,424
Total stockholders’ equity			25,742,705				20,590,934
Noncontrolling interests			(1,340,360	)			(1,812,805	)
Total equity			24,402,345				18,778,129
Total liabilities and stockholders’ equity		$	106,310,631			$	99,516,233

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

		For the years ended March 31,
		2021				2020
REVENUES, NET		$	133,134,633			$	117,327,689
COST OF GOODS SOLD			103,890,824				91,801,259
GROSS PROFIT			29,243,809				25,526,430
SELLING EXPENSES			26,954,914				23,793,603
GENERAL AND ADMINISTRATIVE EXPENSES			10,897,629				8,108,377
IMPAIRMENT OF LONG-LIVED ASSETS			228,506				628,192
TOTAL OPERATING EXPENSES			38,081,049				32,530,172
LOSS FROM OPERATIONS			(8,837,240	)			(7,003,742	)
OTHER EXPENSE:
INTEREST INCOME			707,878				1,063,747
INTEREST EXPENSE			(455,187	)			(698,518	)
OTHER			176,519				(204,064	)
CHANGE IN FAIR VALUE OF PURCHASE OPTION AND WARRANTS LIABILITY			64,090				401,158
LOSS BEFORE INCOME TAXES			(8,343,940	)			(6,441,419	)
PROVISION FOR INCOME TAXES			31,638				16,258
NET LOSS			(8,375,578	)			(6,457,677	)
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST			(255,716	)			(644,308	)
NET LOSS ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.			(8,119,862	)			(5,813,369	)
OTHER COMPREHENSIVE LOSS
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS			1,377,761				(1,068,540	)
COMPREHENSIVE LOSS			(6,997,817	)			(7,526,217	)
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic			40,780,762				32,816,567
Diluted			40,780,762				32,816,567
LOSS PER SHARES:
Basic		$	(0.20	)		$	(0.18	)
Diluted		$	(0.20	)		$	(0.18	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

																						Accumulated
		Common Stock								Additional				Retained Earnings								other				Non-
		Number of								paid-in				Statutory				Accumulated				comprehensive				controlling
		shares				Amount				capital				reserves				deficit				income/(loss)				interest				Total
BALANCE, March 31, 2019			28,936,778				28,937				44,905,664				1,309,109				(30,587,468	)			2,508,964				(1,194,039	)			16,971,167
Stock based compensation			-				-				34,560				-				-				-				-				34,560
Sale of stock and warrants			4,000,008				4,000				9,269,077				-				-				-				-				9,273,077
Net loss			-				-				-				-				(5,813,369	)			-				(644,308	)			(6,457,677	)
Foreign currency translation loss			-				-				-				-				-				(1,068,540	)			25,542				(1,042,998	)
BALANCE, March 31, 2020.			32,936,786				32,937				54,209,301				1,309,109				(36,400,837	)			1,440,424				(1,812,805	)			18,778,129
ECL			-				-				-				-				(421,675	)			-				-				(421,675	)
BALANCE, April 1, 2020			32,936,786				32,937				54,209,301				1,309,109				(36,822,512	)			1,440,424				(1,812,805	)			18,356,454
Exercise of warrants			25,000				25				77,475				-				-				-				-				77,500
Sale of stock and warrants			5,000,004				5,000				9,282,100				-				-				-				-				9,287,100
Issuance of incentive common stocks award			3,790,000				3,790				3,937,810				-				-				-				-				3,941,600
Acquisition of 10% of Jiuxin Medicine			-				-				(990,653	)			-				-				-				728,161				(262,492	)
Net loss			-				-				-				-				(8,119,862	)			-				(255,716	)			(8,375,578	)
Foreign currency translation loss			-				-				-				-				-				1,377,761				-				1,377,761
BALANCE, March 31, 2021.			41,751,790				41,752				66,516,033				1,309,109				(44,942,374	)			2,818,185				(1,340,360	)			24,402,345

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the years ended March 31,
		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	(8,375,578	)		$	(6,457,677	)
Adjustments to reconcile net income to net cash used in operating activities:
Bad debt direct write-off and provision			(706,862	)			446,354
Depreciation and amortization			1,750,890				2,082,817
Impairment of long lived assets			228,506				628,192
Stock based compensation			3,941,600				34,560
Change in fair value of purchase option derivative liability			(64,090	)			(401,158	)
Change in operating assets:
Accounts receivable, trade			(3,307,946	)			(1,567,774	)
Notes receivable			21,539				112,803
Inventories and biological assets			(3,615,017	)			979,935
Other receivables			468,967				(1,010,722	)
Advances to suppliers			1,893,857				148,638
Long term deposit			26,910				596,209
Other current assets			1,004,448				(1,278,833	)
Other noncurrent assets			38,142				87,065
Change in operating liabilities:
Accounts payable, trade			6,380,115				(317,755	)
Other payables and accrued liabilities			(183,111	)			(967,751	)
Customer deposits			368,690				(22,963	)
Taxes payable			66,648				115
Net cash used in operating activities			(62,292	)			(6,907,945	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposal of financial assets available for sale			75,973				14,356
Purchase of financial assets available for sale			-				-
Acquisition of equipment and building			(126,766	)			(656,297	)
Investment in a joint venture			(1,470,119	)			(2,567,083	)
Purchases of intangible assets			(97,802	)			(871,145	)
Additions to leasehold improvements			(379,611	)			(756,444	)
Net cash used in investing activities			(1,998,325	)			(4,836,613	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term bank loan			738,315				1,435,620
Repayment of short-term bank loan			(1,476,630	)			-
Proceeds from third parties loan			-				7,178,100
Repayment of third parties loan			(2,395,629	)			(658,645	)
Proceeds from notes payable			48,292,231				48,974,772
Repayment of notes payable			(51,295,776	)			(46,896,917	)
Increase in financial liability			(73,832	)			(7,178	)
Exercise of warrants			77,500				-
Proceeds from sale of stock and warrants			9,287,100				9,273,077
Repayment of other payable-related parties			(73,426	)			(285,123	)
Net cash provided by financing activities			3,079,853				19,013,706
EFFECT OF EXCHANGE RATE ON CASH			2,670,802				(1,031,744	)
INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH			3,690,038				6,237,404
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year			30,982,606				24,745,202
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of year		$	34,672,644			$	30,982,606
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes		$	37,738			$	17,198
Cash paid for interest			455,187				108,098

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

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 operate drugstores in Lin’an City. On January 2021, Lin’An Jiuzhou was sold to two individuals for total proceeds of $129,586(RMB850,000).

 

In the year ended March 31, 2021, in order to continue expanding and strengthening its local drugstore network, We acquired four single drugstores in fiscal 2021. the Company The acquired stores agreed to cease their stores ‘business and liquidate all of the stores ‘accounts after Jiuzhou Pharmacy acquired them. Jiuzhou Pharmacy then opened four new stores with their government insurance reimbursement certificates.

 

The Company’s offline retail business also includes four 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. In May 2014, Shouantang Technology established Hangzhou Shouantang Bio-technology Co., Ltd. (“Shouantang Bio”). In May 2016, Shouantang Bio set up and held 49% of Hangzhou Kahamadi Bio-technology Co., Ltd. (“Kahamadi Bio”), a joint venture specializing in brand name development for nutritional supplements. In 2018, Jiuzhou Pharmacy invested a total of $741,540 (RMB5,100,000) in and held 51% of Zhejiang Jiuzhou Linjia Medical Investment and Management Co. Ltd (“Linjia Medical”), which has ceased its operation as of March 31, 2021. On March 29, 2019, Jiuzhou Pharmacy formed and currently holds 51% of the equity of Zhejiang AyiGe Medical Health Management Co., Ltd. (“Ayi Health”), which was intended to provide technical support such as IT and customer support to our health management business. However, as the health management business did not progress as planned, on November 19, 2020, Ayi Health was dissolved.

 

The Company currently conducts its online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online pharmacy license. On September 10, 2015, Renovation set up Jiuyi Technology to provide additional technical support such as webpage development to our online pharmacy business. In November 2015, the technical support function was 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). On January 29, 2021, The Company bought back the 10% of Jiuxin Medicine for a total price of $77,410(RMB507, 760).

 

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 2021.

 

 

The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:

 

Entity Name		Background		Ownership
Renovation		●     Incorporated in Hong Kong SAR on September 2, 2008		100%
Jiuxin Management		●     Established in the PRC on October 14, 2008     ●     Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law     ●     Registered capital of $14.5 million fully paid		100%
Shouantang Technology		●     Established in the PRC on July 16, 2010 by Renovation with 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		100%
Qianhong Agriculture		●     Established in the PRC on August 10, 2010 by Jiuxin Management     ●     Registered capital of RMB 10 million fully paid     ●     Carries out herb farming business		100%
Jiuzhou Pharmacy (1)		●     Established in the PRC on September 9, 2003     ●     Registered capital of RMB 5 million fully paid     ●     Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou		VIE by contractual arrangements (2)
Jiuzhou Clinic (1)		●     Established in the PRC as a general partnership on October 10, 2003		VIE by contractual arrangements (2)
		●     Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
Jiuzhou Service (1)		●     Established in the PRC on November 2, 2005   ●     Registered capital of RMB 500,000 fully paid   ●     Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores		VIE by contractual arrangements (2)
Jiuxin Medicine		●     Established in PRC on December 31, 2003     ●     Acquired by Jiuzhou Pharmacy in August 2011     ●     Registered capital of RMB 10 million fully paid     ●     Carries out pharmaceutical distribution services		VIE by contractual arrangements as a wholly-owned subsidiary of Jiuzhou Pharmacy (2)

 

 

Entity Name		Background		Ownership
Jiutong Medical		●     Established in the PRC on December 20, 2011 by Renovation     ●     Registered capital of $2.6 million fully paid     ●     Currently has no operation		100%
Shouantang Bio		●     Established in the PRC in October, 2014 by Shouantang Technology     ●     100% held by Shouantang Technology     ●     Registered capital of RMB 1,000,000 fully paid     ●     Sells nutritional supplements under its own brand name		100%
Jiuyi Technology		●     Established in the PRC on September 10, 2015     ●     100% held by Renovation     ●     Technical support to online pharmacy		100%
Kahamadi Bio		●     Established in the PRC in May 2016     ●     49% held by Shouantang Bio     ●     Registered capital of RMB 10 million     ●     Develop brand name for nutritional supplements		49%
Linjia Medical		●     Established in the PRC in September27, 2017   ●     51% held by Jiuzhou Pharmacy     ●     Registered capital of RMB 20 million     ●     Operates local clinics		VIE by contractual arrangements as a controlled subsidiary of Jiuzhou Pharmacy (2)

 

(1)

Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service had been under the common control of Mr. Lei Liu 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.

(2)

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, an operating agreement, an equity pledge agreement, a voting rights agreement and an 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 subsidiaries under the control of Jiuzhou Pharmacy, Jiuxin Medicine and Shouantang Bio are consolidated into the financial statements of the Company.

 

 

Note 2 – LIQUIDITY

 

The Company’s accounts have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”) on a going concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding (debt and equity) with its expenditure requirements and repayment of the short-term debts as and when they become due.

 

The drug retail business is a highly competitive industry in the PRC. Several large drugstore chains and a variety of single stores operate in Hangzhou City and Zhejiang Province. In order to increase the Company’s competitive advantages and gain more local retail pharmacy market share, from fiscal year 2018, we opened fifty-nine new stores in Hangzhou. As a result, the Company incurred significant incremental expense related to rental, labor hiring and training, and marketing activities. As the retail pharmaceutical market becomes more competitive in recent years, a new store usually cannot make profit in its operation until a year later. In fact, the Company incurred significant expenses with limited incremental revenue in the period it opened new stores. At their openings, except for four stores, almost all of the new stores were without government insurance reimbursement certificates. In fact, it usually takes more than one year for a new store to apply for and obtain the local government insurance reimbursement certificate. As of March 31, 2021, the Company had obtained thirty-seven reimbursement certificates for stores opened in fiscal 2018 and thereafter. Historically in a mature store, more than half of the total revenue were generated from the individual customers’ government insurance program. The Company is in the process of actively applying certificates for all of its new stores. In the future, as more and more stores obtain certificates, the Company expect the income of its new stores to increase and eventually contribute positive operating cash flow. 

 

The Company’s principal sources of liquidity consist of existing cash, equity financing, and bank facilities from local banks as well as personal loans from its principal shareholders when necessary. 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. On June 3, 2020, the Company closed a registered direct offering of 5,000,004 shares of common stock at $2.00 per share with gross proceeds of $10,000,008 from its effective shelf registration statement on Form S-3 pursuant to a Securities Purchase Agreement dated June 1, 2020 (the “2020 Securities Purchase Agreement”), by and among the Company and the investors named therein. 

 

The spread of COVID-19 has negatively impacted the local economy. In order to relieve the operation difficulty, the Government has continued its tax cut policy such as lower certain tax rate. On the other side, local banks are encouraged to provide low interest rate loans to local enterprises. The Company has a credit line agreement from a local bank as described in detail in Note 16. As of March 31, 2021, approximately $0.41 million of the aforementioned bank credit line was available for further borrowing. Additionally, Jiuzhou Pharmacy obtained a credit line of approximately $7,653,850 (RMB50,000,000) from Haihui Commercial Factoring (Tianjin) Co. Ltd. (“Haihui Commercial”) for three years beginning July 26, 2019. As of March 31, 2021, the full amount has been borrowed from Haihui Commercial. Any borrowing thereunder is guaranteed by a third-party guarantor company and secured by the Company’s assets pursuant to a collateral agreement, as well as personal guarantees of some of its principal shareholders.

 

The Company has also obtained additional government insurance reimbursement certificates for its stores opened in the last two years. In a mature store, more than half of the revenue are generated by customers utilizing the government insurance program. With these certificates, mature stores are able to attract more customers who are eligible for the insurance program, and its sales may significantly increase in the next 12 months. Additionally, with the proceeds from the registered direct financing closed on April 15, 2019 and June 3, 2020, and the increased credit line, the Company believes it can support its operations for at least the next 12 months.

 

Note 3 – 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.

 

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 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 consolidated financial statements relate to the assessment of the carrying values of accounts receivable, related allowance for doubtful accounts, losses. 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, cash equivalents and restricted cash, financial assets available for sales, trade accounts receivable, notes receivables, other receivable, accounts payable, other payable, notes payable, long-term loan payable, employee deposits and warrants liability. The carrying amounts of cash and cash equivalents, restricted cash, 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 16). The carrying amount of Long-term loan payable approximates fair value based on borrowing rates of similar bank loan currently available to the Company (Level 2) (See Note 17). 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) (See Note 21). The carrying amount of the financial assets available for sale is recorded at fair value and is determined based on unobservable inputs (Level 3) (See Note 4). The carrying amount of the employee deposits is recorded at fair value and is determined based on unobservable inputs (Level 3) (See Note 22).

 

(amount in absolute value)		Active Market for Identical Assets (Level 1)				Observable Inputs (Level 2)				Unobservable Inputs (Level 3)				Total Carrying Value
Cash, cash equivalents and restricted cash		$	34,672,644				-				-			$	34,672,644
Financial assets available for sale			-				-				91,472				91,472
Trade accounts receivable			13,423,728				-				-				13,423,728
Notes receivable			39,392				-				-				39,392
Other receivable			5,051,960				-				-				5,051,960
Accounts payable			29,895,830				-				-				29,895,830
Notes payable			-				25,663,633				-				25,663,633
Other payable			2,940,000				-				-				2,940,000
Long-term loan payable			-				4,449,903				-				4,449,903
Total		$	86,023,554				30,113,536				91,472			$	116,228,562

 

 

Revenue recognition

 

Effective March 31, 2018, the Company began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue standard was not material to the Company’s consolidated financial statements. The core principle of this new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

 

●

Step 1: Identify the contract with the customer

 

●

Step 2: Identify the performance obligations in the contract

 

●

Step 3: Determine the transaction price

 

●

Step 4: Allocate the transaction price to the performance obligations in the contract

 

●

Step 5: Recognize revenue when the company satisfies a performance obligation

 

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:

 

●

The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct).

 

●

The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

 

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

 

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.

 

The Company’s revenue is net of value added tax (“VAT”) collected on behalf of the PRC tax authorities with 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.

 

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, over-the-counter (“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 merchandise, such as prescription and OTC drugs, are not refundable after the customers leave the counter. Returns 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. The Company based on historical experience, a reserve for potential losses from denial of reimbursement on certain unqualified drugs is made to the receivables from the government agency. Additionally, several onsite clinics adjacent to pharmacies provide limited medical services. Revenue from medical services is recognized after the service has been rendered to a customer. As revenue from medical services is minimal compared to pharmacy retail sales, it is included as part of the pharmacy retail sales.

 

The Company deduct the membership rewards directly from the retail revenue, and present such amounts in net sales as opposed to the current reduction of operation expense classification. 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.

 

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. The Company’s sales policy allows for the return of certain merchandises without reason within seven days after a 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 merchandise is transferred to customers. Historically, sales returns have been minimal.

 

The Company’s revenue is net of 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 years ended March 31, 2021 and 2020:

 

		2021				2020
For the year ended March 31
Retail drugstores
Prescription drugs		$	27,162,968			$	26,045,423
OTC drugs			30,524,057				31,532,248
Nutritional supplements			6,863,559				6,013,622
TCM			4,560,968				5,325,008
Sundry products			1,379,917				1,312,293
Medical devices			5,607,506				3,852,643
Total retail revenue		$	76,098,975			$	74,081,237
Online pharmacy
Prescription drugs		$	8,243,099			$	1,447,469
OTC drugs			7,559,585				5,721,638
Nutritional supplements			956,013				742,809
TCM			295,410				266,638
Sundry products			1,967,174				2,082,601
Medical devices			3,464,638				3,280,060
Total online revenue		$	22,485,919			$	13,541,215
Drug wholesale
Prescription drugs		$	27,477,087			$	24,857,708
OTC drugs			6,242,630				4,196,841
Nutritional supplements			151,657				205,881
TCM			218,758				314,769
Sundry products			28,377				43,854
Medical devices			431,230				86,184
Total wholesale revenue		$	34,549,739			$	29,705,237
Total revenue		$	133,134,633			$	117,327,689

 

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 and membership rewards. 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:

 

		March 31, 2021				March 31, 2020
Trade receivable(included in accounts receivable, net)		$	13,423,728			$	9,770,656
Contract liabilities (included in accrued expenses)			1,470,217				1,106,982

 

 

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.

 

The following represents a reconciliation of cash and cash equivalents in the Consolidated Condensed Balance Sheets to total cash, cash equivalents and restricted cash in the Consolidated Condensed Statements of Cash Flows as of March 31, 2021 and March 31, 2020:

 

		March 31, 2021				March 31, 2020
Cash and cash equivalents		$	22,045,628			$	16,176,318
Restricted cash			12,627,016				14,806,288
Cash, cash equivalents and restricted cash		$	34,672,644			$	30,982,606

 

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 expected credit loss.

 

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 expected credit loss method to estimate the allowance for anticipated uncollectible receivable balances. At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the expected credit loss 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.

 

Credit loss roll forward

 

With the adoption of the current expected credit loss standard in 2020, the company estimates future expected losses on accounts receivable and other receivables over the remaining collection period of the instrument. The roll forward for the allowance for credit losses for the year end March 31, 2021, is as follows:

 

		For the year ended March 31, 2021
		Account receivable				Other receivables				Total
Allowance for credit losses as of March 31, 2020		$	2,264,070				507,671			$	2,771,741
Current expected credit losses opening balance impact on retained earning			189,295				232,380				421,675
Credit loss expense*			427,148				(246,587	)			180,561
Ending allowance for credit losses		$	2,880,513				493,464			$	3,373,977

 

*

The amount represents the reserve made in the current year on estimated potential loss, but not includes the direct write-off of certain collectible from local government insurance agency.

 

 

Advances to suppliers

 

Advances to suppliers consist of prepayments to its vendors, such as pharmaceutical manufacturers and other distributors. Since the acquisition of Jiuxin Medicine, the Company have transferred almost all logistics services of its 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 its drug wholesale business consist of prepayments to its vendors, such as pharmaceutical manufacturers and other distributors. The Company typically receive products from vendors within three to nine months after making prepayments. The Company continuously monitor delivery from, and payments to, its 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.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. 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:

 

		Estimated Useful Life
Leasehold improvements		3-10 years
Motor vehicles		3-5 years
Office equipment & furniture		3-5 years
Buildings		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:

 

		Estimated Useful Life
Land use rights		50 years
Software		3 years
license		Infinite

 

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. In the year ended March 31, 2020, the Company evaluated the licenses of insurance applicable drugstores acquired in the past based on their discounted positive cash value. Due to the stricter government insurance policy in fiscal year 2021, the value of these licenses has declined. As a result, The Company recorded an impairment of $628,192 as of March 31, 2020. In the year ended March 31, 2021, we evaluated the use rights of the forest land, which 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. Based on the evaluation of the forest land use rights, the Company recorded an impairment of $228,506.

 

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.

 

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, 2021 and 2020.

 

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 $309,446 and $262,553 for the year ended March 31, 2021 and 2020, respectively. Such costs consist primarily of print and promotional materials such as flyers to local communities.

 

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.

 

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, 2021 and 2020 were translated at 1 RMB to 0.1525 USD and at 1 RMB to 0.1410 USD, respectively. The average translation rates applied to income and cash flow statement amounts for years ended March 31, 2021 and 2020 were at 1 RMB to 0.1477 USD and at 1 RMB to 0.1436 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, 2021 and March 31, 2020, the Company had deposits totaling $34,602,819 and $30,974,714 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, 2021, two vendors collectively accounted for 42.9% 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, 2020, two vendors collectively accounted for 50.4% 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, 2021, 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, 2020, no customer accounted for more than 10% of the Company’s total sales or more than 10% of total accounts receivable.

 

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Lessees are 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 is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, 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 result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). Lessor accounting is similar to the prior 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 standard, ASU 2014-9.

 

The Company adopted this new accounting standard on April 1, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which includes, among other things, the ability to carry forward the existing lease classification. On April 1, 2019, the Company recorded an after-tax transition adjustment to increase retained earnings by approximately $422,354. The new standard had a material impact on the unaudited condensed consolidated balance sheet, but did not materially impact the Company’s consolidated operating results and had no impact on the Company’s cash flows. The following is a discussion of the Company’s lease policy under the new lease accounting standard:

 

The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and exclude lease incentives.

 

The Company leases premises for retail drugstores, and offices under non-cancellable operating leases. Operating lease payments are expensed over the term of lease using straight line method. A majority of the Company’s retail drugstore leases have a 3 to 10 year term. Usually within one to three months prior to the expiration date of a lease, the Company is required to notify the lessor and has a priority to continue renting the lease property if a lessor intends to lease property. The lease itself does not have restriction or covenants. If both parties agree to continue, a new lease contract with new lease terms has to been signed by both parties. Usually, the rent may increase year by year based on the lease contract. Sublease is typically not allowed. Any damage, if made by the lessee, to the property and equipment within the property has to been fixed or reimbursed by the lessee. The Company does not have any leases entered into that have not yet commenced. The Company has historically been able to renew a majority of its drugstores’ leases. The weighted average remaining lease term is 2.5 years and the weighted average discount rate is 4.19%. Under the terms of its lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the leases. Due to the spread of COVID-19, the Company was able to renegotiate with certain landlords and was able to lower its rent payment. However, the reduction in rent is immaterial. If any reduction is successfully implemented, as the amount is immaterial, the Company simply adjusts rent expense as reduced payments are made.

 

 

Recent Accounting Pronouncements

 

Accounting pronouncements adopted

 

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. The FASB has voted to defer the effective date for public companies that are smaller reporting companies to fiscal years beginning after December 15, 2022. 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. The Company adopted this new accounting standard on April 1, 2020. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a $421,675 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows or financial condition.

 

In August 2018, the FASB issued ASU 2018-13 Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements under ASC 820. This ASU is to be applied on a prospective basis for certain modified or new disclosure requirements, and all other amendments in the standard are to be applied on a retrospective basis. The new standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. ASU 2018-13 has no impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued 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. The Company adopted ASU 2017-04 on January 1, 2020. The adoption of the ASU 2017-04 did not have a material impact on the Company’s consolidated financial statements.

 

Accounting pronouncements not yet effective to adopt

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes” (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company does not expect that the requirements of ASU 2019-12 will have a material impact on its consolidated financial statements.

 

 

NOTE 4 – FINANCIAL ASSETS AVAILABLE FOR SALE

 

As of March 31, 2021 and March 31, 2020, financial assets available for sale amounted to $91,472 (RMB 600,000) and $157,159 (RMB 1,114,500), respectively. The Company has invested in Inner Mongolia Songlu Pharmaceutical Co. (“Songlu Pharmaceutical”). As of March 31, 2021, the fair value of the investment is $91,472 (RMB600,000), which accounts for 0.5% shares of Songlu Pharmaceutical.

 

NOTE 5 – TRADE ACCOUNTS RECEIVABLE

 

Trade accounts receivable consisted of the following:

 

		March 31, 2021				March 31, 2020
Accounts receivable		$	16,304,240			$	12,034,726
Less: allowance for doubtful accounts			(2,880,513	)			(2,264,070	)
Trade accounts receivable, net		$	13,423,728			$	9,770,656

 

For the years ended March 31, 2021 and 2020, $118,349 and $212,338 in accounts receivable were directly written off, respectively. As of March 31, 2021, $509,109 were pledged as collateral for borrowings from financial institutions. As of March 31, 2020, $627,055 were pledged as collateral for borrowings from financial institutions.

 

Note 6 – OTHER CURRENT ASSETS

 

Other current assets consisted of the following:

 

		March 31, 2021				March 31, 2020
Prepaid rental expenses (1)		$	1,441,879			$	1,364,975
Prepaid and other current assets			118,240				163,565
Total		$	1,560,119			$	1,528,540

 

(1)	The balance as of March 31, 2021 and March 31, 2020 includes short-term refundable rental security deposits.

 

Note 7 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

		March 31, 2021				March 31, 2020
Building		$	6,357,748			$	5,880,627
Leasehold improvements			9,595,801				9,209,136
Farmland development cost			1,823,257				1,686,430
Office equipment and furniture			6,006,534				5,632,955
Motor vehicles			376,798				504,327
Total			24,160,138				22,913,475
Less: Accumulated depreciation			(15,211,112	)			(13,059,852	)
Impairment*			(2,399,991	)			(2,219,883	)
Property and equipment, net		$	6,549,035			$	7,633,740

 

*	The variance of impairment from from March 31, 2020 to March 31, 2021 is solely caused by exchange rate variance.

 

Total depreciation expense for property and equipment was $1,516,257 and $1,828,514 for the year ended March 31, 2021 and 2020, respectively. There were no fixed assets impaired in the years ended March 31, 2021 and December 31, 2020.

 

 

Note 8 – LONG-TERM INVESTMENT

 

Long-term investment consists of the following:

 

		March 31, 2021				March 31, 2020
Kahamadi Bio (1)		$	-			$	6,217
Zhetong Medical (2)			3,981,986				2,538,234
Advance to suppliers, net		$	3,981,986			$	2,544,451

 

(1)	It represents 49% investment in Kahamadi Bio. The investment is recorded using the equity method. Kahamadi Bio suffered loss of $6,217 in the year ended March 31, 2021.

(2)

It represents 39% investment in Zhejiang Zhetong Medical Co., Ltd. (“Zhetong Medical”). Zhetong Medical was established in March 2020 to target potential acquisitions or to cooperate with local pharmacies. By attracting more funds from local investors, the Company expects to continue growing its local network in the future. In the year ended March 31, 2021, Jiuzhou Pharmacy injected funds of approximately $1,443,752 into Zhetong Medical. The investment is recorded based on equity method.

 

Note 9 – 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, 2021 and March 31, 2020, advance to suppliers consist of the following:

 

		March 31, 2021				March 31, 2020
Advance to suppliers		$	421,963			$	2,198,863
Less: reserve for vendor non-performance on advances			-				(1,024,063	)
Advance to suppliers, net		$	421,963			$	1,174,800

 

Note 10 – INVENTORY

 

Inventory consisted of finished goods, valued at $16,972,965 and $12,247,004 as of March 31, 2021 and March 31, 2020, 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, 2021 and March 31, 2020.

 

Note 11 – 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, 2021 and March 31, 2020, farmland assets are valued as follows:

 

		March 31,				March 31,
		2021				2020
Farmland assets		$	2,387,136			$	2,177,606
Less: Impairment*			(1,551,709	)			(1,435,259	)
Farmland assets, net		$	835,427			$	742,347

 

*	The difference between the recorded impairment loss as of December 31, 2020 and March 31, 2020 is primarily due to the exchange rate variance over years. There is no leasehold impairment expense in fiscal 2020 and 2021.

 

 

Note 12 – LONG TERM DEPOSITS, LANDLORDS

 

As of March 31, 2021 and March 31, 2020, long term deposits amounted to $1,546,764 and $1,456,384, 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 up front, plus additional deposits.

 

Note 13 – OTHER NONCURRENT ASSETS

 

Other noncurrent assets consisted of the following:

 

		March 31, 2021				March 31, 2020
Forest land use rights*		$	785,569			$	994,558
Others			70,822				52,205
Total		$	856,391			$	1,046,763

 

*

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. In the year ended March 31, 2021, based on the evaluation of the forest land use rights, the Company recorded an impairment of $228,506.

 

The amortization of the prepayment for the lease of land use right was approximately $52,073 and $26,975 for the years ended March 31, 2021 and 2020, 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,		Amount
2022		$	40,046
2023			40,046
2024			40,046
2025			40,046
2026			40,046
Thereafter			585,339

 

 

Note 14 – Leases

 

The Company leases most of its retail stores and corporate offices under operating leases, typically with initial terms of 3 to 10 years. Usually within one to three months prior to the expiration date of a lease, the Company is required to notify the lessor and has a priority to continue renting the lease property if a lessor intends to lease property. The lease itself does not have restriction or covenants. If both parties agree to continue, a new lease contract with new lease terms has to been signed by both parties. Usually the rent may increase year by year based on the lease contract. Sublease is typically not allowed. Any damage, if made by the lessee, to the property and equipment within the property has to been fixed or reimbursed by the lessee. The Company does not have any leases entered into but which have not yet commenced. The net lease cost for the year ended March 31, 2021 is $6,340,671. The Company does not have finance lease according to the definition of ASU 2016-02, Leases (Topic 842). Supplemental cash flow information related to leases for the year ended March 31, 2021 is as follows:

 

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases		$	6,340,671
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			-

 

Supplemental balance sheet information related to leases as of March 31, 2021 is as follows:

 

Operating leases:
Operating lease right-of-use assets		$	16,778,729
Current portion of operating lease liabilities		$	788,171
Long-term operating lease liabilities			15,118,083
Total operating lease liabilities		$	15,906,254
Weighted average remaining lease term
Operating leases			2.5
Weighted average discount rate
Operating leases			4.19	%

 

The following table summarizes the maturity of lease liabilities under operating leases as of March 31, 2021:

 

		Operating
For the year ending March 31,		Leases
2021		$	796,610
2021			5,397,928
2022			3,837,359
2023			2,788,609
2024			1,697,653
Thereafter			2,190,613
Total lease payments			16,708,772
Less: imputed interest			(802,518	)
Total lease liabilities		$	15,906,254

 

 

Note 15 – INTANGIBLE ASSETS

 

Net intangible assets consisted of the following at:

 

		March 31, 2021				March 31, 2020
License (1)		$	2,466,684			$	2,220,512
Software (2)			1,205,857				1,083,024
Land use rights (3)			1,486,663				1,375,095
Total intangible assets			5,159,204				4,678,631
Less: accumulated amortization			(964,046	)			(667,633	)
Less: impairment (4)			(667,102	)			(617,038	)
Intangible assets, net		$	3,528,056			$	3,393,960

 

Amortization expense of intangibles amounted to $296,414 and $254,303 for the years ended March 31, 2021 and 2020, respectively.

 

(1)	This represents the fair value of the licenses of insurance applicable drugstores acquired from a variety of drugstores such as Sanhao Pharmacy and several local stores. 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 2014, the Company acquired Sanhao Pharmacy, a drugstore chain. In September 2017, the Company acquired several new stores for the purpose of the Municipal Social Medical Reimbursement Qualification Certificates. On January 9, 2020, the Company acquired a local drugstore chain. The acquired drugstores ceased their stores’ business and liquidate all of the stores’ accounts after Jiuzhou Pharmacy acquired them. In March 2020, the drugstore chain has dissolved and its certificates were transferred to new stores opened at the same time. In the year ended March 31, 2021, the Company acquired four single drugstores which have been liquidated after the acquisition. Jiuzhou Pharmacy then opened four new stores with the four licenses of local government medical insurance reimbursement program.
(2)	They are primarily the SAP ERP system, the Internet Clinic Diagnosis Terminal system and the Chronic Disease Management system. In 2017, we have installed a leading ERP system, SAP from Germany. SAP is a well-known management system used by many fortune 500 companies. It is being amortized over three years since its installation. In 2020, we have installed an internet Clinic Diagnosis System used to strengthen our ability to perform online diagnosis which may increase more customer spending and a Chronic Disease Management System used to better manage and monitor our members’ health. As of March 31, 2021, the SAP system has a net value of $766,748 (RMB5,029,372), the internet Clinic Diagnosis System has a net value of approximately $409,904 (RMB 2,688,709), the Chronic Disease Management System has a net value of approximately $17,742 (RMB116,379).

 

(3)	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 the Company’s farming business in Lin’an has not grown, the Company does not expect completion of the plant in the near future.
(4)	In the year ended March 31, 2020, the Company evaluated the licenses of insurance applicable drugstores acquired in the past based on the discounted positive cash value. Due to the stricter government insurance policy in the fourth quarter of fiscal year 2020, the value of these licenses has declined. As a result, the Company recorded an impairment in the fourth quarter of fiscal 2020. In the year ended March 31, 2020, we evaluated the use rights of the forest land, which 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. Based on the evaluation of the forest land use rights, the Company recorded an impairment of $228,506.

 

 

Note 16 – 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. Usually, the Company applies to issue a note, which is guaranteed by the bank, to its supplier to pay off its debt in a future date. Before the payment date, the bank will ask the Company to inject cash into the bank. On the payment date, the bank will pay the amount to whoever legally holds the note. As of at March 31, 2021 and March 31, 2020, the balances of notes payable are as follow:

 

Origination

Maturity

March 31,

March 31,

Beneficiary(1)

Endorser

date

date

2021

2020

Jiuzhou Pharmacy

HUB

10/09/19

04/09/20

$

-

$

3,478,259

Jiuzhou Pharmacy

HUB

11/06/19

05/06/20

-

164,582

Jiuzhou Pharmacy

HUB

12/05/19

06/05/20

-

3,106,474

Jiuzhou Pharmacy

HUB

12/31/19

06/30/20

-

2,289,308

Jiuzhou Pharmacy

HUB

01/06/20

07/06/20

-

129,457

Jiuzhou Pharmacy

HUB

02/19/20

08/19/20

-

5,105,096

Jiuzhou Pharmacy

HUB

03/10/20

09/10/20

-

5,324,871

Jiuxin Medicine

HUB

12/26/19

06/26/20

-

1,371,992

Jiuxin Medicine

HUB

12/31/19

06/30/20

-

3,943,776

Jiuxin Medicine

HUB

03/31/20

09/30/20

-

1,692,156

Jiuzhou Pharmacy

HUB

10/10/20

04/10/21

820,847

-

Jiuzhou Pharmacy

HUB

11/09/20

05/09/21

5,715,776

-

Jiuzhou Pharmacy

HUB

12/17/20

06/17/21

1,233,353

-

Jiuzhou Pharmacy

HUB

12/25/20

06/25/21

990,951

-

Jiuzhou Pharmacy

HUB

12/30/20

06/30/21

1,300,222

-

Jiuzhou Pharmacy

HUB

02/05/21

08/05/21

3,075,672

-

Jiuzhou Pharmacy

HUB

03/12/21

09/12/21

5,437,655

-

Jiuxin Medicine

HUB

12/07/20

06/07/21

2,419,382

-

Jiuxin Medicine

HUB

12/30/20

06/30/21

4,503,905

-

Jiuxin Medicine

HUB

03/12/21

09/12/21

165,870

-

Total

$

25,663,633

$

25,951,673

 

(1)

As of March 31, 2021, the Company had $25,663,633 (RMB 168,336,897) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $12,501,401 (RMB 82,001,136) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $6,860,430 three-year deposit (RMB 45,000,000) deposited into HUB as a collateral for current and future notes payable from HUB. As of March 31, 2020, the Company had $26,605,971 (RMB188,677,437) of notes payable from HUB. The Company is required to hold restricted cash in the amount of $14,596,179 (RMB 103,509,456) with HUB as collateral against these bank notes. Included in the restricted cash is a total of $8,763,958 three-year deposit (RMB 62,150,000) deposited into HUB as a collateral for current and future notes payable from HUB.

 

As of March 31, 2021, the Company had a credit line of approximately $13.57 million in the aggregate from HUB. By putting up a three-year deposit of $6.86 million and the restricted cash of $5.64 million deposited in the banks, the total credit line was $26.07 million. As of March 31, 2021, the Company had approximately $25.66 million of bank notes payable and approximately $0.41 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.

 

 

Note 17 – Loan Payable

 

On August 2, 2019 and December 11, 2019, the Company borrowed $717,810 and $6,460,290 from Haihui Commercial Factoring (Tianjin) Co. Ltd. (“Haihui Commercial”), respectively. After deducting processing fee and deposits which are refundable at the end of loan period, the Company received $617,317 and $5,878,864 respectively. The Company is required to pledge accounts receivable of three drugstores to Haihui Commercial. As of March 31, 2021, the remaining loan balance is $4,449,903. The Company is scheduled to make monthly repayments, among which $2,557,634 is due within a year. The Company has an option to pay off the debts earlier than the repayment schedule upon approval from Haihui Commercial.

 

Note 18 – TAXES

 

Income tax

 

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for items which are considered discrete to the period.

 

The effective tax rate based on forecasted annual results for the FYE 2021 is (1.1) %. The effective tax rates on income before income taxes for the year ended March 31, 2021 was (0.4)%. The (0.4)% rate adjustments for the year ended March 31, 2021 represent expenses that primarily include stock option expenses and legal, accounting and other expenses incurred by the Company that are not deductible for PRC income tax. The effective tax rate is based on forecasted annual results and these amounts may fluctuate significantly through the rest of the year as a result of the unpredictable impact of COVID-19 on the Company’s operating activities. 

 

The effective tax rate on income before income taxes for the year ended March 31, 2020 was (0.3) %. The (0.3) % rate adjustments for the year ended March 31, 2020 represent expenses that primarily include stock option expenses and legal, accounting and other expenses incurred by the Company that are not deductible for PRC income tax. The effective tax rate is based on forecasted annual results and these amounts may fluctuate significantly through the rest of the year as a result of the unpredictable impact of COVID-19 on its operating activities.

 

A reconciliation of the income tax provision at the federal statutory rate and the effective rate is as follows:

 

		For the year ended March 31
		2021				2020
U.S. Statutory rates			21.0	%			21.0	%
Foreign income not recognized in the U.S.			(21.0	)			(21.0	)
China income taxes			25.0				25.0
Change in valuation allowance			(25.0	)			(25.0	)
Non-deductible expenses-permanent difference			(0.4	)			(0.3	)
Effective tax rate			(0.4	)%			(0.3	)%

 

The Company has recorded $0 unrecognized benefit as of December 31, 2021. On the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized benefit within the next 12 months 

 

Note 19 – 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 $1,076,811 and $1,341,167 in employment benefits and pension for the years ended March 31, 2021 and 2020, respectively.

 

 

Note 20 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS

 

Amounts payable to related parties are summarized as follows:

 

		March 31, 2021				March 31, 2020
Due to a director and CEO (1) :		$	445,305			$	490,218

 

(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.

 

The Company leases a retail space from Mr. Lei Liu. The lease expires in September 2021. Rent expenses totaled $27,342 and $26,582 for the twelve months ended March 31, 2021 and 2020, respectively. The amounts owed under the lease for the twelve months ended December 31, 2021 and 2020 were not paid to Mr. Liu as of March 31, 2020.

 

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). On January 29, 2021, The Company bought back the 10% of Jiuxin Medicine for a total price of $77,410(RMB507,760). Mr. Lei Liu owns 51% of Hangzhou Kangzhou Biotech Co. Ltd.

 

Note 21 – 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 has expired 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:

 

		Common Stock Warrants				Common Stock Warrants
		March 31, 2021(1)				March 31, 2020
Stock price		$	-			$	1.77
Exercise price		$	-			$	3.10
Annual dividend yield			-	%			-	%
Expected term (years)			-				0.81
Risk-free interest rate			-	%			0.71	%
Expected volatility			-	%			62.08	%

 

(1)	As of March 31, 2021, the warrants had been expired and 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 $64,090 as of March 31, 2020. For the year ended March 31, 2021, the Company recognized a gain of $64,090 for the investor warrant and placement agent warrant, as a result of warrants expiration, respectively. As a result, no warrant liability is carried on the consolidated balance sheets for the investor warrant and placement agent warrant, collectively, as of March 31, 2021.

 

 

Note 22 – Employee Deposits

 

To encourage the 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. As of March 31, 2021, we have closed all clinics under Linjia Medical and ceased its oeration. In order to properly reflect Linjia Medical’s liabilities, the Company reclassified the deposit of $0 (RMB0) and $70,507 (RMB500, 000) as financial liability as of March 31, 2021 and March 31, 2020.

 

Note 23 – STOCKHOLDER’S EQUITY

 

Common stock

 

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 June 1, 2020, an investor exercised 25,000 warrants at the price of $3.10 per share in cash. The Company issued 25,000 shares of common stock as a result.

 

On June 3, 2020, the Company closed a registered direct offering of 5,000,004 shares of common stock at $2.00 per share with gross proceeds of $10,000,008 from its effective shelf registration statement.

 

Stock warrants

 

Concurrent with the registered direct offering of common stock that closed on April 15, 2019, the Company issued to several investors in a private placement warrants to purchase up to 3,000,006 shares of common stock. 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. 240,000 shares at an exercise price of $3.125 per share. The warrant became exercisable on October 11, 2019 and will expire on April 11, 2024.

 

Concurrent with the registered direct offering of common stock that closed on June 3, 2020, the Company issued to several investors in a private placement warrants to purchase up to 3,750,003 shares of common stock. In connection with the offering, the Company also issued warrants to its placement agent of this offering, pursuant to which the agent may purchase up to 6.5% of the aggregate number of shares of common stock sold in the offering, i.e. 300,000 shares at an exercise price of $2.57 per share. The warrant becomes exercisable on December 2, 2020 and will expire on June 2, 2025.

 

Upon evaluation, both the warrants issued in April 2019 and June 2020 meet the definition of an equity transaction under FASBASC 815. Accordingly, the fair value of the warrants is recorded as a part of additional paid-in capital.

 

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. 

 

On December 31, 2020, the Company granted a total of 3,790,000 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. All $3,941,600 of such expense has been recorded as a service compensation expense in the year ended March 31, 2021.

 

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, 2021 and 2020, none was recorded as compensation expense. As of March 31, 2021, all compensation costs related to stock option compensation arrangements granted have been recognized. 

 

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, 2021 and 2020, 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 24 – 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:

 

		The year ended March 31,
		2021				2020
Net loss attributable to controlling interest		$	(8,119,862	)		$	(5,813,369	)
Weighted average shares used in basic computation			40,780,762				32,816,567
Diluted effect of stock options and warrants
Weighted average shares used in diluted computation			40,780,762				32,816,567
Loss per share – Basic:
Net loss before noncontrolling interest		$	(0.20	)		$	(0.18	)
Add: Net loss attributable to noncontrolling interest		$	-			$	-
Net loss attributable to controlling interest		$	(0.20	)		$	(0.18	)
Loss per share – Diluted:
Net income before noncontrolling interest		$	(0.20	)		$	(0.18	)
Add: Net loss attributable to noncontrolling interest		$	-			$	-
Net loss attributable to controlling interest		$	(0.20	)		$	(0.18	)

 

For the year ended March 31, 2021, 967,000 shares underlying employee stock options and 6,750,009 shares underlying outstanding purchase options to several investors, and 540,000 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 25 – 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.

  

The following table presents summarized information by segment of the continuing operations for the year ended March 31, 2021:

 

		Retail drugstores				Online Pharmacy				Drug wholesale				Herb farming				Total
Revenue		$	76,098,975			$	22,485,919			$	34,549,739			$	-			$	133,134,633
Cost of goods			53,093,226				20,146,730				30,650,868				-				103,890,824
Gross profit		$	23,005,749			$	2,339,189			$	3,898,871			$	-			$	29,243,809
Selling expenses			21,975,048				2,770,997				2,208,869				-				26,954,914
General and administrative expenses			9,088,152				288,890				1,487,303				33,284				10,897,629
Impairment of long-lived assets			-				-				-				228,506				228,506
Loss from operations		$	(8,057,451	)		$	(720,698	)		$	202,699			$	(261,790	)		$	(8,837,240	)
Depreciation and amortization		$	1,709,049			$	-			$	41,841			$	-			$	1,750,890
Total capital expenditures		$	392,788			$	-			$	-			$	-			$	392,788

 

The following table presents summarized information by segment of the continuing operations for the year ended March 31, 2020:

 

		Retail drugstores				Online Pharmacy				Drug wholesale				Herb farming				Total
Revenue		$	74,081,237			$	13,541,215			$	29,705,237			$	-			$	117,327,689
Cost of goods			53,244,302				12,106,510				26,450,447				-				91,801,259
Gross profit		$	20,836,935			$	1,434,705			$	3,254,790			$	-			$	25,526,430
Selling expenses			19,434,860				2,148,709				2,210,034				-				23,793,603
General and administrative expenses			5,505,303				243,283				2,359,791				-				8,108,377
Impairment of long-lived assets			628,192				-				-				-				628,192
Loss from operations		$	(4,731,420	)		$	(957,287	)		$	(1,315,035	)		$				$	(7,003,742	)
Depreciation and amortization		$	2,042,951			$	-			$	39,866			$	-			$	2,082,817
Total capital expenditures		$	1,406,470			$	-			$	3,176			$	-			$	1,409,646

 

 

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, 2021 and 2020 were as follows: 

 

		For the year ended
		March 31,
		2021				2020
Prescription drugs		$	27,162,968			$	26,045,423
OTC drugs			30,524,057				31,532,248
Nutritional supplements			6,863,559				6,013,622
TCM			4,560,968				5,325,008
Sundry products			1,379,917				1,312,293
Medical devices			5,607,506				3,852,643
Total		$	76,098,975			$	74,081,237

  

The Company’s net revenue from external customers through online pharmacy by main product category is as follows:

 

		For the year ended
		March 31,
		2021				2020
Prescription drugs		$	8,243,099			$	1,447,469
OTC drugs			7,559,585				5,721,638
Nutritional supplements			956,013				742,809
TCM			295,410				266,638
Sundry products			1,967,174				2,082,601
Medical devices			3,464,638				3,280,060
Total		$	22,485,919			$	13,541,215

 

The Company’s net revenue from external customers through wholesale by main product category is as follows:

 

		For the years ended
		March 31,
		2021				2020
Prescription drugs		$	27,477,087			$	24,857,708
OTC drugs			6,242,630				4,196,841
Nutritional supplements			151,657				205,881
TCM			218,758				314,769
Sundry products			28,377				43,854
Medical devices			431,230				86,184
Total		$	34,549,739			$	29,705,237

 

 

Note 26 – SUBSEQUENT EVENTS

 

On May 14, 2021, the Company and China Jo-Jo Drugstores Holdings, Inc., an exempted company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of the Company (“CJJD Cayman”) entered into a definitive agreement and plan of merger (the “Merger Agreement”) related to a proposed merger transaction. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into CJJD Cayman (the “Redomicile Merger”), with CJJD Cayman surviving and changing its name to China Jo-Jo Drugstores, Inc. Following the Redomicile Merger, CJJD Cayman, together with its subsidiaries, will own and continue to conduct the Company’s business in substantially the same manner as is currently being conducted by the Company and its subsidiaries. The Redomicile Merger is subject to the Company’s shareholders’ approval at the special shareholders meeting to be held on July 19, 2021.