SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
For the quarterly period ended: December 31, 2009
June 30, 2010
or
[ ] Transition Report Pursuant To Section 13 Or
¨ | Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in Charter)
Nevada | | 333-147698 | | 98-0557852 |
(State or other jurisdiction of
incorporation or organization)
| | (Commission File No.) | | (IRS Employee
Identification No.)
|
its charter)
Nevada 98-0557852
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation of (I.R.S. Employer
origination) Identification Number)
Room 507-513, 5th Floor A Building, Meidu Plaza
Gongshu District, Hangzhou, Zhejiang Province
P.R.People's Republic of China
(Address N/A
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
+86principal executive offices) (Zip code)
+86 (571) 88077078
(Registrant’s Telephone number)
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x[X] No ¨
[ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted 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 ¨Yes[ ] No ¨
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller
reporting company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
| | Accelerated filer ¨
|
| | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
| | Smaller reporting company x
|
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ¨[ ] No x
[X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each issuer’sissuer's classes of common
stock, as of the latest practicable date: 20,000,00013,500,002 shares issued and
outstanding as of February 4,August 9, 2010.
Transitional Small Business Disclosure Form (Check one): Yes x No ¨
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR NINE MONTHS ENDED DECEMBER 31, 2009
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TABLE OF CONTENTS
TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
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2
CAUTION REGARDING FORWARD-LOOKING INFORMATION
All statements contained in this Quarterly Report on Form 10-Q (“("Form 10-Q”10-Q") for
China Jo-Jo Drugstores, Inc., other than statements of historical facts, that
address future activities, events or developments are forward-looking
statements, including, but not limited to, statements containing the words
“believe,” “anticipate,” “expect”"believe," "anticipate," "expect" and words of similar import. These statements
are based on certain assumptions and analyses made by us in light of our
experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.
Such risks include, among others, the following: national and local general
economic and market conditions: our ability to sustain, manage or forecast our
growth; raw material costs and availability; new product development and
introduction; existing government regulations and changes in, or the failure to
comply with, government regulations; adverse publicity; competition; the loss of
significant customers or suppliers; fluctuations and difficulty in forecasting
operating results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.
Consequently, all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements and there can be no assurance that the
actual results anticipated by management will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on our business operations.
| |
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION) | |
| |
CONSOLIDATED BALANCE SHEETS | |
AS OF DECEMBER 31, 2009 AND MARCH 31, 2009 | |
| | | | | | |
A S S E T S | | | | | | |
| | December 30, | | | March 31, | |
| | 2009 | | | 2009 | |
| | (Unaudited) | | | | |
CURRENT ASSETS | | | | | | |
Cash | | $ | 1,226,929 | | | $ | 996,302 | |
Restricted cash | | | 362,349 | | | | - | |
Accounts receivable, trade | | | 1,922,664 | | | | 1,265,110 | |
Inventories | | | 3,527,071 | | | | 2,793,101 | |
Other receivables | | | 364,574 | | | | 67,079 | |
Other receivables - related parties | | | - | | | | 2,432 | |
Advances to suppliers | | | 6,813,318 | | | | 5,485,113 | |
Advances to supplier - related party | | | 2,190,826 | | | | 1,797,104 | |
Other current assets | | | 1,455,707 | | | | 564,379 | |
Total current assets | | | 17,863,438 | | | | 12,970,620 | |
| | | | | | | | |
PROPERTY AND EQUIPMENT, net | | | 911,001 | | | | 979,432 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Long term deposit | | | 2,326,829 | | | | 2,015,149 | |
| | | | | | | | |
Total assets | | $ | 21,101,268 | | | $ | 15,965,201 | |
| | | | | | | | |
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Short term loans | | $ | 1,467,000 | | | $ | 1,465,000 | |
Notes payable | | | 720,816 | | | | - | |
Accounts payable, trade | | | 3,217,895 | | | | 5,939,237 | |
Other payables | | | 1,158,763 | | | | 404,731 | |
Other payables - related party | | | 333,029 | | | | 326,715 | |
Taxes payable | | | 1,125,652 | | | | 811,316 | |
Accrued liabilities | | | 248,481 | | | | 360,655 | |
Total liabilities | | | 8,271,636 | | | | 9,307,654 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
SHAREHOLDERS' EQUITY | | | | | | | | |
Common stock; $0.001 par value; 75,000,000 shares authorized; | | | | | | | | |
20,000,000 and 15,800,000 shares issued and outstanding | | | | | | | | |
as of December 31, 2009 and March 31, 2009, respectively | | | 20,000 | | | | 15,800 | |
Paid-in capital | | | 867,884 | | | | 661,800 | |
Statutory reserves | | | 1,309,109 | | | | 1,309,109 | |
Retained earnings | | | 10,982,385 | | | | 5,033,275 | |
Accumulated other comprehensive loss | | | (349,746 | ) | | | (362,437 | ) |
Total shareholders' equity | | | 12,829,632 | | | | 6,657,547 | |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 21,101,268 | | | $ | 15,965,201 | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | | | | | | | |
| |
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION) | |
| |
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME | |
FOR THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008 | |
(Unaudited) | |
| | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | December 31, | | | December 31, | |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
REVENUES | | $ | 14,923,706 | | | $ | 11,562,762 | | | $ | 38,863,743 | | | $ | 33,096,321 | |
| | | | | | | | | | | | | | | | |
COST OF GOODS SOLD | | | 10,156,871 | | | | 8,238,078 | | | | 27,574,136 | | | | 24,139,585 | |
| | | | | | | | | | | | | | | | |
GROSS PROFIT | | | 4,766,835 | | | | 3,324,684 | | | | 11,289,607 | | | | 8,956,736 | |
| | | | | | | | | | | | | | | | |
SELLING EXPENSES | | | 912,312 | | | | 487,395 | | | | 1,986,471 | | | | 1,280,838 | |
GENERAL & ADMINISTRATIVE EXPENSES | | | 441,861 | | | | 111,386 | | | | 1,372,205 | | | | 614,987 | |
OPERATING EXPENSES | | | 1,354,173 | | | | 598,781 | | | | 3,358,676 | | | | 1,895,825 | |
| | | | | | | | | | | | | | | | |
INCOME FROM OPERATIONS | | | 3,412,662 | | | | 2,725,903 | | | | 7,930,931 | | | | 7,060,911 | |
| | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSE), NET | | | 31,557 | | | | 6,448 | | | | 41,800 | | | | (9,190 | ) |
| | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | | | 3,444,219 | | | | 2,732,351 | | | | 7,972,731 | | | | 7,051,721 | |
| | | | | | | | | | | | | | | | |
PROVISION FOR INCOME TAXES | | | 797,866 | | | | 736,828 | | | | 2,023,621 | | | | 1,738,462 | |
| | | | | | | | | | | | | | | | |
NET INCOME | | | 2,646,353 | | | | 1,995,523 | | | | 5,949,110 | | | | 5,313,259 | |
| | | | | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 1,520 | | | | (5,042 | ) | | | 12,691 | | | | 32,730 | |
| | | | | | | | | | | | | | | | |
COMPREHENSIVE INCOME | | $ | 2,647,873 | | | $ | 1,990,481 | | | $ | 5,961,801 | | | $ | 5,345,989 | |
| | | | | | | | | | | | | | | | |
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES | | | 20,000,000 | | | | 15,800,000 | | | | 17,409,489 | | | | 15,800,000 | |
| | | | | | | | | | | | | | | | |
BASIC AND DILUTED EARNING PER SHARE | | $ | 0.13 | | | $ | 0.13 | | | $ | 0.34 | | | $ | 0.34 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | | | | | | | | | | | | | | | |
| |
(FORMERLY
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION) | |
| |
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
2010 2010
--------------- -------------
(Unaudited)
---------------
ASSETS
------
CURRENT ASSETS
Cash $ 15,774,697 $ 801,593
Restricted cash 807,941 746,703
Accounts receivable, trade 1,446,093 1,228,294
Inventories 3,963,780 3,770,411
Other receivables 246,484 282,073
Advances to suppliers 10,179,812 6,850,240
Other current assets 1,630,603 1,331,167
---------------- -------------
Total current assets 34,049,410 15,010,481
---------------- -------------
PROPERTY AND EQUIPMENT, net 1,326,425 1,186,292
---------------- -------------
OTHER ASSETS:
Long term deposit 2,321,115 2,311,661
Prepaid - noncurrent 5,671,660 5,508,963
---------------- -------------
Total other assets 7,992,775 7,820,624
---------------- -------------
Total assets $ 43,368,610 $ 24,017,397
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short term loans $ 1,473,000 $ 880,200
Notes payable 1,587,026 1,464,241
Accounts payable, trade 3,348,229 2,330,317
Other payables 166,488 225,716
Other payables - related parties 880,107 935,000
Taxes payable 1,140,709 1,235,083
Accrued liabilities 439,804 257,091
---------------- -------------
Total current liabilities 9,035,363 7,327,648
---------------- -------------
Purchase option derivative liability 344,507 -
---------------- -------------
Total liabilities 9,379,870 7,327,648
---------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock; $0.001 par value; 500,000,000 and 250,000,000
shares authorized; 13,500,002 and 10,000,000 shares issued
and outstanding as of June 30, 2010 and March 31, 2010,
respectively 13,500 10,000
Paid-in capital 15,921,489 877,884
Statutory reserves 1,309,109 1,309,109
Retained earnings 17,007,480 14,855,016
Accumulated other comprehensive loss (262,838) (362,260)
---------------- -------------
Total shareholders' equity 33,988,740 16,689,749
---------------- -------------
Total liabilities and shareholders' equity $ 43,368,610 $ 24,017,397
================ ==============
|
4
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended June 30,
2010 2009
------------------- ------------------------
REVENUES 15,207,428 11,681,464
COST OF GOODS SOLD 10,593,532 8,657,568
------------------- ------------------------
GROSS PROFIT 4,613,896 3,023,896
------------------- ------------------------
SELLING EXPENSES 823,358 477,777
GENERAL & ADMINISTRATIVE EXPENSES 773,762 365,210
------------------- ------------------------
OPERATING EXPENSES 1,597,120 842,987
------------------- ------------------------
INCOME FROM OPERATIONS 3,016,776 2,180,909
OTHER INCOME (EXPENSE), NET (57,532) 6,635
CHANGE IN FAIR VALUE OF PURCHASE OPTION DERIVATIVE LIABILITY 57,944 -
------------------- ------------------------
INCOME BEFORE INCOME TAXES 3,017,188 2,187,544
PROVISION FOR INCOME TAXES 864,724 588,383
------------------- ------------------------
NET INCOME 2,152,464 1,599,161
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments 99,422 (1,420)
------------------- ------------------------
COMPREHENSIVE INCOME $ 2,251,886 $ 1,597,741
=================== ========================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 12,653,848 7,900,000
=================== ========================
BASIC AND DILUTED EARNING PER SHARE $ 0.17 $ 0.20
=================== ========================
5
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
Retained Earnings Accumulated
Common Stock ----------------------- other
Number of Paid-in Statutory comprehensive
shares Amount capital reserves Unrestricted income/(loss) Total
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, March 31, 2009 7,900,000 $ 7,900 $ 669,700 $1,309,109 $ 5,033,275 $ (362,437) $ 6,657,547
Net income 1,599,161 1,599,161
Foreign currency translation adjustments (1,420) (1,420)
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, June 30, 2009 (Unaudited) 7,900,000 $ 7,900 $ 669,700 $1,309,109 $ 6,632,436 $ (363,857) $ 8,255,288
========== ======= ============ ========== ============= ============== ============
Shares issued for reorganization on
September 17, 2009 2,100,000 2,100 (2,100) -
Stock-based compensation 202,120 202,120
Shareholder contribution 8,164 8,164
Net income 8,222,580 8,222,580
Foreign currency translation adjustments 1,597 1,597
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, March 31, 2010 10,000,000 $10,000 $ 877,884 $1,309,109 $ 14,855,016 $ (362,260) $16,689,749
========== ======= ============ ========== ============= ============== ============
Issurance of common stock 3,500,000 3,500 15,446,056 15,449,556
Fractional shares due to the one-for-two
reverse split 2 -
Reclassification of purchase option to
derivative liabilities (402,451) (402,451)
Net income 2,152,464 2,152,464
Foreign currency translation adjustments 99,422 99,422
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, June 31, 2010 (Unaudited) 13,500,002 $13,500 $15,921,489 $1,309,109 $ 17,007,480 $ (262,838) $33,988,740
========== ======= ============ ========== ============= ============== ============
| | | | | | | | | | | | | | | | | Accumulated | | | | |
| | Common Stock | | | | | | Retained Earnings | | | other | | | | |
| | Number of | | | | | | Paid-in | | | Statutory | | | | | | comprehensive | | | | |
| | shares | | | Amount | | | capital | | | reserves | | | Unrestricted | | | income/(loss) | | | Totals | |
BALANCE, March 31, 2008 | | | 15,800,000 | | | $ | 15,800 | | | $ | 661,800 | | | $ | 606,665 | | | $ | (1,077,797 | ) | | $ | (390,125 | ) | | $ | (183,657 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | 5,313,259 | | | | | | | | 5,313,259 | |
Adjustment of statutory reserves | | | | | | | | | | | | | | | 531,326 | | | | (531,326 | ) | | | | | | | - | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | 32,730 | | | | 32,730 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2008 (unaudited) | | | 15,800,000 | | | $ | 15,800 | | | $ | 661,800 | | | $ | 1,137,991 | | | $ | 3,704,136 | | | $ | (357,395 | ) | | $ | 5,162,332 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | 1,500,257 | | | | | | | | 1,500,257 | |
Adjustment of statutory reserves | | | | | | | | | | | | | | | 171,118 | | | | (171,118 | ) | | | | | | | - | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | (5,042 | ) | | | (5,042 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, March 31, 2009 | | | 15,800,000 | | | $ | 15,800 | | | $ | 661,800 | | | $ | 1,309,109 | | | $ | 5,033,275 | | | $ | (362,437 | ) | | $ | 6,657,547 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for reorganization on | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 17, 2009 | | | 4,200,000 | | | | 4,200 | | | | (4,200 | ) | | | | | | | | | | | | | | | - | |
Stock-based compensation | | | | | | | | | | | 202,120 | | | | | | | | | | | | | | | | 202,120 | |
Net income | | | | | | | | | | | | | | | | | | | 5,949,110 | | | | | | | | 5,949,110 | |
Shareholder contribution | | | | | | | | | | | 8,164 | | | | | | | | | | | | | | | | 8,164 | |
Foreign currency translation adjustments | | | | | | | | | | | | | | | | | | | | 12,691 | | | | 12,691 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, December 31, 2009 (unaudited) | | | 20,000,000 | | | $ | 20,000 | | | $ | 867,884 | | | $ | 1,309,109 | | | $ | 10,982,385 | | | $ | (349,746 | ) | | $ | 12,829,632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements. | | | | | | | | |
| |
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION) | |
| | | | | | |
CONSOLIDATED STATEMENTS OF CASH FLOWS | |
FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008 | |
(Unaudited) | |
| | | | | | |
| | 2009 | | | 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 5,949,110 | | | $ | 5,313,259 | |
Adjustments to reconcile net income to net cash | | | | | | | | |
provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 389,809 | | | | 331,582 | |
Loss on fixed assets disposal | | | - | | | | 321 | |
Stock compensation | | | 126,325 | | | | - | |
Change in operating assets | | | | | | | | |
Accounts receivable, trade | | | (655,559 | ) | | | (516,212 | ) |
Inventories | | | (729,858 | ) | | | (814,081 | ) |
Other receivables | | | (297,283 | ) | | | (386,195 | ) |
Other receivables - related parties | | | 2,435 | | | | 165,592 | |
Advances to suppliers | | | (1,320,177 | ) | | | (3,269,792 | ) |
Advances to suppliers - related parties | | | (391,108 | ) | | | (641,987 | ) |
Other current assets | | | (889,536 | ) | | | 126,672 | |
Long term deposit | | | (308,803 | ) | | | - | |
Change in operating liabilities | | | | | | | | |
Accounts payable, trade | | | (2,007,814 | ) | | | (322,498 | ) |
Other payables and accrued liabilities | | | 716,512 | | | | (25,221 | ) |
Other payables-related parties | | | 5,866 | | | | (7,278 | ) |
Taxes payable | | | 313,101 | | | | 325,495 | |
Net cash provided by operating activities | | | 903,020 | | | | 279,657 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of equipment | | | (57,110 | ) | | | (22,944 | ) |
Additions to leasehold improvements | | | (263,619 | ) | | | (246,402 | ) |
Net cash used in investing activities | | | (320,729 | ) | | | (269,346 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Restricted cash | | | (362,349 | ) | | | - | |
Payments on short-term loans | | | (1,466,400 | ) | | | (508,060 | ) |
Proceeds from short-term loans | | | 1,466,400 | | | | 508,060 | |
Net cash used in financing activities | | | (362,349 | ) | | | - | |
| | | | | | | | |
EFFECT OF EXCHANGE RATE ON CASH | | | 10,685 | | | | 24,082 | |
| | | | | | | | |
INCREASE IN CASH | | | 230,627 | | | | 34,393 | |
| | | | | | | | |
CASH, beginning of period | | | 996,302 | | | | 878,948 | |
| | | | | | | | |
CASH, end of period | | $ | 1,226,929 | | | $ | 913,341 | |
| | | | | | | | |
The accompanying notes are an integral part of these financial statements. | |
6
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
June 30,
2010 2009
------------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,152,464 $ 1,599,161
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 148,584 121,033
Stock compensation 40,529 -
Change in fair value of purchase option derivative liability (57,944) -
Change in operating assets
Accounts receivable, trade (211,953) 124,975
Inventories (177,259) 97,471
Other receivables 36,600 17,455
Advances to suppliers (3,288,775) (552,270)
Advances to suppliers - related parties - (93,389)
Other current assets (256,265) (244,132)
Long term deposit - (296,553)
Prepaid rent - noncurrent (16,938) -
Change in operating liabilities
Accounts payable, trade 1,004,479 (203,057)
Other payables and accrued liabilities 81,500 9,195
Notes payable 116,344 -
Taxes payable (99,041) (125,237)
------------------ --------------------
Net cash provided by (used in) operating activities (527,675) 454,652
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (127,334) (7,668)
Additions to leasehold improvements (315,375) (170,893)
------------------ --------------------
Net cash used in investing activities (442,709) (178,561)
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (57,958) -
Proceeds from equity financing 15,449,516 -
Proceeds from short-term loans 586,920 -
Other payables-related parties (54,942) -
------------------ --------------------
Net cash provided by financing activities 15,923,536 -
------------------ --------------------
EFFECT OF EXCHANGE RATE ON CASH 19,952 (245)
------------------ --------------------
INCREASE IN CASH 14,973,104 275,846
CASH, beginning of period 801,593 996,302
------------------ --------------------
CASH, end of period $ 15,774,697 $ 1,272,148
================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 17,352 $ -
================== ====================
Cash paid for income taxes $ 837,658 $ 584,945
================== ====================
7
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Note 1-1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
China Jo-Jo Drugstores, Inc. (“("Jo-Jo Drugstores”Drugstores" or the “Company”"Company"), was
incorporated in Nevada on December 19, 2006, originally under the name
“Kerrisdale"Kerrisdale Mining Corporation.”" On September 24, 2009, the Company changed its
name to “China"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 HK”HK"), and Renovation HK
became a wholly-owned subsidiary of the Company. On the closing date, the
Company issued 15,800,0007,900,000 of its common stock (taking into account the 1-for-2
reverse stock split effected on April 9, 2010) to Renovation HK’sHK's stockholders
in exchange for 100% of the capital stock of Renovation HK. Prior to the share
exchange transaction, the Company had 4,200,0002,100,000 shares of common stock issued
and outstanding.outstanding (taking into account the 1-for-2 reverse stock split effected on
April 9, 2010). After the share exchange transaction, the Company had 20,000,00010,000,000
shares of common stock outstanding (taking into account the 1-for-2 reverse
stock split effected on April 9, 2010) and Renovation HK’sHK's stockholders owned
79% of the issued and outstanding shares. The management members of Renovation
HK became the directors and officers of the Company. The share exchange
transaction was accounted for as a reverse acquisition and recapitalization
whereby Renovation HK is deemed to be the accounting acquirer (legal acquiree)
and the Company the accounting acquiree (legal acquirer) and, as a result, the
consolidated financial statements of the Company (the legal acquirer) is, in
substance, those of Renovation HK (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. As the share exchange
transaction was accounted for as a reverse acquisition and recapitalization,
there was no gain or loss recognized on the transaction. The carrying values of assets, liabilities, and equity of Renovation HK did not change. In reporting earnings per sharehistorical
financial statements for periods prior to September 17, 2009 the Company used 15,800,000 shares, or the shares issued to Renovation HK’s stockholders in exchange for 100% of the capital stockare those of
Renovation HK.
HK except that the equity section and earnings per share have been
retroactively restated to reflect the reverse acquisition.
Renovation HK was incorporated on September 2, 2008, under the laws of Hong Kong
Special Administrative Region (“("Hong Kong”Kong"). Renovation HK has no substantive
operations of its own except for its holding of Zhejiang Jiuxin Investment
Management Co., Ltd. (“("Jiuxin Management”Management"), its wholly-ownedwholly owned subsidiary. Through
Jiuxin Management, the Company controls three companies through certain
exclusive agreements discussed below, that operate a chain of pharmacies in the
People’sPeople's Republic of China (“PRC”("PRC" or “China”"China"), namely, Hangzhou Jiuzhou Grand
Pharmacy Chain Co., Ltd. (“("Jiuzhou Pharmacy”Pharmacy"), Hangzhou Jiuzhou Clinic of
Integrated Traditional and Western Medicine (“("Jiuzhou Clinic”Clinic") and Hangzhou
Jiuzhou Medical and Public Health Service Co., Ltd. (“("Jiuzhou Service”Service", and
collectively with Jiuzhou Pharmacy and Jiuzhou Clinic as “HJ Group”"HJ Group").
Jiuxin Management was established in the PRC by Renovation HK on October 14,
2008, as a wholly foreign owned enterprise (“WFOE”("WFOE"), with registered capital of
$4,500,000. As of June 30, 2010, Renovation HK is required by the PRC company law to pay 15% of thetransferred all registered
capital by December 31, 2009to Jiuxin Management, and the balance to be paid within two years. Jiuxin Management has no substantive
operations of its own except for entering into certain exclusive agreements with
HJ Group and performing its obligations thereunder.
Jiuzhou Pharmacy is a PRC limited liability company established in Zhejiang
Province on September 9, 2003 with registered capital of $605,000 (RMB
5,000,000). It is engaged, engages in the retail sales of prescription and non prescription
drugs, traditional Chinese medicine and general merchandise in the PRC.
Jiuzhou Clinic is a PRC general partnership established in Zhejiang Province on
October 10, 2003. It is engaged in providing both traditional and western
medical services in the PRC.
8
Jiuzhou Service is a PRC limited liability company established in Zhejiang
Province on November 2, 2005 with registered capital of $60,500 (RMB 500,000)RMB 500,000 ($60,500).
It is engaged in providing medical-related management consulting services in the
PRC.
On April 7, 2010, Jiuzhou Pharmacy was granted an Internet Pharmaceutical
Transaction Sevice Qualification Certificate ( the "Certificate") by the State
Food and Drug Administration of Zhejiang Province. The Certificate allows
Jiuzhou Pharmacy to engage in online retail pharmaceutical sales throughout the
PRC.
All three HJ Group companies arehave been under the common control of the same
three owners (the “Owners”"Owners"). since their respective establishment dates, pursuant
to agreements amongst the Owners to vote their interests in concert as
memorialized in a voting agreement. Based on such voting agreement, the Company
has determined that common control exists among the three HJ Group companies in
accordance with the guidance of definition of common control accounting
standard. Operationally, the Owners have operated the three HJ Group companies
in conjunction with one another since each company's respective establishment
date. Each HJ Group company holds the licenses and approvals necessary to
operate its business in China.
The paid-in capital of all three HJ Group companies was funded by individuals who were the majority
shareholders of Renovation HK prior to the share exchange transaction with the Company.HK. PRC law currently has limits on foreign ownership
of companies in certain industries, including those of HJ Group. To comply with
these foreign ownership restrictions, on August 1, 2009, Jiuxin Management
entered into the following exclusive agreements with HJ Group and the Owners
(collectively the “Contractual Arrangements”"Contractual Arrangements"):
.
The Company has concluded that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou
Service are each a Variable Interest Entity (VIE) and that the Company's wholly
owned subsidiary, Jiuxin Management, absorb a majority of the risk of loss from
the activities of these three companies, and enables the Company, through Jiuxin
Management, to receive a majority of their respective expected residual returns.
Such conclusion is based on the terms of the Contractual Arrangements as
follows:
(1) Under the Consulting Services Agreement,, through which Jiuxin Management will
provide exclusive consulting and services to HJ Group for a quarterly fee
in the amount of each HJ Group company's quarterly net income after tax.
The Company has the right to advise, consult, manage and operate all three HJ Group companies, and collect and own allreceive the expected residual gains of their net profits;
(2) Operating Agreement, through which Jiuxin Management has the right to recommend director candidates and appoint the senior executives of HJ Group, approve any transactions that may materially affect the assets, liabilities, rights or operations of HJ Group, and guarantee the contractual performance by HJ Group of any agreements with third parties, in exchange for a pledge by each HJ
Group company, and there is no cap on such expected residual gains. The
Company is also obligated to absorb the risk of its accounts receivableloss from the activities of
each HJ Group company. The Company is not protected from such risk of loss
and assets;
(3) Proxyis not guaranteed a return by HJ Group or by other parties involved
with HJ Group. The consulting services agreement shall remain in effect for
the maximum period of time permitted by law, unless sooner terminated by
Jiuxin Management or if either Jiuxin Management or an HJ Group company
becomes bankrupt or insolvent, or otherwise dissolves or ceases business
operations.
(2) Under the Equity Pledge Agreement,, under which the Owners have vestedpledged their collective voting control over the threerights,
title and equity interest in HJ Group companiesas security for Jiuxin Management to
collect its fees from each HJ Group company under the Consulting Services
Agreement. On May 18, 2010, all the owners effectively completed the
registration of their equity pledge to Zheijiang Management Co., Ltd.
(3) Under the Operating Agreement, Jiuxin Management has exclusive authority of
all decision-making relating to HJ Group's ongoing major operations,
including establishing compensation levels and hiring and firing key
personnel. In order to ensure HJ Group's normal operation, Jiuxin
Management agrees to act as the guarantor for HJ Group in any contract,
agreement or transaction with third parties relating to HJ Group's
operations, and to guarantee HJ Group's performance of such contract,
agreement or transaction. As a counter guarantee, each HJ Group company
agrees to pledge all of its assets including receivables to Jiuxin
Management and will only transferwhich have not been pledged to any third parties at the
execution date of this agreement. The operating agreement shall remain in
effect unless terminated by Jiuxin Management.
9
(4) Under the Proxy Agreement, the Owners have authorized any designee of
Jiuxin Management to exercise all of their respective equity interestsvoting rights as
owners of HJ Group. The voting rights proxy agreement shall remain in
HJ Group to Jiuxin Management or its designee(s);
(4) effect for the maximum period of time permitted by law.
(5) Under the Option Agreement,, under which the Owners have granted Jiuxin Management
the irrevocableexclusive right and option to acquire all of their equity interests in
HJ Group; and
(5) Equity Pledge Agreement, under whichGroup. The option agreement shall remain in effect for the Owners have pledged all of their rights, titles and interests in HJ Group to Jiuxin Management to guarantee the performance of their obligations under the Consulting Services Agreement.
On October 27, 2009,maximum
period time permitted by law.
Accordingly, the Company was madeaccounts for each of these three companies as a party to a series of amendments to the contractual arrangements with HJ Group. Specifically, four of the five agreements comprising the contractual arrangements – namely, the consulting services agreement, the operating agreement, the option agreement and the voting rights proxy agreement – were amended to remove a provision which terminated these agreements on May 1, 2010 unless the Company completed a financing of at least $25 million and listed its common stock on The NASDAQ Capital Market by such date. As amended:
| · | the consulting services agreement shall remain in effect for the maximum period of time permitted by law, unless sooner terminated by Jiuxin Management or if either Jiuxin Management or an HJ Group company becomes bankrupt or insolvent, or otherwise dissolves or ceases business operations; |
| · | the operating agreement shall remain in effect unless terminated by Jiuxin Management; |
| · | the option agreement shall remain in effect for the maximum period time permitted by law; and |
| · | the voting rights proxy agreement shall remain in effect for the maximum period of time permitted by law. |
VIE.
As a result of the Contractual Arrangements, and amendments thereto, which obligate the Company to
absorb all of the risk of loss from HJ Group’sGroup's activities and enablesenable the Company
to receive all of HJ Group’sGroup's expected residual returns, the Company accounts for
each HJ Group company as a variable interest entity (“VIE”("VIE") under Financial
Accounting Standards Board (FASB)’s's accounting standard. Accordingly, the
financial statements of HJ Group are consolidated into the financial statements
of the Company.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The reporting entities
- ------------------------
The Company’sCompany's consolidated financial statements of reflect the activities of the
Company and the following subsidiary and VIEs:
Subsidiaries | | Incorporated in | | Percentage of Ownership |
Renovation HK | | Hong Kong | | 100.00% |
Jiuxin Management | | PRC | | 100.00% |
Jiuzhou Pharmacy | | PRC | | VIE by Contractual Arrangements |
Jiuzhou Clinic | | PRC | | VIE by Contractual Arrangements |
Jiuzhou Service | | PRC | | VIE by Contractual Arrangements |
Percentage of
Subsidiaries Incorporated in Ownership
- ----------------- ------------------------- --------------------------------
Renovation HK Hong Kong 100%
Jiuxin Management PRC 100%
Jiuzhou Pharmacy PRC VIE by Contractual Arrangements
Jiuzhou Clinic PRC VIE by Contractual Arrangements
Jiuzhou Service PRC VIE by Contractual Arrangements
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.
The consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiarysubsidiaries and its VIEs. All significant
inter-company transactions and balances between the Company, its subsidiarysubsidiaries
and VIEs are eliminated upon consolidation.
Consolidation of variable interest entities
- -----------------------------------------------
In accordance with the accounting standard,consolidation of Variable Interest Entities standards,
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 that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou
Service are each a VIE and that the
Company’sCompany's wholly owned subsidiary, Jiuxin
Management, absorb a majority of the risk of loss from the activities of these
three companies, and enable the Company, through Jiuxin Management, to receive a
majority of their respective expected residual returns.
Such conclusion is based
on the terms of the Contractual Arrangements as described in Note 1.
10
Accordingly, the Company accounts for each of these three companies as a VIE.
Additionally, as the three HJ Group companies are under common control, the
consolidated financial statements have been prepared as if the transactions had
occurred retroactively as to the beginning of the reporting period of these
consolidated financial statements.
Control is defined under the accounting standard defining common control as “an"an
individual, enterprise, or immediate family members who hold more than 50
percent of the voting ownership interest of each entity.”" Because Lei Liu, Li
Qi, and Chong’anChong'an Jin collectively own 100% of HJ Group and have agreed to vote
their interests in concert since the establishment of each HJ Group company as
memorialized in a voting agreement, the Company believes that these three
individuals collectively have control of HJ Group in accordance the accounting standard.with EITF 02-05.
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 HK.
Although the Company recognizes the consolidation of VIEs standard but does not
provide for retroactive accounting treatment, HJ Group in substance were
controlled by the same three individuals on September 9, 2003, October 10, 2003
and November 2, 2005, the establishment dates of Jiuzhou Pharmacy, Jiuzhou
Clinic and Jiuzhou Service, respectively. Such common control condition resulted
in the share exchange transaction to be a capital transaction in substance,
reflected as a recapitalization, and the Company has accordingly recorded the
consolidation of Renovation HK at its historical cost.
Use of estimates
- ------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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. For example, the Company estimates its allowance for doubtful
accounts and useful lives of plant and equipment. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Fair values of financial instruments
- ----------------------------------------
The accounting standards regarding fair value of financial instruments and
related fair value measurements defines fair value, establishes a three-level
valuation hierarchy for disclosures of fair value measurement and enhances
disclosures requirements for fair value measures. The carrying amounts reported
in the balance sheets for current receivables, payables, notes payables and
short term loans qualify as financial instruments and are a reasonable estimate
of fair value because of the short period of time between the origination of
such instruments and their expected realization and their current market rate of
interest. The three levels are defined as follow:
| · |
-- Level 1 inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. |
| · | Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| · | Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. |
The Company did not identify any assets or liabilities
in active markets.
-- Level 2 inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets, and inputs that are
requiredobservable for the assets or liability, either directly or indirectly,
for substantially the full term of the financial instruments.
-- Level 3 inputs to
be presentedthe valuation methodology are unobservable
and significant to the fair value.
In connection with the public offering of the Company's common stock that closed
on April 28, 2010, the Company agreed to issue its underwriters, Madison
Williams and Company and Rodman & Renshaw, LLC, an option for $100 to purchase
up to a total of 105,000 shares of common stock (3% of the shares sold) at $6.25
per share (125% of the price of the shares sold in the offering). The option is
exercisable commencing on October 23, 2010 and expires on April 22, 2015.
11
The Company is treating the common shares underlying the option as a derivative
liability as the strike price of the option is denominated in U.S. dollars, a
currency other than the Company's functional currency, the Chinese RMB. As a
result, the option is not considered indexed to the Company's own stock, and as
such, all future changes in the fair value of the option are recognized
currently in earnings until such time as the option is exercised or expired.
On April 22, 2010, the issue date of the option, the Company classified the fair
value of this option as a liability resulting in a decrease of additional
paid-in capital of $402,451 and the establishment of a $402,451 option liability
to recognize the option's fair value. The Company recognized a gain of $57,944
from the change in fair value of option liability for the three months ended
June 30, 2010. There was no option outstanding as of March 31, 2010.
This option does not trade in an active securities market, and as such, the
Company estimates the fair value of this option using the Black-Scholes Option
Pricing Model ("Black-Scholes Model") on the date that the option was originally
issued and as of June 30, 2010 using the following assumptions:
Underwriter Purchase Option (1)
June 30, April 22,
2010 2010
(Unaudited) (Unaudited)
------------- -------------------
Stock price $ 4.20 $ 4.78
Exercise price $ 6.25 $ 6.25
Annual dividend yield 0% 0%
Expected term (years) 4.81 5.00
Risk-free interest rate 1.79% 2.57%
Expected volatility 120% 120%
(1) As of June 30, 2010, the option to purchase 105,000 had not been exercised.
The option cannot be exercised until October 23, 2010.
Expected volatility is based on historical volatility. Historical volatility was
computed using daily pricing observations for recent periods that correspond to
the term of the option. The Company believes this method produces an estimate
that is representative of future volatility over the expected term of this
option. The Company has no reason to believe future volatility over the expected
remaining life of this option is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the option. The
risk-free interest rate is based on U.S. Treasury securities according to the
remaining term of the option.
As required by the FASB's accounting standards, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Depending on the product and the
terms of the transaction, the fair values option liability were modeled using a
series of techniques, including closed-form analytic formula, such as the
Black-Scholes Model, which does not entail material subjectivity because the
methodology employed does not necessitate significant judgment, and the pricing
inputs are observed from actively quoted markets.
The fair value of the 105,000 shares underlying the option outstanding as of
June 30, 2010 was determined using the Black-Scholes Model, defined in the
FASB's accounting standard of fair value measurement as level 2 inputs, and the
Company recorded the change in earnings. As a result, the option liability is
carried on the consolidated balance sheetsheets at fair value.
12
The following table sets forth, by level within the fair value hierarchy, the
Company's financial assets and liabilities that were accounted for at fair value
as of June 30, 2010:
Carrying Value at Fair Value Measurement at
June 30, June 30,
2010 2010
----------------- ------------------------------
Level 1 Level 2 Level 3
--------- -------- ---------
Purchase option derivative liability (unaudited) $ 344,507 $ -- $344,507 $ --
Revenue recognition
- --------------------
Revenue from sales of prescription medicine at the 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 the drugstores is recognized at the
point of sale, which is when the customer pays for and receives the merchandise.
Revenue from medical services is recognized after the service has been rendered
to the customer.
Revenue from sales of merchandise to non-retail customers is recognized when the
following conditions are met: 1) persuasive evidence of an arrangement exists
(sales agreements and customer purchase orders are used to determine the
existence of an arrangement); 2) delivery of goods has occurred and risks and
benefits of ownership have been transferred, which is when the goods are
received by the customer at its designated location in accordance with the sales
terms; 3) the sales price is fixed or determinable; and 4) collectability is
probable. Historically, sales returns have been immaterial.
The Company’sCompany's revenue is net of value added tax (“VAT”("VAT") collected on behalf of
PRC tax authorities in respect of the sale of merchandise. VAT collected from
customers, net of VAT paid for purchases, is recorded as a liability in the
balance sheet until it is paid to the relevant PRC tax authorities.
Cash
- ----
Cash consists of cash on hand, cash in the drugstores and cash at banks.
Restricted cash
- ----------------
The Company’sCompany's restricted cash consists of cash 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. As of June 30, 2010, restricted cash and notes payable
amounted to $807,941 and $1,587,026, respectively. As of March 31, 2010,
restricted cash and notes payable amounted to $746,703 and $1,464,241,
respectively.
Accounts receivable
- --------------------
Accounts receivable represent amounts due from banks relating to retail sales
that are paid or settled by the customers’customers' debit or credit cards, amounts due
from government social security bureaus relating to retail sales of drugs,
prescription medicine, and medical services that are paid or settled by the
customers’customers' medical insurance cards, and amounts due from non-retail customers
for sales of merchandise.
Management regularly reviews aging of receivables and changes in payment trends
by its customers, and records a reserve when they believe collection of amounts
due are at risk. Accounts considered uncollectible are written off.
Historically, the amount of bad debt write-off has been immaterial and the
Company has been able to collect substantially all amounts due from these
parties. As of December 31, 2009At June 30, 2010 and March 31, 2009,2010, management concluded all amounts
are collectible and allowance for doubtful accounts was not deemed not necessary.
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average cost method. Market is the lower of replacement cost or net
realizable value. The Company carries out physical inventory counts on a monthly
basis at each store and warehouse location to ensure that the amounts reflected
in the consolidated financial statements at each reporting period are properly
stated and valued. The Company records write-downs to inventories for shrinkage
losses and damaged merchandise that are identified during the inventory counts.
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
following estimated useful lives of the assets, taking into consideration the
assets’assets' estimated residual value. Leasehold improvements are amortized over the
shorter of 5 yearslease term or theremaining lease termperiod of the underlying assets.
Following are the estimated useful lives of the Company’sCompany's other property and
equipment:
| Estimated Useful Life |
Leasehold improvements | 5 years |
Motor vehicles | 5 years |
Office equipment & furniture | 3-5 years |
Estimated Useful Life
---------------------
Leasehold improvements 3-10 years
Motor vehicles 5 years
Office equipment & furniture 3-5 years
Maintenance, repairs and minor renewals are charged to expense as incurred.
Major additions and betterment to property and equipment are capitalized.
Impairment of long lived assets
- -----------------------------------
The Company evaluates long lived tangible and intangible assets for impairment,
at least annually, but more often 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 asset’sasset's 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.
Based on its review, the Company believes that, as of December 31, 2009June 30,
2010 and March 31, 2009,2010, there was no impairment.
Income taxes
- -------------
The Company records income taxes pursuant to the accounting standards for income
taxes. The accounting standards for income taxes require the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consists
of taxes currently due plus deferred taxes.
A tax position is recognized as a benefit only if it is “more"more likely than not”not"
that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more"more likely than not”not" test, no tax benefit is
recorded. The accounting standard also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition. The adoption had no affect on the Company’sCompany's
financial statements. There arewere no deferred tax amounts at December 31, 2009June 30, 2010 and
March 31, 2009.
2010.
The charge for taxation is based on the results for the year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probable that taxable profit will be available against which deductible
temporary differences can be utilized. Deferred tax is calculated at the tax
rates that are expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when related items are credited or charged directly to equity,
in which case the deferred tax is also dealt with in equity.
- ------------------------
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company’sCompany's products that are sold in the PRC are subject to a
Chinese value-added tax on the gross sales price. The value-added tax rate variesvary
from 9%0% to 17%, depending on the type of products sold. This VAT may be offset
by VAT paid by the Company on raw materials and other materials included in the
cost of producing theiror acquiring its finished products. The Company recorded VAT
payable and VAT receivable net of payments in the accompanying financial
statements. The VAT tax return is filed offsetting the payables against the
receivables.
Stock Based Compensation
- --------------------------
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with the Financial Accounting Standards Board'sFASB's
accounting standards regarding accounting for stock-based compensation and
accounting for equity instruments that are issued to other than employees for
acquiring or in conjunction with selling goods or services. Costs are measured
at the estimated fair market value of the consideration received or the
estimated fair value of the equity instruments issued, whichever is more
reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as
defined by these accounting standards. In the case of equity instruments issued
to consultants, the fair value of the equity instrument is recognized over the
term of the consulting agreement.
Advertising and promotion costs
- ----------------------------------
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs amounted to $185,551$39,419 and $104,198$97,432 for the three months ended December 31,June
30, 2010 and 2009, and 2008, respectively. Advertising and promotion costs amounted to $311,659 and $160,188 for the nine months ended December 31, 2009 and 2008, respectively. Advertising costs consist primarily of print
and television advertisements.
Pre-opening costs
- ------------------
Expenditures related to the opening of new drugstores, other than expenditures
for property and equipment, are expensed as incurred.
Vendor allowances
- ------------------
The Company accounts for vendor allowances according to FASB’s accounting standard. Vendor allowances reduceby reducing the carrying value of
inventories and are subsequently transferredtransferring the amounts to cost of goods sold
when the inventories are sold, unless those allowances are specifically
identified as reimbursements for advertising, promotion and other services, in
which case they are recognized as a reduction of the related advertising and
promotion or other service costs.
For the three months ended December 31,June 30, 2010 and 2009, and 2008, the Company recognized vendor
allowances of $81,498$269,979 and $231,685$46,802 in cost of goods sold, respectively.
For the nine months ended December 31, 2009 and 2008, the Company recognized vendor allowances of $188,278 and $344,693 in cost of goods sold, respectively.
Distribution costs
- -------------------
Distribution costs represent the costs of transporting the merchandise from
warehouseswarehouse to stores. These costs are expensed as incurred and are included in
sales, marketing and other operating expenses.
- -----------------
The Company leases premises for retail drugstores, warehouseswarehouse, offices, and officesland
under non-cancelable operating leases. Operating lease payments are expensed on
a straight-line basis over the term of lease. A majority of the Company’sCompany's retail
drugstore leases have a 3 to 5-year10-year term with a renewal option upon the
expiryexpiration of the lease. The Company has historically been able to renew a
majority of its drugstores leases. Under the terms of the lease agreements, the
Company has no legal or contractual asset retirement obligations at the end of
the lease.
Land leased from government is amortized on a straight-line basis
over a 30-year term.
Commitments and contingencies
- -------------------------------
Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and other sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment can be reasonably estimated.
Historically, the Company has experienced no product liability or malpractice
claims.
Foreign currency translation
- ------------------------------
The Company uses the United States dollar (“("U.S. dollars”dollars" or “USD”"USD") for
financial reporting purposes. The Company’s subsidiaryCompany's subsidiaries and VIEs maintain their
books and records in their functional currency, being the primary currency of
the economic environment in which their operations are conducted.
In general, for consolidation purposes, the Company translates the subsidiaries'
and VIEs' 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 statement 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 subsidiaries’subsidiaries' and VIEs’VIEs'
financial statements are recorded as accumulated other comprehensive income.
The accounting standard, “Reporting"Reporting Comprehensive Income”Income", requires disclosure
of all components of comprehensive income and loss on an annual and interim
basis. Comprehensive income and loss is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company’sCompany's accumulated other
comprehensive income and loss only consist of changes in foreign currency
exchange rates. Accumulated other comprehensive loss in the statement of
shareholders’shareholders' equity amounted to $349, 746$262,838 and $362,437$362,260 as of December 31, 2009June 30, 2010 and
March 31, 2009,2010, respectively. The balance sheet amounts with the exception of
equity at December 31, 2009June 30, 2010 and March 31, 20092010 were translated at 1 RMB to $0.1467$0.14730
USD and at 1 RMB to $0.1465$0.14670 USD, respectively. The average translation rates
applied to income and cash flow statement amounts for the ninethree months ended
December 31,June 30, 2010 and 2009 and 2008 were at 1 RMB to $0.14664$0.14673 USD and at 1 RMB to $0.14559$0.14663
USD, respectively.
Concentrations and credit risk
- ---------------------------------
The Company’sCompany's operations are all carried out in the PRC. Accordingly, the
Company’sCompany's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by
the general state of the PRC’sPRC's economy. The Company’sCompany's operations in the PRC are
subject to specific considerations and significant risks not typically
associated with companies in the North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company’sCompany's results may be
adversely affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Certain financial instruments, which subject the Company to concentration of
credit risk, consist of cash and restricted cash. The Company balances at
financial institutions located in Hong Kong and China. The Company maintains
balances at financial institutions which, from time to time, may exceed Hong
Kong Deposit Protection Board insured limits for the banks located in Hong Kong.
Balances at financial institutions or state ownedstate-owned banks within the PRC are not
covered by insurance. As of December 31, 2009June 30, 2010 and March 31, 2009,2010, the Company had
deposits totaling $1,549,521$4,884,053 and $995,448$1,533,175 that are not covered by insurance,
respectively. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
16
For the three months ended June 30, 2010 and nine months ended December 31, 2009, and 2008, all of the Company’sCompany's sales
and purchases arose in the PRC. No major customers accounted for more than 10%
of the Company’sCompany's total revenues for the three months ended June 30, 2010 and
nine months ended December 31, 2009, and 2008, respectively.
For the three months ended December 31,June 30, 2010, two vendors collectively accounted for
32% of the Company's total purchases and 26% of total inventory prepayment. For
the three months ended June 30, 2009, two vendors collectively accounted for 13% and 11%30%
of the Company’sCompany's total purchases and 32% of the total accounts payable and 16% of total purchase deposit, respectively. For the nine months ended December 31, 2008, one vendor accounted for 20% of the Company’s purchase and 7%1% of total accounts payable at December 31, 2008.
For the nine months ended December 31, 2009 and 2008, one vendor accounted for 17% of the Company’s total purchases and 15% of the total accounts payable; and 20% of the Company’s total purchases and 7% of the total accounts payable, respectively.
payable.
Recently issued accounting pronouncements
In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. On July 1, 2009, the Company adopted this accounting standard, but it did not have a material impact on the disclosures related to its consolidated financial statements.
In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company is currently assessing the impact of adoption this standard.
In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. The Company adopted this accounting standard, but it did not have a material impact on the disclosures related to its consolidated financial statements.
In October 2009, FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements, but the Company does not expect this standard to have a material effect on its consolidated financial statements.
- --------------------------------------------
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting
for Transfers of Financial Assets—anAssets-an amendment of FASB Statement No. 140.The140.The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The Company doesadopted this standard and the standard did not expecthave
material effect on the adoption of this ASU to have a material impact on itsCompany's consolidated financial statements.
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standards Update amends the FASB Accounting Standards Codification
for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’sentity's economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’sentity's involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU todid not have a material impact
on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU todid not have a material impact on
its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 –- Accounting and Reporting for
Decreases in Ownership of a Subsidiary –- a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling"Non-controlling
Interests in Consolidated Financial Statements –- An Amendment of ARB No. 51.”" If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The Company does not expect the adoption of this ASU todid not have a material impact on
its consolidated financial statements.
17
In January 2010, FASB issued ASU No. 2010-06 –- Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number).This update provides amendments to Subtopic 820-10 that
clarify existing disclosures as follows: 1) Level of disaggregation. A reporting
entity should provide fair value measurement disclosures for each class of
assets and liabilities. A class is often a subset of assets or liabilities
within a line item in the statement of financial position. A reporting entity
needs to use judgment in determining the appropriate classes of assets and
liabilities. 2) Disclosures about inputs and valuation techniques. A reporting
entity should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3.The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluatingadopted the impactdisclosures standards, except for the disclosures
to be adopted for fiscal year beginning after December 15, 2010, and the
adoption of this ASU did not have a material impact on its consolidated
financial instruments.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements," or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13,
"Compensation-Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," or ASU 2010-13. ASU 2010-13
provides amendments to Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in currency of a market in which a
substantial porting of the entity's equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of this ASU 2010-17
to have a material impact on its consolidated financial statements.
18
Reclassification
- ----------------
Certain prior period amounts have been reclassified to conform to the current
period presentation. These classifications have no effect on net income.
Note 3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest- OTHER CURRENT ASSETS
Other current assets consist of the following:
June 30,
2010 March 31,
(unaudited) 2010
--------------------- -------------------
Prepaid rental expense $ 1,352,933 $ 1,205,881
Lease rights transfer fees (1) 100,330 92,021
Prepaids and other assets 177,340 33,265
--------------------- -------------------
Total $ 1,630,603 $ 1,331,167
===================== ===================
(1) Lease rights transfer fees are money paid
forby the
three months ended December 31, 2009Company to secure store
rentals in coveted areas. These additional costs of acquiring the right to
lease new store locations are capitalized and
2008, amounted to $24,185 and $10,648, respectively. Interest paid foramortized over the
nine months ended December 31, 2009 and 2008, amounted to $53,519 and $31,985, respectively.Income taxes paid forperiod of
the three months ended December 31, 2009 and 2008 amounted to $652,717 and $678,892, respectively. Income taxes paid for the nine months ended December 31, 2009 and 2008 amounted to $1,817,371 and $1,676,147, respectively.
Non-cash financing activities includes $720,816 of notes payable issued to pay off accounts payable for the nine months ended December 31, 2009.
initial lease term.
19
Note 4 – ADVANCES TO SUPPLIERS
Advances to suppliers are money deposited with or advanced to outside vendors or related parties on future inventory purchases. Most- PROPERTY AND EQUIPMENT
Property and equipment as of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchases on a timely basis.
This amount is refundable and bears no interest. As of December 31, 2009June 30, 2010 and March 31, 2009, advances to suppliers, including advances to related parties, amounted to $9,004,144 and $7,282,217, respectively.
Note 5 - PROPERTY AND EQUIPMENT
Property and equipment consists2010 consisted of the
following:
| | December 31, 2009 | | | March 31, 2009 | |
| | (Unaudited) | | | | |
Leasehold improvements | | $ | 2,324,428 | | | $ | 2,057,892 | |
Furniture and equipment | | | 360,329 | | | | 304,709 | |
Motor Vehicles | | | 164,591 | | | | 162,443 | |
Total | | | 2,849,348 | | | | 2,525,044 | |
Less: Accumulated depreciation and amortization | | | 1,938,347 | | | | 1,545,612 | |
Property and equipment, net | | $ | 911,001 | | | $ | 979,432 | |
| | | | | | | | |
June 30,
2010 March 31,
(unaudited) 2010
------------ ------------
Leasehold improvements $ 2,755,828 $ 2,588,627
Office equipment and furniture 509,717 379,668
Motor vehicles 162,665 162,665
------------ ------------
Total 3,428,210 3,130,960
Less: Accumulated depreciation and amortization 2,101,785 1,944,668
------------ ------------
Property and equipment, net $ 1,326,425 $ 1,186,292
============ ============
Total depreciation expense for property and equipment for the three months ended
December 31,June 30, 2010 and 2009
was $148,584 and
2008 was $141,062 and $152,281, respectively. Total depreciation expense for property and equipment for the nine months ended December 31, 2009 and 2008 was $389,809 and $331,582,$121,033, respectively. No depreciation
expense was included in cost of goods sold for the
financial statement periods presented because the
Company’sCompany's business does not involve manufacturing of merchandise and the amount
of depreciation of property and equipment utilized in acquiring, warehousing and
transporting
the merchandise to locations ready for sale is not material.
Note 5 - ADVANCES TO SUPPLIERS
Advances to suppliers is money deposited or advanced to outside vendors for
future inventory purchases. Most of the Company's vendors 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 June 30, 2010 and March 31, 2010, advances to suppliers amounted
to $10,179,812 and $6,850,240, respectively.
Note 6 – OTHER ASSETS
Other assets consist of the following:
| | December 31, 2009 | | | March 31, 2009 | |
| | (unaudited) | | | | |
Prepaid rental expenses | | $ | 867,220 | | | $ | 475,864 | |
Lease rights transfer fees (1) | | | 342,934 | | | | - | |
Prepaid advertisement expenses | | | 123,461 | | | | 14,721 | |
Prepaids and other assets | | | 122,092 | | | | 73,794 | |
Total | | $ | 1,455,707 | | | $ | 564,379 | |
(1) | Lease rights transfer fee is money paid to original store leases for the Company to secure store rentals in coveted areas. The activities involved in originating or acquiring leases are not substantively different from the activities involved in lending arrangements and, therefore, the cost for acquiring the right to lease the new stores are capitalized and amortized over the period of the lease term. |
Note 7 –- LONG TERM RENTAL DEPOSITS
Long term rental deposits areincludes money deposited or advanced to landlords for
securing retail store leases for which the Company does not anticipate applying
or being returned within the next twelve months. Most of the Company’sCompany's landlords
require a minimum of six months’months' rent being paid up front plus additional
deposits. As of December 31, 2009June 30, 2010 and March 31, 2009, the2010, long term rental deposit for retail
leases amounted to $2,326,829$2,321,115 and $2,015,149,$2,311,661, respectively.
20
Note 8 – SHORT TERM LOANS
Short term loans represent amounts due7 - PREPAID - NONCURRENT
Prepaid - noncurrent consist of the following:
June 30,
2010 March 31,
(unaudited) 2010
------------- -----------
Prepayment for lease of land use right - noncurrent (1) $ 4,234,875 $ 4,254,300
Prepayment for new entity (2) 1,031,100 1,026,900
Prepayment for construction 159,986 -
Lease rights transfer fees-noncurrent 205,728 227,763
Prepaids and other assets 39,971 -
------------- ----------
Total $ 5,671,660 $ 5,508,963
============= ===========
(1) Prepayment for lease of land use right is a payment made to
various banks and are due on demand or normally within one year. These loans generally can be reneweda local
government in connection with
the banks. Short term bank loans at December 31, 2009entering into a 30-year operating land lease
agreement. As of June 30, 2010 and March 31,
2009, consisted2010, the balance amounted to
$4,234,875 and $4,254,300, respectively.
(2) In connection with the same lease agreement, the Company prepaid
$1,031,100 (RMB 7,000,000) to establish a new entity, Hangzhou Jiuxin
QianHong Agriculture Development Ltd. On August 10, 2010, the entity
was established with registered capital of
$1,480,000 (RMB 10,000,000).
Note 8 - STATUORY RESERVE
Statutory reserves represent restricted retained earnings. Based on their legal
formation, all PRC entities are required to set aside 10% of their net incomes
as reported in their statutory accounts on an annual basis to the
following:
| | December 31, 2009 | | | March 31, 2009 | |
| | (Unaudited) | | | | |
Hangzhou Bank, due February 2, 2010 annual interest at 4.86%, secured by the | | | | | | |
personal properties of some of the Company’s directors | | $ | 880,200 | | | $ | 879,000 | |
| | | | | | | | |
| | | | | | | | |
Hangzhou Bank, due March 13, 2010 annual interest at 4.86%, secured by the | | | | | | | | |
personal properties of some of the Company’s directors | | $ | 586,800 | | | $ | 586,000 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 1,467,000 | | | $ | 1,465,000 | |
Interest expenseStatutory
Surplus Reserve Fund (the "Reserve Fund"). Once the total set-aside in the
Reserve Fund reaches 50% of an entity's registered capital, further
appropriations are discretionary. The Reserve Fund can be used to increase the
entity's registered capital upon approval by relevant government authorities and
to eliminate its future losses under PRC GAAP upon a resolution by its board of
directors. The Reserve Fund is not distributable to shareholders except in the
event of liquidation.
Appropriations to the above statutory reserves are accounted for as a transfer
from unrestricted earnings to statutory reserves. During the three months ended
DecemberJune 30, 2010 and 2009, the Company made total appropriations to these statutory
reserves of $0 and $0, respectively. The Company fulfilled the 50% registered
capital requirement as of March 31, 2009 and 2008 amounted to $18,009 and $10,647, respectively. Interest expense for2009. Therefore, during the ninethree months
ended December 31,June 30, 2010 and 2009, no additional appropriations to the statutory
reserves were made from unrestricted earnings.
There are no legal requirements in the PRC to fund these statutory reserves by
transfer of cash to any restricted accounts, and 2008 amounted to $53,519 and $31,985, respectively.
the Company does not do so.
These statutory reserves are not distributable as cash dividends.
Note 9 - TAXES
Income Tax
- -----------
The Company is registered in Nevada whereas its subsidiary, Renovation HK, is
registered in Hong Kong, and conducts all of the Company’sits business operations are conducted through Renovation
HK’sHK's subsidiary, Jiuxin Management, and the three PRC VIEs, Jiuzhou Pharmacy,
Jiuzhou Clinic and Jiuzhou Service. Jiuxin Management and the VIEs are subject
to PRC tax laws.
21
Beginning January 2008, the Chinese Enterprise Income Tax (“EIT”("EIT") law replaced
China’sChina's former income tax laws. The standard EIT rate of 25% replaced the 33%
rate previously applicable to PRC enterprises. Therefore, starting from January
2008 Jiuzhou Pharmacy has been subject to an effective tax rate of 25%.
Jiuzhou Clinic and Jiuzhou Service are subject to the regular income tax rate of
25% in calendar year 20082009 and 2010.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the year incurred. No significant penalties
or interest relating to income tax were incurred during the three months ended
June 30, 2010 and 2009.
GAAP also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition.
The following table reconciles the
USU.S. statutory
tax rates to the Company's
effective tax rate for the
ninethree months ended
December 31,June 30, 2010 and 2009
(unaudited):
2010 2009
---------- ----------
U.S. Statutory rates 34% 34%
Foreign income not recognized in USA (34) (34)
China income taxes 25 25
Other (a) 4 2
---------- ----------
Effective tax rate 29% 27%
---------- ----------
(a) The 4% and
2008, unaudited: | | 2009 | | | 2008 | |
U.S. Statutory rates | | | 34 | % | | | 34 | % |
Foreign income not recognized in USA | | | (34 | ) | | | (34 | ) |
China income taxes | | | 25 | | | | 25 | |
Other(a) | | | - | | | | (2 | ) |
Effective tax rate | | | 25 | % | | | 23 | % |
| (a) | The 2% represents the expenses (income) incurred by the Company that are not subjected to PRC income tax. |
Value Added Tax
Sales of birth control related products are2% for the three months ended June 30, 2010 and 2009,
respectively, represents the expenses incurred by the Company that
were not subject to VAT, while Chinese herbsPRC income tax.
Jo-Jo Drugstores is incorporated in the U.S. and has incurred a net operating
loss for income tax purposes for 2010. As of June 30, 2010, the estimated net
operating loss carryforwards for U.S. income tax purposes amounted to $379,000
which may be available to reduce future years' taxable income. These
carryforwards will expire, if not utilized by 2030. Management believes that the
realization of the benefits arising from this loss appears to be uncertain due
to the Company's limited operating history and continuing losses for U.S. income
tax purposes. Accordingly, the Company has provided a 100% valuation allowance
at June 30, 2010. The valuation allowance at June 30, 2010 was $129,000. The
Company's management reviews this valuation allowance periodically and makes
adjustments as necessary. The Company had no net operating loss as of March 31,
2010.
The Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $15,513,643 as of June 30, 2010, which are included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the future.
Value Added Tax
- -----------------
Sales of products are subject to 13% VAT and all other sales are subjectranging from 0% to 17% VAT.. VAT on sales and on
purchases amounted to $2,379,548$2,454,477 and $1,672,385$1,987,825 for the three months ended December 31, 2009,June
30, 2010, respectively, and $1,855,268$1,894,552 and $1,392,682$1,461,063 for the three months ended
December 31, 2008,June 30, 2009, respectively.
VAT on sales and on purchases amounted to $6,213,137 and $4,524,153 for the nine months ended December 31, 2009, respectively, and $5,394,740 and $3,788,586 for the nine months ended December 31, 2008December 31, 2008, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday.
Taxes payable at December 31, 2009June 30, 2010 and March 31, 20092010 consisted of the following:
| | December 31, 2009 | | | March 31, 2009 | |
| | (Unaudited) | | | | |
VAT | | $ | 283,357 | | | $ | 196,784 | |
Income tax | | | 804,831 | | | | 588,681 | |
Others | | | 37,464 | | | | 25,851 | |
Total taxes payable | | $ | 1,125,652 | | | $ | 811,316 | |
June 30,
2010 March 31,
(unaudited) 2010
------------ -----------
VAT $ 252,238 $ 341,989
Income tax 856,435 875,868
Others 32,036 17,226
------------ -----------
Total taxes payable $ 1,140,709 $ 1,235,083
============ ===========
22
Note 10 - SHORT TERM LOANS
Short term loans represent amounts due to various banks and are normally due on
demand or within one year. These loans generally can be renewed with the banks.
Short term bank loans at June 30, 2010 and March 31, 2010, consisted of the
following:
June 30, 2010 March 31,
(unaudited) 2010
------------------ -----------
Two loans with Hangzhou Bank, due September 2010 with annual
interest at 4.86%, secured by the personal properties of
certain of the Company's shareholders $ 1,178,400 $ 586,800
Hangzhou Bank, due July 2010 with annual interest at 4.86%,
secured by the personal properties of certain of the
Company's shareholders 294,600 293,400
------------------ -----------
Total $ 1,473,000 $ 880,200
================== ===========
All short term loans were repaid subsequently to June 30, 2010. Interest expense
for the three months ended June 30, 2010 and 2009 amounted to $17,352 and
$18,211, respectively.
Note 11 - POSTRETIREMENT BENEFITS
Regulations in the PRC require the Company to contribute to a defined
contribution retirement plan for all permanent employees. The contribution is
based on a percentage of an employee's current compensation as required by the
local government. The Company contributed $13,076 and $15,429 in employment
benefits and pension during the three months ended June 30, 2010 and 2009,
respectively.
Note 12 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTSAmounts receivable from and payable to related parties are summarized as
follows:
| | December 31, 2009 | | | March 31, 2009 | |
| | (Unaudited) | | | | |
Amounts due from directors (1): | | $ | - | | | $ | 2,432 | |
Amount due to director (2): | | $ | 333,029 | | | $ | 326,715 | |
Advances to supplier (3): | | $ | 2,190,826 | | | $ | 1,797,104 | |
(1) | Represents interest free loans
June 30,
2010 March 31,
(unaudited) 2010
------------- -----------
Amount due to two directors of the Company, Li Qi and Chong'an Jin. The loans are due upon demand. |
(1): $ 880,107 $ 935,000
============= ===========
(2) | Represents leasehold improvement expenses and other expenses paid by a director of the Company, Lei Liu, on behalf of the Company. The amount is interest free and due upon demand. |
| |
(3) | Represents prepayment for inventory purchase made to a supplier, which was formerly owned by some of the Company’s directors. The Company will collect inventory from the supplier which will reduce the advance. |
(1) As of June 30, 2010 and March 31, 2010, amount due to directors
represents contributions from Li Qi ,Chong'an Jin, and Lei Liu to Jiuxin
Management to enable Jiuxin Management to meet its approved PRC registered
capital requirements. Such contributions are to be returned to these
directors upon demand.
Note 13 - EARNINGS PER SHARE and CAPITAL TRANSACTIONS
Stock-based compensation
- -------------------------
On September 1, 2009, pursuant to agreements entered on July 30, 2009,
shareholders of Renovation HK sold shares of Renovation HK to service providers
including the Company's chief financial officer and legal counsel which shares,
after the share exchange transaction between the Company and Renovation HK on
September 17, 2009, collectively represented 2.50% of the Company's issued and
outstanding common stock.
Using the fair value of services provided as of March 31, 2010, the Company
estimated that the total stock compensation expense to be recognized from these
transactions was $202,120. The
Company’s purchases fromCompany recognized $126,325 as stock compensation
expense for the
related party supplier amountedyear ended March 31, 2010. The remaining $75,795 was applied to
$1,254,749accrued legal fees, which were expensed during the year ended March 31, 2009.
On March 15, 2010, the Company agreed to issue 6,897 shares (taking into account
the 1-for-2 reverse stock split effected on April 9, 2010) of restricted common
stock to a director. The shares are to be issued in quarterly installments
beginning on March 31, 2010, and
$108,045$9,976 was recorded as director compensation
expense for the three months ended
December 31, 2009June 30, 2010.
On April 9, 2010, the Company effected a 1-for-2 reverse split of its issued and
2008, respectively,outstanding common shares and
$2,255,817a proportional reduction of its authorized common
shares. Therefore, all share and
$909,314per share amounts used in the Company's
consolidated financial statements and notes thereto have been retroactively
restated to reflect the 1-for-2 reverse stock split.
23
On May 1, 2010, the Company agreed to issue 2,340 shares of common stock to its
legal counsel, and $3,744 was recorded as service compensation expense for the
ninethree months ended December 31, 2009June 30, 2010.
On May 14, 2010, the Company entered into an agreement pursuant to which the
Company agreed to issue 10,000 shares of restricted common stock to its chief
financial officer upon the adoption of a stock incentive plan (the "Plan"). The
shares are to vest in five installments and 2008, respectively.
distributed to the chief financial
officer at the end of the agreement's term, and $8,169 was recorded as officer
compensation expense for the three months ended June 30, 2010.
The Company also leases retailagreed under the agreement to issue 4,000 shares of restricted
common stock from the Plan as a bonus to its chief financial officer and office space$18,640
was recorded as compensation expense for the three months ended June 30, 2010.
Shareholders Contribution
- --------------------------
On June 8, 2009, the three Owners of Jiuzhou Pharmacy acquired 100% equity
interests of Kuaileren Pharmacy Co., Ltd. ("Kuaileren") from its owner for stock
consideration. On August 21, 2009, the three Owners contributed their 100%
equity interests of Kuaileren to Jiuzhou Pharmacy, and Kuaileren became a
director (see Note 15 below)wholly-owned subsidiary of Jiuzhou Pharmacy. The registered capital of Kuaileren
is $15,000 (RMB 100,000).
Note 11 – EARNINGS PER SHARE
The transfer of the equity interest has been treated
as a contribution to owner's equity and has been valued at $8,164, the estimated
fair value of the equity interest transferred.
Earnings per share
- --------------------
The Company reports earnings per share in accordance with the provisions of
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 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:
| | 2009 (Unaudited) | | | 2008 (Unaudited) | |
For the three months ended December 31, | | | | | | |
Net income for earnings per share | | $ | 2,646,353 | | | $ | 1,995,523 | |
Weighted average shares used in basic computation | | | | | | | | |
Basic and Diluted | | | 20,000,000 | | | | 15,800,000 | |
Earnings per share | | | | | | | | |
Basic and Diluted | | $ | 0.13 | | | $ | 0.13 | |
| | 2009 (Unaudited) | | | 2008 (Unaudited) | |
For the nine months ended December 31, | | | | | | |
Net income for earnings per share | | $ | 5,949,110 | | | $ | 5,313,259 | |
Weighted average shares used in basic computation | | | | | | | | |
Basic and Diluted | | | 17,409,489 | | | | 15,800,000 | |
Earnings per share | | | | | | | | |
Basic and Diluted | | $ | 0.34 | | | $ | 0.34 | |
Note 12 – SHAREHOLDERS’ EQUITY
Stock Based Compensation
On September 1, 2009, pursuant to agreements entered on July 30, 2009, shareholders of Renovation HK sold shares of Renovation HK to service providers including the Company’s chief financial officer and legal counsel which, after the share exchange transaction between the Company and Renovation HK on September 17, 2009, collectively represent 2.50% of the Company’s issued and outstanding common stock.
Using the fair value of services provided as of December 31, 2009, the Company estimated that the total stock compensation expense to be recognized from these transactions was $202,120. The Company recognized $0 and $126,325 as stock compensation expense during the three and nine months ended December 31, 2009. The remaining $75,795 was applied to accrued legal fees, which were expensed during the year ended March 31, 2009.
Shareholders Contribution
On June 8, 2009, the three Owners of Jiuzhou Pharmacy acquired 100% equity interests of Kuaileren Pharmacy Co., Ltd. (“Kuaileren”) from its owner for stock consideration. On August 21, 2009, the three Owners contributed their 100% equity interests of Kuaileren to Jiuzhou Pharmacy, and Kuaileren became a wholly-owned subsidiary of Jiuzhou Pharmacy. The registered capital of Kuaileren is $15,000 (RMB 100,000). The transfer of the equity interest has been treated as a contribution to owner’s equity and has been valued at $8,164, the estimated fair value of the equity interest transferred.
Statutory Reserves
Statutory reserves represent restricted retained earnings. Based their legal formation, all PRC entities are required to set aside 10% of their net incomes as reported in their statutory accounts on an annual basis to the Statutory Surplus Reserve Fund (the “Reserve Fund”). Once the total set-aside in the Reserve Fund reaches 50% of an entity’s registered capital, further appropriations are discretionary. The Reserve Fund can be used to increase the entity’s registered capital upon approval by relevant government authorities and to eliminate its future losses under PRC GAAP upon a resolution by its board of directors. The Reserve Fund is not distributable to shareholders except in the event of liquidation.
The Company has fulfilled the 50% registered capital requirement as of March 31, 2009. Therefore, during the nine months ended December 31, 2009, no additional appropriations to the statutory reserves were made from unrestricted earnings.
There are no legal requirements in the PRC to fund these statutory reserves by transfer of cash to any restricted accounts, and therefore, the Company does not do so. These statutory reserves are not distributable as cash dividends.
Note 13 - POSTRETIREMENT BENEFITS
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees. The contribution is based on a percentage required by the local government and the employees' current compensation. The Company contributed $33,717 and $27,053 in employment benefits and pension during
Three Months Ended
June 30,
2010 2009
(unaudited) (unaudited)
------------ --------------
Net income for earnings per share $ 2,152,464 $ 1,599,161
Weighted average shares used in basic computation
Basic and diluted 12,653,848 7,900,000
Earnings per share
------------ --------------
Basic and diluted $ 0.17 $ 0.20
For the three months ended
December 31, 2009 and 2008, respectively. The Company contributed $67,858 and $58,559 in employment benefits and pension duringJune 30, 2010, 105,000 shares underlying the
nineoutstanding purchase option were excluded from the diluted earnings per share
calculation as they are anti-dilutive. For the three months ended
December 31,June 30, 2009,
there was no purchase option outstanding.
All share and
2008, respectively.per share amounts used in the Company's consolidated financial
statements and notes thereto have been retroactively restated to reflect the
1-for-2 reverse stock split effected on April 9, 2010.
Note 1415 - SEGMENTS
The Company sells prescription and over the counterover-the-counter medicines, traditional
Chinese medicines, which are medicines derived from Chinese herbs, Chinese
herbs, dietary supplements,supplement, medical devices, etc.instruments and sundry items. The class of
customer,customers, selling practice and distribution process are the same for all
products. The Company’sCompany's chief operating decision-makers (i.e. the chief executive
officer and his direct reports) review financial information presented on a
consolidated basis, accompanied by disaggregated information about revenues by
product lines for purposes of allocating resources and evaluating financial
performance. There are no segment managers who are held accountable for
operations, operating results and plans for levels or components below the
consolidated unit level. Based on qualitative and quantitative criteria
established by the accounting standard, “Disclosures"Disclosures about Segments of an
Enterprise and Related Information”,Information," the Company considers itself to be
operating within one reportable segment.
24
The Company does not have long-lived assets located in foreign countries.outside the PRC. In
accordance with the enterprise-wide disclosure requirements of FASB’sFASB's accounting
standard, the Company's net revenue from external customers by main productsegment is
as follows: | | Three months Ended December 31, | |
| | 2009 | | | 2008 | |
| | (Unaudited) | | | (Unaudited) | |
Prescription Drugs | | $ | 5,389,120 | | | $ | 4,248,830 | |
Over The Counter (OTC) Drugs | | | 4,516,533 | | | | 3,418,696 | |
Nutritional Supplements | | | 1,234,362 | | | | 1,334,225 | |
Traditional Chinese Medicine Products | | | 2,776,579 | | | | 1,749,295 | |
Medical Devices | | | 321,155 | | | | 350,727 | |
Sundry Products and Others | | | 685,957 | | | | 460,989 | |
Total | | $ | 14,923,706 | | | $ | 11,562,762 | |
| | Nine months Ended December 31, | |
| | 2009 | | | 2008 | |
| | (Unaudited) | | | (Unaudited) | |
Prescription Drugs | | $ | 14,181,479 | | | $ | 12,178,657 | |
Over The Counter (OTC) Drugs | | | 11,895,897 | | | | 8,769,355 | |
Nutritional Supplements | | | 4,568,279 | | | | 5,545,568 | |
Traditional Chinese Medicine Products | | | 5,416,461 | | | | 3,538,906 | |
Medical Devices | | | 983,974 | | | | 1,201,348 | |
Sundry Products and Others | | | 1,817,653 | | | | 1,862,487 | |
Total | | $ | 38,863,743 | | | $ | 33,096,321 | |
Three Months Ended
June 30,
2010 2009
(unaudited) (unaudited)
------------ ------------
Prescription Drugs $ 6,162,598 $ 4,498,498
Over-The-Counter (OTC) Drugs 5,441,859 2,560,209
Nutritional Supplements 1,731,081 525,937
Traditional Chinese Medicine Products 1,290,891 1,230,105
Sundry Products 371,263 2,592,740
Medical Devices 209,736 273,975
------------ ------------
Total $15,207,428 $ 11,681,464
============ ============
Note
1516 - COMMITMENTS AND CONTINGENCIES
Operating lease commitments
- -----------------------------
The Company recognizes lease expense on a straight line basis over the term of
the lease in accordance to the accounting standard. The Company has entered into
various tenancy agreements for its store premises and for the leaseland that it has
leased from a local government to be used potentially for the cultivation of
store premises. The Company’s leases do not contain any escalating lease payments or contingent rental payments terms.
Jiuzhou Pharmacy leases aChinese medicinal herbs.
One of the Company's retail spacespaces and its corporate office spaceare leased from Lei
Liu, a director of the Company, under long-term operating lease agreements beginningfrom
August 2008 to August 2010 and from January 2008 to March 2012, respectively.
The rent expense for the retail space and the corporate office space are $44,004$406,814 and
$29,032$42,531 for the three months ended December 31,June 30, 2010 and 2009, and 2008, respectively. The rent for the retail and the corporate office space are $131,976 and $130,644 for nine months ended December 31, 2009 and 2008, respectively. For the
three months ended June 30, 2010 and nine months ended December 31, 2009, $175,968 wasrent paid to Mr. Liu for retailamounted to
$44,190 and corporate office space rental. For the three months and nine months ended December 31, 2008, no rent was paid to Mr. Liu.
$0, respectively.
The Company’sCompany's commitments for minimum rental payments under its leaseleases for the
next five years and thereafter are as follows:
Period ending March 31, | | Amount | |
2010 | | $ | 357,795 | |
2011 | | $ | 1,262,525 | |
2012 | | $ | 991,990 | |
2013 | | $ | 718,576 | |
2014 | | $ | 468,814 | |
Thereafter | | | 70,003 | |
Years ending March 31, Amount
- --------------------------------------------------------------------- ----------
2011 $1,411,140
2012 1,698,291
2013 1,477,275
2014 1,235,845
2015 844,088
Thereafter 853,504
Rental expense for the three months ended December 31,June 30, 2010 and 2009 and 2008 amounted to
$416,702$432,428 and $235,527,$257,454, respectively.
RentalAs of June 30, 2010 and March 31, 2010, prepayment on retail spaces and
corporate office rental expense for the nine months ended December 31, 2009 and 2008 amounted to $926,795$1,352,934 and $691,548,$1,205,881,
respectively.
25
Logistics Services Commitments
On January 1, 2009 the
- --------------------------------
The Company entered into a one-yearrenewed its agreement for logistics services (“("Logistics Agreement”Agreement")
with Zhejiang Yingte Logistics Co., Ltd. (“Yingte”("Yingte") to provide logistics and
other related services.services from January 1, 2010 to December 31, 2010. Pursuant to
the Logistics Agreement, Yingte accepts goods from the Company’sCompany's suppliers,
stores the goods and then deliverdelivers the goods to the Company’sCompany's store locations as
directed by the Company, for whichand the Company is required to pay Yingte 1% of the
purchase price of the delivered goods. The Company is obligated to pay a minimum
of RMB 2,900,000 annually (1% of RMB 290 million:million, the total minimum amount of
goods to be delivered under the Logistics Agreement).
As of December 31, 2009, the Company has not yet renewed its contract with Yingte for 2010.
As of DecemberJune 30, 2010 and March 31, 2009, the Company did not have any contingent
liabilities.
Legal Proceedings
- ------------------
In December 2009, Jiuzhou Pharmacy filed suit against The CompanyVentana Group, LLC and
Michael Hom in the California Superior Court for the County of San Mateo,
alleging breach of contract of an agreement entered into with the defendants in
2008 and seeking damages of $25,000. The suit was subsequently amended to remove
Michael Hom as a defendant. In May 2010, Jiuzhou Pharmacy sought for default
judgment against the defendants, which was granted on July 14, 2010. Jiuzhou
Pharmacy is not awarein the process of any legal proceedings in which any director, officer, ownerexecuting the judgment against The Ventana Group,
LLC.
Note 17 - SUBSEQUENT EVENT
In connection with the land use right lease agreement with a local government,
Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. ("Qianhong") was
established with registered capital of record or beneficial owner$1,480,000 (RMB 10,000,000) on August 10,
2010. As of more than five percent of any class of voting securities ofJune 30, 2010, the Company or any affiliateprepaid $1,031,100 (RMB 7,000,000) of
such director, officer, or security holder, is a party adverse toregistered capital (Note 7), and the Company or has a material interest adverse to the Company.
Note 16 – SUBSEQUENT EVENT
remaining $444,000 (RMB 3,000,000) of
registered capital was contributed on August 9, 2010.
The Company has performed an evaluation of subsequent events through February 8, 2010, the date
these consolidated financial statements were issued.
Financial Condition and Results
of Operations.
The following management’smanagement's discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the “safe harbor”"safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”"may", “will”"will", “could”"could", “expect”"expect",
“anticipate”"anticipate", “intend”"intend", “believe”"believe", “estimate”"estimate", “plan”"plan", “predict”"predict", and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the “Risk Factors”"Risk
Factors" section of this report.the Company's current report on Form 8-K filed with the SEC
on September 24, 2009. We undertake no obligation to update publicly any
forward-looking statements for any reason even if new information becomes
available or other events occur in the future.
Our financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange Rates”"Exchange
Rates" below for information concerning the exchanges rates at which Renminbi
("RMB") were translated into U.S. Dollars at various pertinent dates and for
pertinent periods.
Overview
China Jo-Jo Drugstores, Inc. (“("Jo-Jo Drugstores”Drugstores" or the “Company”"Company"), was
incorporated in Nevada on December 19, 2006, originally under the name
“KerrisdaleKerrisdale Mining Corporation.” On September 24, 2009, The Company changed its
name to “China"China Jo-Jo Drugstores, Inc.”" in connection with the share exchange
transaction described below.
On September 17, 2009, the Company completed a share exchange transaction
with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation HK”("Renovation"), a Hong Kong
company, and Renovation HK became a wholly-owned subsidiary of the Company. On the
closing date, the Company issued 15,800,0007,900,000 of its common stock to the
stockholders of Renovation HK’s stockholders in exchange for 100% of the capital stock of
Renovation HK.Renovation. Prior to the share exchange transaction, the Company had 4,200,0002,100,000
shares of common stock issued and outstanding. After the share exchange
transaction, the Company had 20,000,00010,000,000 shares of common stock outstanding and Renovation HK’s stockholders owned 79% of the issued and
outstanding, shares.of which 79% were owned by the stockholders of Renovation. The
management members of Renovation HK became the directors and officers of the
Company. 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) is, in substance, those of
Renovation HK (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 HK is a holding company that, through its wholly-owned PRC
subsidiary, Zhejiang Jiuxin Investment Management Co., Ltd. (“("Jiuxin
Management”Management"), controls the three HJ Group companies in the PRC, companies, namely Hangzhou
Jiuzhou Grand Pharmacy Chain Co., Ltd. (“("Jiuzhou Pharmacy”Pharmacy"), Hangzhou Jiuzhou
Clinic of Integrated Traditional and Western Medicine General Partnership
(“("Jiuzhou Clinic”Clinic"), and Hangzhou Jiuzhou Medical & Public Health Service Co.,
Ltd. (“("Jiuzhou Service”Service", and with Jiuzhou Pharmacy and Jiuzhou Clinic
collectively as “HJ Group”"HJ Group"), by a series of contractual arrangements. All of our
business operations are carried out by HJ Group.
Developments during the Quarter
On April 7, 2010, Jiuzhou Pharmacy became the first company in Zhejiang
Province to be granted an Internet Pharmaceutical Transaction Service
Qualification Certificate (the "Certificate") by the State Food and Drug
Administration of Zhejiang Province. The
contractual arrangementsCertificate allows Jiuzhou Pharmacy to
engage in online retail pharmaceutical sales throughout the People's Republic of
China.
On April 9, 2010, the Company effected a 1-for-2 reverse split of its
issued and outstanding common shares and a proportional reduction of its
authorized common shares.
27
On April 28, 2010, the Company completed a registered public offering of
3.5 million shares of common stock at a price of $5.00 per share, with HJ Group are necessarygross
proceeds to comply with Chinese laws limiting foreign ownershipthe Company of certain companies. Through these contractual arrangements, we have the abilityapproximately $17.5 million, prior to substantially influence the daily operationsdeducting
underwriting discounts, commissions and financial affairs ofoffering expenses.
On May 18, 2010, the three HJ Group companies, appoint their senior executives and approve all matters requiring approvalowners of Jiuzhou Pharmacy completed the
registration of their equity owners. Aspledge obligations under the Equity Pledge Agreement,
which is a result of these contractual arrangements, which enable us to control HJ Group, we are considered the primary beneficiary of HJ Group. Please see Note 1 to our consolidated financial statements for the three months ended December 31, 2009, for the impactpart of the contractual arrangements, with the local State
Administration of Industry and Commerce.
In connection with the 30-year lease that we entered into in February 2010
with The People's Government of Qianhong Village in Lin'an, Zhejiang Province,
we have established Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd.
("Qianhong") as a wholly-owned subsidiary of Jiuxin Management with registered
capital of RMB 10 million (approximately $1.48 million) on our consolidated financial statements.
On October 27, 2009, we were made a party to a series of amendments to the contractual arrangements with HJ Group. Specifically, fourAugust 10, 2010. RMB
7 million (approximately $1,031,100) of the five agreements comprising the contractual arrangements – namely, the consulting services agreement, the operating agreement, the option agreementregistered capital was prepaid as of
June 30, 2010, and the voting rights proxy agreement – were amended to remove a provision terminating these agreementsbalance of RMB 3 million (approximately $444,000) was
paid on May 1, 2010 unless we complete a financing of at least $25 million and the listing of our common stock on The NASDAQ Capital Market by such date. As amended:
| · | the consulting services agreement shall remain in effect for the maximum period of time permitted by law, unless sooner terminated by Jiuxin Management or if either Jiuxin Management or an HJ Group company becomes bankrupt or insolvent, or otherwise dissolves or ceases business operations; |
| · | the operating agreement shall remain in effect unless terminated by Jiuxin Management; |
| · | the option agreement shall remain in effect for the maximum period time permitted by law; and |
| · | the voting rights proxy agreement shall remain in effect for the maximum period of time permitted by law. |
August 9, 2010.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, which requires uswe 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 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. We believe the
following accounting policies involve the most significant judgment and
estimates used in the preparation of our financial statements. We have not made
any material changes in the methodology used in these accounting policies during
the past eighteen months.
Revenue recognition
- --------------------
Revenue from sales of prescription medicine at the 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 the drugstores is recognized at
the point of sale, which is when the customer pays for and receives the
merchandise.
Revenue from medical services (which is nominal) is recognized after the
service has been rendered to the customer.
Revenue from sales of merchandise to non-retail customers is recognized
when the following conditions are met: 1) persuasive evidence of an arrangement
exists (sales agreements and customer purchase orders are used to determine the
existence of an arrangement); 2) delivery of goods has occurred and risks and
benefits of ownership have been transferred, which is when the goods are
received by the customer at its designated location in accordance with the sales
terms; 3) the sales price is fixed or determinable; and 4) collectability is
probable. Historically, sales returns have been immaterial.
28
Our revenue is net of value added tax (“VAT”("VAT") collected on behalf of tax
authorities in respect of the sale of merchandise. VAT collected from customers,
net of VAT paid for purchases, is recorded as a liability in the balance sheet
until it is paid to the tax authorities.
Vendor allowances
- ------------------
The Company accounts for vendor allowances according the accounting
standards, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor, and by Reseller to Sales Incentives
Offered to Consumers by Manufacturers.Manufacturers. Vendor allowances reduce the carrying
value of inventories and subsequently transferred to cost of goods sold when the
inventories are sold, unless those allowances are specifically identified as
reimbursements for advertising, promotion and other services, in which case they
are recognized as a reduction of the related advertising and promotion costs.
Slotting allowances are a major portion of total allowances. With slotting
allowances, the vendors reimburse the Company for the cost of placing new
product on the shelf. The Company has no obligation or commitment to keep the
product on the shelf for a minimum period.
A small portion of vendor allowance also includes advertising and promotion
allowances for the promotion of vendors' products in stores. The promotion may
be any combination of a temporary price reduction or a feature in print ads.
Depreciation and Amortization
- -------------------------------
Our non-current assets include property and equipment, including leasehold
improvements, long term deposits, and long term advances to suppliers.prepayment. We depreciate our
equipment assets using the straight-line method over the estimated useful lives
of the assets. We make estimates of the useful lives of the equipment (including
the salvage values), in order to determine the amount of depreciation expense to
be recorded during any reporting period. We amortize leasehold improvements of
our retail drugstores and other business premises over the shorter of five yearslease term
or remaining lease term. A majority of ourperiods. Our leases have a five-yearthree to ten year term. We
estimate the useful lives of our other property and equipment at the time we
acquire the assets based on our historical experience with similar assets as
well as anticipated technological and other changes. If technological changes
were to occur more rapidly than anticipated or in a different form than
anticipated, we may shorten the useful lives assigned to these assets as
appropriate, which will result in the recognition of increased depreciation and
amortization expense in future periods. There has been no change to the
estimated useful lives and salvage values during the ninethree months ended December 31, 2009June 30,
2010 and 2008.
2009.
Impairment of Long-Lived Assets
- ----------------------------------
We evaluate our long lived tangible and intangible assets for impairment,
at least annually, but more often 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 asset’sasset's 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. Based on itsour review, we believe that, as of December 31, 2009,June 30, 2010,
there was no impairment.
Inventories
- -----------
We state our inventory at the lower of cost or market. Cost is determined
using the weighted average cost method. Market is the lower of replacement cost
or net realizable value. We carry out physical inventory counts on a monthly
basis at each store and distribution location to ensure that the amounts
reflected in the consolidated financial statements at each reporting period are
properly stated and valued. We record write-downs to inventory for shrinkage
losses and damaged merchandise that are identified during the inventory counts.
The inventory write downs for the ninethree months ended December 31,June 30, 2010 and 2009 and 2008 have
been immaterial.
29
Recent Accounting Pronouncements
In April 2009, the FASB issued an accounting standard that requires disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this accounting standard, fair values for these assets and liabilities were only disclosed annually. This standard applies to all financial instruments within its scope and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This standard does not require disclosures for earlier periods presented for comparative purposes at initial adoption, but in periods after the initial adoption, this standard requires comparative disclosures only for periods ending after initial adoption. On July 1, 2009, the Company adopted this accounting standard, but it did not have a material impact on the disclosures related to its consolidated financial statements.
In June 2009, the FASB issued an accounting standard amending the accounting and disclosure requirements for transfers of financial assets. This accounting standard requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity (“QSPE”). This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company does not expect this standard to have a material effect on its consolidated financial statements.
In June 2009, the FASB also issued an accounting standard amending the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes the exception from applying the consolidation guidance within this accounting standard. Further, this accounting standard requires a company to perform a qualitative analysis when determining whether or not it must consolidate a VIE. It also requires a company to continuously reassess whether it must consolidate a VIE. Additionally, it requires enhanced disclosures about a company’s involvement with VIEs and any significant change in risk exposure due to that involvement, as well as how its involvement with VIEs impacts the company’s financial statements. Finally, a company will be required to disclose significant judgments and assumptions used to determine whether or not to consolidate a VIE. This accounting standard is effective for financial statements issued for fiscal years beginning after November 15, 2009, and the Company is currently assessing the impact of adoption this standard.
In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The Company is currently evaluating the impact of this ASU on its consolidated financial statements.
In October 2009, FASB issued an ASU regarding accounting for own-share lending arrangements in contemplation of convertible debt issuance or other financing. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements.
In December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting
for Transfers of Financial Assets—anAssets-an amendment of FASB Statement No. 140.The140.The
amendments in this Accounting Standards Update improve financial reporting by
eliminating the exceptions for qualifying special-purpose entities from the
consolidation guidance and the exception that permitted sale accounting for
certain mortgage securitizations when a transferor has not surrendered control
over the transferred financial assets. In addition, the amendments require
enhanced disclosures about the risks that a transferor continues to be exposed
to because of its continuing involvement in transferred financial assets.
Comparability and consistency in accounting for transferred financial assets
will also be improved through clarifications of the requirements for isolation
and limitations on portions of financial assets that are eligible for sale
accounting. The Company doesadopted this standard and the standard did not expecthave
material effect on the adoption of this ASU to have a material impact on itsCompany's consolidated financial statements.
In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities. This
Accounting Standards Update amends the FASB Accounting Standards Codification
for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’sentity's economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’sentity's involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU todid not have a material impact
on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU todid not have a material impact on
its consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 –- Accounting and Reporting for
Decreases in Ownership of a Subsidiary –- a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling"Non-controlling
Interests in Consolidated Financial Statements –- An Amendment of ARB No. 51.”" If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The Company does not expect the adoption of this ASU todid not have a material impact on
its consolidated financial statements.
30
In January 2010, FASB issued ASU No. 2010-06 –- Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers. 2) Activity in Level 3 fair value measurements. In
the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about
purchases, sales, issuances, and settlements (that is, on a gross basis rather
than as one net number).This update provides amendments to Subtopic 820-10 that
clarify existing disclosures as follows: 1) Level of disaggregation. A reporting
entity should provide fair value measurement disclosures for each class of
assets and liabilities. A class is often a subset of assets or liabilities
within a line item in the statement of financial position. A reporting entity
needs to use judgment in determining the appropriate classes of assets and
liabilities. 2) Disclosures about inputs and valuation techniques. A reporting
entity should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements that
fall in either Level 2 or Level 3.The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3
fair value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. The Company is currently evaluatingadopted the impactdisclosures standards, except for the disclosures
to be adopted for fiscal year beginning after December 15, 2010, and the
adoption of this ASU did not have a material impact on its consolidated
financial statements.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements," or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13,
"Compensation-Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," or ASU 2010-13. ASU 2010-13
provides amendments to Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in currency of a market in which a
substantial porting of the entity's equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of this ASU 2010-17
to have a material impact on its consolidated financial statements. Results of Operations
31
Results of Operations
- Three Months ended December 31, 2009 as compared to Three Months ended December 31, 2008
Revenue. Our revenue increased by $3,360,944 or 29.1% to $14,923,706The following table summarizes our results of operations for the three months
ended December 31, 2009 from $11,562,762June 30, 2010 and 2009.
Three Months Ended
June 30,
2010 2009
--------------------------- ---------------------------
Percentage Percentage
of of
Amount total revenue Amount total revenue
------------ ------------- ----------- -------------
Revenues $15,207,428 100.0% $11,681,464 100.0%
Gross Profit $ 4,613,896 30.3% $ 3,023,896 25.9%
Selling Expenses $ 823,358 5.4% $ 477,777 4.1%
General and Administrative Expenses $ 773,762 5.1% $ 365,210 3.1%
Income from Operations $ 3,016,776 19.8% $ 2,180,909 18.7%
Other Income (Expense), Net $ (57,532) (0.4)% $ 6,635 0.1%
Change in Fair Value of Purchase Option
Derivative Liability $ 57,944 0.4% $ - -%
Income Tax Expenses $ 864,724 5.7% $ 588,383 5.0%
Net Income $ 2,152,464 14.2% $ 1,599,161 13.7%
Revenue. Our revenue increased by $3,525,964 or 30.2% to $15,207,428 for the
three months ended December 31, 2008June 30, 2010 from $11,681,464 for the three months ended
June 30, 2009 due to operating additionalthe opening of new store locations.locations and increased same store
sales. Of this increase, 38.7%$1,135,750 or $1,302,1667% of the increase was fromattributable to
new stores, with the remainder primarily attributable to our maturing stores
that werewe opened subsequent to December 31, 2008.during the three months ended June 30, 2010. We operated 2231
stores as of December 31, 2009,June 30, 2010, as compared to 1519 stores as of December 31, 2008.June 30, 2009. We
anticipate that our overall revenue will continue to increase as we open
additional stores.
Gross Profit. Our gross profit increased by 43.4%$1,590,000 or 52.6% to $4,766,835$4,613,896
for the three months ended December 31, 2009June 30, 2010 from $3,324,684$3,023,896 for the three months
ended December 31, 2008.June 30, 2009. Our gross margin slightly increased from 28.8%25.9% for the three months
ended December 31, 2008June 30, 2009 to 31.9%30.3% for the three months ended December 31, 2009.June 30, 2010 as a
result of selling more over-the-counter drugs. We anticipate that our overall
gross profit will continue to increase as our sales increase. Additionally, we
anticipate that our gross margin will increase as we will be able to obtain
better pricing terms from our suppliers and achieve further economies of scale
as a result of purchasing larger quantities of products. However, in order to
increase sales volume we may lower our prices which may have an adverse effect
on our margins. We presently do not privately label any of our products and are
constantly adjusting our product mix to meet customer demand and to maximize our
gross margin.
Sales and Marketing
Selling Expenses. Our sales and marketingselling expenses increased by 87.1%$345,581 or 72.3% to
$912,312$823,358 for the three months ended December 31, 2009June 30, 2010 from $487,395$477,777 for the three
months ended December 31, 2008 and was a primary driver of our increased revenues during the quarter.June 30, 2009. The increase in sales and marketing expenseselling expenses was primarily a
result of the continued expansion of our drugstore chain from 15 stores for the three months ended December 31, 2008 to 22 stores for the three months ended December 31, 2009. Sales and marketingoperating additional store locations. Selling expenses as a percentage
of our revenue increased slightly to 6.1%5.4% for the three months ended December 31, 2009June 30,
2010 from 4.2%4.1% for the three months ended December 31, 2008.June 30, 2009. We expect that our
sales and marketingselling expenses will increase as we continue to expand our store network.
network within
the city of Hangzhou as well as into other cities within Zhejiang Province.
General and Administrative Expenses. Our general and administrative expenses
increased by 296.7%$408,552 or 111.9% to $441,861$773,762 for the three months ended December 31, 2009June 30,
2010 from $111,386$365,210 for the three months ended December 31, 2008 as a result of adding additional infrastructure.June 30, 2009. General and
administrative expenses as a percentage of our revenue increased to 3.0%5.1% for the
three months ended December 31, 2009 from 1.0%June 30, 2010 as compared to 3.1% for the three months ended
December 31, 2008.June 30, 2009. The increase in general administrative expenses relate to our
operating as a US publicly traded company during the three months ended June 30,
2010. As we continue to open drugstores in Hangzhou and to expand into other
cities within Zhejiang Province, further develop our infrastructure, and incur
expenses related to being a U.S. public company, we anticipate that our general
and administrative expenses will increase.
increase in absolute dollars as well as a
percentage of total revenues.
Income from Operations. As a result of the foregoing,increased gross margin, our income
from operations increased by $835,867 or 38.3% to $3,412,662$3,016,776 for the three
months ended December 31, 2009June 30, 2010 from $2,725,903$2,180,909 for the three months ended December 31, 2008, an increase of 25.2%.June 30,
2009. Our operating margin for the three months ended December 31,June 30, 2010 and 2009 was
19.8% and 2008 was 22.9% and 23.6%18.7%, respectively.
Results of Operations - Nine Months ended December 31, 2009 as compared
32
Income Taxes. Our income tax expense increased to Nine Months ended December 31, 2008
Revenue. Our revenue increased by $5,767,422 or 17.4% to $38,863,743$864,724 for the ninethree months
ended December 31, 2009June 30, 2010 from $33,096,321$588,383 for the ninethree months ended December 31, 2008 due to operating additional store locations. Of this increase, $2,852,304 is attributable to new stores or 49.5% of the total increase. As of December 31, 2008 we operated 15 stores, as compared to 22 stores as of December 31, 2009. We anticipate that our overall revenue will continue to increase as we open additional stores.
Gross Profit. Our gross profit increased by 26.0% to $11,289,607 for the nine months ended December 31,June 30, 2009 from $8,956,736 for the nine months ended December 31, 2008. Our gross margin slightly increased from 27.1% for the nine months ended December 31, 2008 to 29.0% for the nine months ended December 31, 2009. We anticipate that our overall gross profit will continue to increase as our sales increase. Additionally, we anticipate that our gross margin will increase as we will be able to obtain better pricing terms from our suppliers and achieve further economies of scale as a
result of purchasing larger quantities of products. We presently do not privately label any of our products and are constantly adjusting our product mix to meet customer demand and to maximize our gross margin.
Sales and Marketing Expenses. increased operating income. Our sales and marketing expenseseffective tax rate increased by 55.1% to $1,986,471from
26.9% for the ninethree months ended December 31,June 30, 2009 from $1,280,838to 28.6% for the ninethree months
ended December 31, 2008. This increase was primarily a result of the continued expansion of our drugstore chain from 15 stores for the nine months ended December 31, 2008 to 22 stores for the nine months ended December 31, 2009. Sales and marketing expenses as a percentage of our revenue increased slightly to 5.1% for the nine months ended December 31, 2009 from 3.9% for the nine months ended December 31, 2008. We expect that our sales and marketing expenses will increase as we continue to expand our store network.
General and Administrative Expenses. Our general and administrative expenses increased by 123.1% to $1,372,205 for the nine months ended December 31, 2009 from $614,987 for the nine months ended December 31, 2008. General and administrative expenses as a percentage of our revenue increased to 3.5% for the nine months ended December 31, 2009 from 1.9% for the nine months ended December 31, 2009. As we continue to open drugstores, further develop our infrastructure, and incur expenses related to being a U.S. public company, we anticipate that our general and administrative expenses will increase.
Income from Operations. June 30, 2010.
Net Income. As a result of the foregoing, our net income from operations increased to $7,930,931$2,152,464
for the ninethree months ended December 31, 2009June 30, 2010 from $7,060,911$1,599,161 for the ninethree months
ended December 31, 2008, an increase of 12.3%. Our operating margin for the nineJune 30, 2009.
Liquidity
Three months ended December 31, 2009 and 2008 was 20.4% and 21.3%, respectively.
Liquidity
Nine Month Period Ended December 31, 2009
June 30, 2010
For the ninethree months ended December 31, 2009,June 30, 2010, we generated $903,020 fromused cash in operating
activities of $527,675, as compared to $279,657cash generated by operating activities of
$454,652 for the ninethree months ended December 31, 2008.June 30, 2009. The decrease is a resultprimarily
attributable an increase in advances paid to suppliers of a greater reduction to$2,736,505 offset by
an increase in net income of $553,303 and an increase in accounts payable offset by a decrease of
cash advances$1,207,536 from the three months ended June 30, 2009 to suppliers.
June 30, 2010.
We used $320,729$442,709 in investing activities during the ninethree months ended December 31, 2009 as compared to $269,346 during the nine months ended December 31, 2008. This slight increase in investing activities was primarily a result of purchasing additional equipment.
Cash used in financing activities was $362,349 for the nine month period ended December 31, 2009June
30, 2010, as compared to cash used in investing activities of $178,561 during
the three months ended June 30, 2009 as a result of our store expansion during
the three months ended June 30, 2010.
Cash provided by financing activities was $15,923,536 for the three months
ended June 30, 2010, as compared to cash provided by financing activities of $0
for the nine month periodthree months ended December 31, 2008.June 30, 2009. The increase wasis due to the result of borrowing money that was offset by bank requirements to keep cash deposits with the bank as security for notes payable outstanding with the bank.
equity
offering which raised $15.4 million in net proceeds, after deducting underwriter
discount, commission, and offering expenses.
As of December 31, 2009,August 13, 2010, we had unrestricted cash of $1,226,929.$13,915,167. Our total current assets
as of June 30, 2010 were $17,863,438$34,049,410 and our total current liabilities,
excluding the $344,507 derivative liability, were $8,271,636$9,035,363 which resulted in a
net working capital of $9,591,802.
$25,014,047 as of June 30, 2010.
Capital Resources
During the nine months ended December 31, 2009,
In April 2010, we borrowed and repaid $1,466,400.sold 3.5 million shares of common stock in a public
offering at a price of $5.00 per share for gross proceeds of approximately $17.5
million. We have fundedanticipate that our continued expansion from our operating cash flow.existing capital resources will enable us to
continue to add new drugstores in Zhejiang Province. However, if make a
significant acquisition that cannot be financed with our working capital, we were to expand more aggressively throughout Hangzhou and other parts of the Zhejiang Province, we willmay
need additional capital.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
When we open store locations, we typically enter into lease agreements that
are generally between fourthree to fiveten years. Our commitments for minimum rental
payments under our leases for the next five years and thereafter are as follows:
Years ending March 31, | | | |
2010 | | $ | 357,795 | |
2011 | | | 1,262,525 | |
2012 | | | 991,990 | |
2013 | | | 718,576 | |
2014 | | | 468,814 | |
Thereafter | | | 70,003 | |
Three months ending June 30,
- ----------------------------
2011 $ 1,411,140
2012 1,698,291
2013 1,477,275
2014 1,235,845
2015 884,088
Thereafter 853,504
33
Logistics Services Commitments We use a third party service provider, Zhejiang Yingte Logistics Co., Ltd.,
(“Yingte”("Yingte") to accept goods from our suppliers and to deliver the goods to our
store locations. On January 1, 20092010 we entered into a one year agreement with
Yingte and are obligated to pay 1% of the purchase price of the goods received
from our suppliers by Yingte during the term of the agreement, from January 1,
20092010 to December 31, 2009,2010, with a contractual minimum of 2,900,000 RMB.
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’sstockholder'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
HJ Group maintains its books and records in Renminbi (“RMB”("RMB"), the lawful
currency of the PRC. In general, for consolidation purposes, the Company
translates HJ Group’sGroup's assets and liabilities into U.S. Dollars 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 HJ Group’sGroup's financial
statements are recorded as accumulated other comprehensive income.
Until July 21, 2005, RMB had been pegged to US$U.S. Dollars at the rate of
RMB8.30: US$USD$1.00. On July 21, 2005, the PRC government reformed the exchange
rate system into a managed floating exchange rate system based on market supply
and demand with reference to a basket of currencies. In addition, the exchange
rate of RMB to US$USD was adjusted to RMB8.11: US$USD$1.00 as of July 21, 2005. The
People’sPeople's Bank of China announces the closing price of a foreign currency such as
US$USD$ traded against RMB in the inter-bank foreign exchange market after the
closing of the market on each working day, which will become the unified
exchange rate for the trading against RMB on the following working day. The
daily trading price of US$USD against RMB in the inter-bank foreign exchange market
is allowed to float within a band of ±0.3%0.3% around the unified exchange rate
published by the People’sPeople's Bank of China. This quotation of exchange rates does
not imply free convertibility of RMB to other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’sPeople's Bank of China. Approval of foreign currency payments by
the Bank of China or other institutions required submitting a payment
application form together with invoices, shipping documents and signed
contracts.
The exchange rates used to translate amounts in RMB into USU.S. Dollars for
the purposes of preparing the consolidated financial statements or otherwise
stated in this report were as follows:
| December 31,
2009
| | March 31,
2009
| | December 31,
2008
|
Balance sheet items, except for the registered and paid-up capital, as of end of period/year | USD1:RMB 0.1467 | | USD1:RMB0.1465 | | USD1:RMB 0.1467 |
| | | | | |
Amounts included in the statement of operations, statement of changes in stockholders'
equity and statement of cash flows for the period/ year ended
| USD1:RMB 0.14664 | | USD1:RMB0.14582 | | USD1:RMB 0.14559 |
June 30, March 31, June 30,
2010 2010 2009
---------- ---------- ------------
Balance sheet items, except for the USD1:RMB USD1:RMB USD1:RMB
registered and paid-up capital, as of end 0.14730 0.14670 0.1465
of period/year
Amounts included in the statement of USD1:RMB USD1:RMB USD1:RMB
operations, statement of changes in 0.14673 0.14664 0.14663
stockholders' equity and statement of cash
flows for the period/ year ended
No representation is made that RMB amounts have been, or would be, converted
into US$U.S. Dollars at the above rates.
Inflation
We believe that inflation has not had a material effect on our operations
to date.
Not applicable
Evaluation of Disclosure Controls and Procedures
As of December 31, 2009,June 30, 2010, we carried out an evaluation, under the supervision
and with the participation of our management, including our chief executive
officer and our chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, (asas defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as amended.
Based upon that evaluation, our chief executive officer and chief financial
officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not effective.
Duringineffective at the three monthsreasonable assurance
level.
In our annual report on Form 10-K for the year ended DecemberMarch 31, 20092010, we
identifiedreported certain weaknesses involving control activities, primarily accounting
and finance personnel weaknesses. Our current accounting staff members areremain
relatively inexperienced in U.S. GAAP- based reporting and require additional
training so as to meet with the higher demands necessary to fulfill the
requirements of U.S. GAAP-based reporting and SEC rules and regulations.
The Company’sCompany's management has identified the steps it believes are necessary
to address the weaknesses described above, and expect that we will
satisfactorily address the control deficiencies and weaknesses relating to these
matters by the end of our fiscal year ending March 31, 2010,2011, although there can
be no assurance that compliance will be achieved in this time frame.
Management, including our chief executive officer and our chief financial
officer, does not expect that our disclosure controls and internal controls will
prevent errors and omissions, even as the same are improved to address any
deficiencies and/or weaknesses. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and errors and omissions, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control.
Our financial reporting process includes extensive procedures we undertake
in order to obtain assurance regarding the reliability of our published
financial statements, notwithstanding the material weaknesses in internal
control. We expanded our review of accounting for business combinations to help
compensate for our material weaknesses in order to provide assurance that the
financial statements are free of material inaccuracies or omissions of material
fact. As a result, management, to the best of its knowledge, believes that (i)
this report does not contain any untrue statements of a material fact or omits
any material fact and (ii) the financial statements and other financial
information included in this report have been prepared in conformity with U.S.
GAAP and fairly present in all material aspects our financial condition, results
of operations, and cash flows.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the
quarter ended December 31, 2009period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
None.
Except as described below, 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,
is an adverse party or has a material interest adverse to our company.
On December 8, 2009, Jiuzhou Pharmacy filed suit against The Ventana Group,
LLC and Michael Hom in the California Superior Court for the County of San Mateo
(Case Number CV490272), alleging breach of contract of an agreement entered into
with the defendants in 2008 and seeking damages of $25,000. The suit was
subsequently amended to remove Mr. Hom as a defendant. In May 2010, Jiuzhou
Pharmacy sought for default judgment against the remaining defendant, which was
granted on July 14, 2010. Jiuzhou Pharmacy is in the process of executing the
judgment against the defendant.
Item 1A. Risk Factors.
You should carefully consider
As of and for 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 offering 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.Risks Relating to Our Business
Our relatively limited operating history makes it difficult to evaluate our future prospects and results of operations.
We have a limited operating history. Jiuzhou Pharmacy opened its first drugstore in March 2004, Jiuzhou Clinic began its first clinic in October 2003, and Jiuzhou Service commenced operation in November 2005. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries such as the pharmaceutical industry in China. Some of these risks and uncertainties relate to our ability to:
maintain our market position;
attract additional customers and increase spending per customer;
respond to competitive market conditions;
increase awareness of our brand and continue to develop customer loyalty;
respond tothree months ended June 30, 2010, there were no material
changes in our regulatory environment;
maintain effective controlrisk factors from those disclosed in Part I, Item 1A, of our
costs and expenses;
raise sufficient capital to sustain and expand our business;
attract, retain and motivate qualified personnel; and
ability to find and open new locations.
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
We depend substantiallyannual report on the continuing efforts of our executive officers, 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 members of our management team. In particular, we depend on the services of the three co-founders of HJ Group, Mr. Lei Lu, who is also our chief executive officer and the chairman of our board of directors, and Ms. Li Qi and Mr. Chong’an Jin, who are also members of our board of directors. The implementation of our business strategy and our future success depend in large part on our continued ability to attract and retain highly qualified management personnel. We face competition for personnel from other drugstore chains, retail chains, supermarkets, convenience stores, pharmaceutical companies and other organizations. Competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them, which could materially and adversely affect our financial condition and results of operations. We may be unable to attract or retain the personnel required to achieve our business objectives and failure to do so could severely disrupt our business and prospects. The process of hiring suitably qualified personnel is also often lengthy. In the past, we have had two major challenges to our recruiting efforts: (1) unqualified candidates who represent themselves as being qualified, and (2) talented and competent candidates who do not match our job requirements. If our recruitment and retention efforts are unsuccessful in the future, it may be more difficult for us to execute our business strategy.
We do not maintain key-man insurance for members of our management team. If we lose the services of any senior management, we may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and prospects. Furthermore, as we expect to continue to expand our operations, we will need to continue attracting and retaining experienced management. Each of our three founders has entered into a confidentiality and non-competition agreement with us regarding these agreements. However, if any disputes arise between our founders and us, we cannot assure you, in light of uncertainties associated with the PRC legal system, that any of these agreements could be enforced in China, where the three founders reside and hold some of their assets. See “Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could limit the protections available to you and us.”
We may need additional capital to expand outside of Hangzhou, and our inability to obtain capital, use internally generated cash, or use shares of our common stock or debt to finance future expansion efforts could impair the growth and expansion of our business.
As of December 31, 2009, we had RMB 8.4 million ($1.2 million) in unrestricted cash. Based on our current operating plans, we expect our existing resources, including our current cash and cash flows from operations, to be sufficient to fund our anticipated cash needs, including for working capital and capital expenditures for at least the next 12 months. We may, however, need to raise additional funds if our expenditures exceed our current expectations due to changed business conditions or other future developments.
Reliance on internally generated cash or debt to finance our operations or to complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to use shares of common stock to consummate acquisitions will depend on our market value from time to time and the willingness of potential sellers to accept our common stock as full or partial payment. Using shares of common stock for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use common stock to make future acquisitions, our ability to grow through acquisitions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (i) obtain additional capital on acceptable terms, (ii) use internally generated cash or debt to complete expansions because it significantly limits our operational or financial flexibility, or (iii) use shares of common stock to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement and negatively impact our stock price.
Our ability to raise additional funds in the future is subject to a variety of uncertainties, including:
our future financial condition, results of operations and cash flows;
general market conditions for capital-raising activities by pharmaceutical companies; and
economic, political and other conditions in China and elsewhere.
We may be unable to obtain additional capital in a timely manner or on commercially acceptable terms or at all.
We may need additional capital, and the sale of additional shares or other equity securities could result in dilution to our stockholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will 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, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain credit facility. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in further operating and financing covenants that would further 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.
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
Risks Relating to Our Pharmacy Operations
Our operating results are difficult to predict, and we may experience significant fluctuations in our operating results.
Our operating results may fluctuate significantly. As a result, you may not be able to rely on period to period comparisons of our operating results as an indication of our future performance. Factors causing these fluctuations include, among others:
our ability to maintain and increase sales to existing customers, attract new customers and satisfy our customers’ demands;
the frequency of customer visits to our drugstores and the quantity and mix of products our customers purchase;
the price we charge for our products or changes in our pricing strategies or the pricing strategies of our competitors;
timing and costs of marketing and promotional programs organized by us and/or our suppliers, including the extent to which we or our suppliers offer promotional discounts to our customers;
our ability to acquire merchandise, manage inventory and fulfill orders;
technical difficulties, system downtime or interruptions that may affect our product selection, procurement, pricing, distribution and retail management processes;
the introduction by our competitors of new products or services;
the effects of strategic alliances, potential acquisitions and other business combinations, and our ability to successfully and timely integrate them into our business;
changes in government regulations with respect to pharmaceutical and retail industries; and
current economic and geopolitical conditions in China and elsewhere.
In addition, a significant percentage of our operating expenses are fixed in the short term. As a result, a delay in generating revenue for any reason could result in substantial operating losses.
Moreover, our business is subject to seasonal variations in demand. In particular, traditional retail seasonality affects the sales of certain pharmaceuticals and other non-pharmaceutical products. Sales of our pharmaceutical products benefit in our fiscal third quarter (October 1st through December 31st) from the winter cold and flu season, and are lower in our fiscal fourth quarter (January 1st through March 31st ) because Chinese New Year falls into that quarter each year and our customers generally pay fewer visits to drugstores during this period. In addition, sales of some health and beauty products are driven, to some extent, by seasonal purchasing patterns and seasonal product changes. Failure to manage the increased sales effectively in the high sale season, and increases in inventory in anticipation of sales increase could have a material adverse effect on our financial condition, results of operations and cash flow.
Many of the factors discussed above are beyond our control, making our quarterly results difficult to predict, which could cause the trading price of our securities to decline below investor expectations. You should not rely on our operating results for prior periods as an indication of our future results.
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 drugstore 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 these preferences. In particular, we must optimize our product selection and inventory positions based on sales trends. We cannot assure you that our product selection, especially our selections of nutritional supplements and food products, will accurately reflect customer preferences at any given time. If we fail to anticipate accurately 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 proposition must be appropriate for our target customers. If we are not able to maintain and increase the awareness of our pharmacy brand, products and services, 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. We also cannot assure you that our current and planned spending on 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.
If we are unable to optimize management of our distribution activities, we may be unable to meet customer demand.
We currently outsource our distribution and inventory functions to Yingte Logistics. Our ability to meet customer demand may be significantly limited if we do not successfully and efficiently conduct our distribution activities, or if Yingte Logistics’ facilities are destroyed or shut down for any reason, including as the result of a natural disaster. Any disruption in the operation of our distribution could result in higher costs or longer lead times associated with distributing our products. In addition, as 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 distribution process could decrease our operating margins and reduce our 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 our business successfully as well as meet our customers’ expectations. However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of our increased offering of private label products, rapid changes in product life cycles, changing consumer preferences, uncertainty of success of product launches, seasonality, and manufacturer backorders and other vendor-related problems. We cannot assure you 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 forecast product demand accurately. 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 too much inventory would 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 lose that customer, either of which could have a material adverse effect on our business, financial condition and results of operations.
The centralization of procurement may not help us achieve anticipated savings and may place additional burdens on the management of our supply chain.
All of the product procurement for our drugstore chain is handled through our corporate headquarters. Such centralization of merchandise procurement and replenishment operations is intended to reduce 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, the centralization of merchandise procurement is expected to increase the complexity of tracking inventory, create additional inventory handling and transportation costs and place additional burdens on the management of our supply chain. Furthermore, we may not be successful in achieving the cost savings expected from the renegotiation of certain supplier contracts due to the nature of the products covered by those contracts and the market position of the related suppliers. If we cannot successfully reduce our costs through centralizing procurement, our profitability and prospects would be materially and adversely affected.
Our brand name, 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 name to be a valuable asset. We may be unable to prevent third parties from using our brand name without authorization. Unauthorized use of our brand name by third parties may adversely affect our business and reputation, including the perceived quality and reliability of our products and services. We plan to apply for trademark protection of our logo in China, although we have not done so nor have we registered our brand nameForm 10-K as of the date of this prospectus.
We also rely on trade secrets to protect our know-how and other proprietary information, including pricing, purchasing, promotional strategies, customer lists and/or suppliers lists. However, trade secrets are difficult to protect. While 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, if any, executed by the foregoing persons may not be enforceable or provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Our employees are required to sign an employment agreement as a condition of employment, which contains a confidentiality provision.
If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts could be expensive and time-consuming, and the outcome is unpredictable. In addition, if our competitors independently develop information that is equivalent to our trade secrets or other proprietary information, it will be even more difficult for us 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, because 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 or 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 which 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 proceedings to which we may become a party could cause us to:
seek licenses from third parties;
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 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 drugstores and to maintain accurate and up-to-date operating and financial data for 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 system. Any system failure which causes interruptions to the input, retrieval and transmission of data or increase in the service time could disrupt our normal operation. Although we believe that our disaster recovery plan is adequate in handling the failure of our computer software and hardware systems, we cannot assure you 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. 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 expanding operations, our ability to grow may be constrained.
As a retailer of pharmaceutical and other healthcare products, we are exposed to inherent risks relating to product liability and personal injury claims.
Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceutical and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs. Furthermore, the applicable laws, rules and regulations require our in-store pharmacists to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information the in-store pharmacists deem significant. Our in-store pharmacists may 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 advices given by our in-store pharmacists. In addition, product liability claims may be asserted against us with respect to any of the products we sell and as a retailer, we are required to pay for damages for any successful product liability claim against us, although we may have the right under applicable PRC laws, rules and regulations to recover from the relevant manufacturer for compensation we paid to our customers in connection with a product liability claim. We may also be obligated to recall affected products. If we are found liable for product liability claims, we could be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation as well as our brand name may also suffer. We, like many other similar companies in China, do not carry product liability insurance. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any business interruption insurance in China, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
Future acquisitions are expected to be a part of our growth strategy, and could expose us to significant business risks.
One of our strategies is to grow our business through acquisition. However, we cannot assure you 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 financing on satisfactory terms for larger acquisitions, if at all. 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 or at all. The negotiation and completion of potential acquisitions, whether or not ultimately consummated, could also require significant diversion of management’s time and resources and potential disruption of our existing business. Furthermore, we cannot assure you that the expected synergies from future acquisitions will actually materialize. In addition, future acquisitions could result in the incurrence of additional indebtedness, costs, and contingent liabilities. 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;
our inability to generate sufficient revenue to recover costs and expenses of the acquisitions; and
potential loss of, or harm to, relationships with employees or customers.
Any of the above could significantly disrupt our ability to manage our business and materially and adversely affect our business, financial condition and results of operations.
We may not be able to manage our expansion of operations effectively and failure to do so could strain our management, operational and other resources, which could materially and adversely affect our business and growth potential.
We anticipate continued expansion of our business to address growth in demand for our products and services, as well as to capture new market opportunities. The continued growth of our business has resulted in, and will continue to result in, substantial demands on our management, operational and other resources. In particular, the management of our growth will require, among other things:
our ability to continue to identify and lease new store locations at acceptable prices;
our ability to optimize product offerings and increase sales of private label products;
our ability to control procurement cost and optimize product pricing;
our ability to control operating expenses and achieve a high level of efficiency, including, in particular, our ability to manage the amount of time required to open new stores and for stores to become profitable, to maintain sufficient inventory levels and to manage warehousing, buying and distribution costs;
information technology system enhancement;
strengthening of financial and management controls;
increased marketing, sales and sales support activities; and
hiring and training of new personnel.
If we are not able to manage our growth successfully, our business and prospects would be materially and adversely affected.
We depend on the continued service of, and on the ability to attract, motivate and retain a sufficient number of qualified and skilled staff, especially in-store pharmacists, for our stores.
Our ability to continue expanding our retail drugstore chain and deliver high quality products and customer service depends on our ability to attract and retain qualified and skilled staff, especially in-store pharmacists. In particular, the applicable PRC regulations require at least one qualified pharmacist to be stationed in every drugstore to instruct or advise customers on prescription drugs. Over the years, a significant shortage of pharmacists has developed due to increasing demand within the drugstore industry as well as demand from other businesses in the healthcare industry. We cannot assure you that we will be able to attract, hire and retain sufficient numbers of skilled personnel and in-store pharmacists necessary to continue to develop and grow our business. In the past, our major recruiting challenges included unqualified candidates who represent themselves as being qualified, and talented and competent candidates who do not match our job requirements. The inability to attract and retain a sufficient number of skilled personnel and in-store pharmacists could limit our ability to open additional stores, increase revenue or deliver high quality customer service. In addition, competition for these individuals could cause us to offer higher compensation and other benefits in order to attract and retain them, which could materially and adversely affect our financial condition and results of operations.
We face significant competition, and if we do not compete successfully against existing and new competitors, our revenue and profitability would be materially and adversely affected.
The drugstore industry in China is highly competitive, and we expect competition to intensify in the future. Our primary competitors include other drugstore chains and independent drugstores. We also increasingly face competition from discount stores, convenience stores and supermarkets as we increase 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 that we offer and our brand name. We believe that the continued consolidation of the drugstore industry and continued new store openings by chain store operators will further increase competitive pressures in the industry. In addition, we may be subject to additional competition from new entrants to the drugstore industry in China. If the PRC government removes the barriers for the foreign companies to operate majority-owned retail drugstore business in China, we could face increased competition from foreign companies. 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, 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. In addition, 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 compete successfully could materially and adversely affect our business, financial condition, results of operation and prospects.
Changes in economic conditions and consumer confidence in China may influence the retail industry, consumer preferences and spending patterns.
Our business and revenue growth primarily depend on the size of the retail market of pharmaceutical products 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 our expansion of retail stores 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. 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.
The retail prices of some of our products are subject to control, including periodic downward adjustment, by PRC governmental authorities.
An increasing percentage of our pharmaceutical products, primarily those included in the national and provincial medical insurance catalogs, are subject to price controls in the form of fixed retail prices or retail price ceilings. See “Government Approval and Regulation of Our Principal Products or Services — Price Controls” above. In addition, the retail prices of these products are also subject to periodic downward adjustments as the PRC governmental authorities seek to make pharmaceutical products more affordable to the general public. Since May 1998, the relevant PRC governmental authorities have ordered price reductions of thousands of pharmaceutical products. The latest price reduction occurred in October 2008 and affected 1,357 different pharmaceutical products. However, for our fiscal year ended March 31, 2009, the adjustment only required us to adjust 105 of our 2,300 prescription drug prices which did not have any significant effect on our revenues as most of our products are priced substantially below the price ceilings. Any future price controls or government mandated price reductions may have a material adverse affect on our financial condition and results of operations, including significantly reducing our revenue and profitability.
Our retail operations require a number of permits and licenses in order to carry on their business.
Drugstores in China are required to obtain certain permits and licenses from various PRC governmental authorities, including GSP certification. We are also required to obtain food hygiene certificates for the distribution of nutritional supplements and food products. We cannot assure you 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 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 the 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 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 and materially reduce 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 assure you that we may successfully obtain such licenses, permits or certifications.
The continued penetration of counterfeit products into the retail market in China may damage our brand and reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.
There has been continued penetration of counterfeit products into the pharmaceutical retail market in China. Counterfeit products are generally sold at lower prices than the authentic products due to their low production costs, and in some cases are very similar in appearance to the authentic products. 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 the PRC government has been increasingly active in combating counterfeit pharmaceutical and other products, there is not yet an effective counterfeit pharmaceutical product regulation control and enforcement system in China. Although we have implemented a series of quality control procedures in our procurement process, we cannot assure you that we would not be selling counterfeit pharmaceutical products inadvertently. Any unintentional sale of counterfeit products may subject us to negative publicity, fines and other administrative penalties or even result in litigation against us. Moreover, the continued proliferation of counterfeit products and other products in recent years may reinforce the negative image of retailers 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.
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 the PRC National Medical Insurance Program.
Eligible participants in the PRC national medical insurance program, mainly consisting of urban residents in China, are entitled to buy medicines using their medical insurance cards in 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 assure you 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 be, in part, dependent upon the number and quality of doctors, nurses and other medical support personnel that we employ and our ability to maintain good relations 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; 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 adversely affect our business and results of operations in the event we do not comply or if the cost of compliance is expensive. 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 determined 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 diverse, 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.
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 adverse publicity regarding us, which would harm our reputation. If we are found liable for malpractice claims, we could be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation as well as our brand name may also suffer. Because malpractice claims are not common in China, we do not carry malpractice insurance. As a result, any imposition of malpractice liability could materially harm our business, financial condition and results of operations.
We face competition that could adversely affect our results of operations.
Our clinics compete with a large number and variety of healthcare facilities in their respective markets. There are numerous government-run and private hospitals and clinics available to the general populace. There can be no assurance that these or other clinics, hospitals or other facilities will not commence or expand such operations, which would increase their competitive position. Further, there can be no assurance that a healthcare organization, having greater resources in the provision or management of healthcare services, will not decide to engage in operations similar to those being conducted by us in Hangzhou.
Risks Related to Our Corporate Structure
In order to comply with Chinese regulations limiting foreign ownership of Chinese pharmacy chain operating 30 or more stores and limiting foreign ownership of Chinese medical clinics to Sino-foreign joint venture, we conduct our drugstore business through Jiuzhou Pharmacy and our clinics through Jiuzhou Clinic and Jiuzhou Service by means of contractual arrangements. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, our business could be adversely affected. If the PRC regulatory bodies determine that the agreements that establish the structure for operating our business in China do not comply with PRC regulatory restrictions on foreign investment in drugstore and medical practice, we could be subject to severe penalties. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business.
Current PRC regulations limit any foreign investor’s ownership of drugstores to 49.0% if the investor owns interests in more than 30 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, but controls the drugstore chain through contractual arrangements with our wholly foreign owned enterprise (“WFOE”), Jiuxin Management, we have been advised by our PRC counsel, Allbright Law Offices, that the regulations on foreign ownership of drugstores do not apply to us even if our drugstore chain expands beyond 30 stores. Similarly, foreign ownership of medical practice in China is limited to means of Sino-foreign joint venture. Since we do not have actual equity interest in Jiuzhou Clinic or Jiuzhou Service, but control these entities through contractual arrangements, our PRC counsel has advised us that the PRC regulations restricting foreign ownership of medical practice are not 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 we have been advised by our PRC counsel, that based on their understanding of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate structure and contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service and their respective owners) 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 assure you that the PRC regulatory authorities will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable. 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, the PRC Property Rights Law that became effective on October 1, 2007 may require us to register with the relevant government authority the security interests on the equity interests in Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service granted to us under the equity pledge agreements that are part of the contractual arrangements. If we are required to register such security interests, failure to complete such registration in a timely manner may result in such equity pledge agreements to be unenforceable against third party claims.
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 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 assure you that our current ownership and operating structure would 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 to provide 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 our PRC consolidated entities;
discontinuing or restricting the operations of our PRC consolidated entities;
imposing conditions or requirements with which we or our PRC consolidated entities may not be able to comply;
requiring us or our PRC consolidated entities to restructure the relevant ownership structure or operations;
restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or
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 the licensing and permit requirements. 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. Issues, risks and uncertainties relating to Chinese government regulation of the industry include the following:
we only have contractual control over Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. We do not own them due to the restriction of foreign investment in pharmacy chains with 30 or more drugstores and foreign ownership of medical practice; and
uncertainties relating to the regulation of drugstores and medical practice in China, including evolving licensing practices, 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, or compromise enforceability of related contractual arrangements, or have other harmful effects on us.
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
Our contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service and their respective owners may not be as effective in providing control over these entities as direct ownership.
We have no equity ownership interest in Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service, and rely on contractual arrangements to control and operate these companies and their businesses. These contractual arrangements may not be as effective in providing control over these companies as direct ownership. For example, Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service could fail to take actions required for our business despite its contractual obligation to do so. If Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service fails to perform under their agreements with us, we may have to rely on legal remedies under Chinese law, which may not be effective. In addition, we cannot assure you that the respective owners of Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service will act in our best interests.
Because we rely on contractual arrangements to control HJ Group and for our revenue, the termination of such agreements will severely and detrimentally affect our continuing business viability under our current corporate structure.
We are a holding company and do not have any assets or conduct any business operations other than the contractual arrangements between Jiuxin Management, our WFOE, and each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. All of our business operations are conducted by, and we derive all of our revenues from, the three HJ Group companies. Because neither we nor our WFOE own equity interests of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, the termination of the contractual arrangements would sever our ability to continue receiving payments from these companies under our current holding company structure.
As we do not have any equity interests in any of the HJ Group companies, in the event the contractual arrangements terminate, we will lose our control over them and their business operations, as well as our sole source of revenues. Should this occur, we may seek to acquire control of the HJ Group companies 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 cannot assure you that there will not be any event or reason that may cause the contractual arrangements to terminate. In the event that the contractual arrangements are terminated for any reason, 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.
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 necessary to service any debt we may incur. In particular, we rely on earnings generated by each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, 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 its 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 10.0% of their after-tax profit based on PRC accounting standards each year to their statutory surplus reserve fund until the accumulative amount of such reserves reach 50.0% 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 December 31, 2009, our restricted reserves totaled RMB 9.5 million ($1.3 million) and we had unrestricted retained earnings of RMB 70.1 million ($10.9 million). 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.
Management members of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.
Mr. Lei Liu, chairman of the board of directors and our chief executive officer, is also the executive director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic, and the supervising director of Jiuzhou Service. Mr. Chong’an Jin, one of our directors, is the supervising director of Jiuzhou Pharmacy, the managing general partner of Jiuzhou Clinic, and the executive director of Jiuzhou Service. Ms. Li Qi, corporate secretary and also a member of the 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 officer (in the case of Mr. Liu), 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 assure you, however, that when conflicts of interest arise, every one 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, any 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 the 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 HJ Group’s 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 Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service and their respective management, all of which are located in China.
Risks Related to Doing Business in China
The three HJ Group companies are subject to restrictions on making payments to us.
We are a holding company incorporated in Nevada and do not have any assets or conduct any business operations other than our indirect investments in the three HJ Group companies. As a result of our holding company structure, we rely entirely on payments from these companies under their contractual arrangements with our WFOE, Jiuxin Management. 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. See “Government control of currency conversion may affect the value of your investment.” Furthermore, if our affiliated entity in China incurs 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 ordinary shares.
Uncertainties with respect to the Chinese legal system could adversely affect us.
We conduct our business primarily through the three HJ Group companies, all of which are PRC entities. 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 wholly foreign-owned enterprises. 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 some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management.
We are a holding company and do not have any assets or conduct any business operations other than the contractual arrangements between Jiuxin Management and the three HJ Group companies. In addition, all of HJ Group’s assets are located in, and all of our other senior executive officers (excepting our chief financial officer) 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 our senior executive officers and directors not residing 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 have substantial difficulty in protecting their interests through actions against our management or directors than would shareholders of a corporation with assets and management members located in the United States.
We may need to obtain additional governmental approvals to open new drugstores. Our inability to obtain such approvals will have a material adverse effect on our business and growth.
According to the Measures on the Administration of Foreign Investment in the Commercial Sector promulgated by the PRC Ministry of Commerce (the “Measures”), 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 it is necessary for a company contractually controlled by a foreign invested enterprise to obtain approvals to open new retail stores. In addition, the Measures state that PRC Ministry of Commerce 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 assure you that the PRC Ministry of Commerce will not require that such approvals to be obtained. If additional governmental approval is deemed to be necessary and we are not able to obtain such approvals on a timely basis or at all, our business, financial condition, results of operations and prospects, as well as the trading price of our common stock, will be materially and adversely affected.
The advent of recent healthcare reform directives from the PRC 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 PRC government has set in motion a series of policies in fairly rapid successions aimed to improve China’s healthcare system. Such policies include (1) discouraging hospitals from both prescribing and dispensing medication, (2) the unveiling of formal healthcare reform guidelines in April 2009, aimed to improve the availability of and subsidies for “essential” drugs, and (3) the announcement of China’s National Essential Drugs List (“NEDL”) in August 2009, listing approximately 300 medicines that are expected to be sold at government-controlled prices. While an underlying goal of these policies is to make drugs more accessible to China’s poorer populations, such policy as discouraging hospitals from both prescribing and dispensing medication 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 lead to a rise in the number of government-subsidized community healthcare service centers, which will erode the convenience and price advantage that our drugstores traditionally enjoy against hospitals.
Governmental control of currency conversion may affect the value of your investment.
The Chinese government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our income is primarily derived from payments from the three 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 China State Administration of Foreign Exchange 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.
Fluctuation 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 and 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 make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency.
Dividends we receive from our subsidiary located in the PRC may be subject to PRC withholding tax.
The recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provides that a maximum income tax rate of 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, and the State Council has reduced such rate to 10% through the implementation regulations. We are a Nevada holding company and substantially all of our income is derived from the operations of the three HJ Group companies located in the PRC, who are contractually obligated to pay their quarterly profits to our WFOE. Therefore, dividends paid to us by our WFOE in China may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the EIT Law. If we are required under the EIT Law and its implementation regulations to pay income tax for any dividends we receive from our WFOE, it may have a material and adverse effect on our net income and materially reduce the amount of dividends, if any, we may pay to our shareholders.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our WFOE. Shortages in the availability of foreign currency may restrict the ability of our WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency-denominated obligations. Under existing PRC 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 the SAFE by complying with certain procedural requirements. However, approval from the SAFE or its local branch 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 loans denominated in foreign currencies. The PRC 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 shareholders.
We face risks related to health epidemics and other outbreaks.
Our business could be adversely affected by the effects of an epidemic outbreak, such as the SARS epidemic in April 2004. Any prolonged recurrence of such adverse public health developments in China may have a material adverse effect on our business operations. For instance, health or other government regulations adopted in response may require temporary closure of our stores or offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS or any other epidemic.
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.
The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities
The OTC Bulletin Board is a quotation system, not an issuer listing service, market or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is not as efficient as buying and selling stock through an exchange. As a result, it may be difficult for you to sell your common stock or you may not be able to sell your common stock for an optimum trading price.
The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last sale prices and volume limitations in over-the-counter securities. Because trades and quotations on the OTC Bulletin Board involve a manual process, the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmations may be delayed significantly. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.
When fewer shares of a security are being traded on the OTC Bulletin Board, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Lower trading volumes in a security may result in a lower likelihood of an individual’s orders being executed, and current prices may differ significantly from the price one was quoted by the OTC Bulletin Board at the time of the order entry.
Orders for OTC Bulletin Board securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the OTC Bulletin Board. Due to the manual order processing involved in handling OTC Bulletin Board trades, order processing and reporting may be delayed, and an individual may not be able to cancel or edit his order. Consequently, one may not able to sell shares of common stock at the optimum trading prices.
The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of securities on the OTC Bulletin Board if the common stock or other security must be sold immediately. Further, purchasers of securities may incur an immediate “paper” loss due to the price spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid price for securities bought and sold through the OTC Bulletin Board. Due to the foregoing, demand for securities that are traded through the OTC Bulletin Board may be decreased or eliminated.
Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. We intend to apply for listing on The NASDAQ Capital Market, but cannot assure you that this listing or listing on any other exchange will ever occur.
Our common shares have historically been sporadically or "thinly-traded" on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky" investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for our current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes, additions or departures of our key personnel, as well as other items discussed under this "Risk Factors" section, as well as elsewhere in this prospectus. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share 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.
Our directors and executive officers collectively control approximately 63.8% of our outstanding shares of stock that are 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 our shareholders and us. 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 to 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 resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results
The market price for our stock may be volatile.
The market price for our stock may be volatile and subject to wide fluctuations in response to factors 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.
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.
Volatility in our common share price may subject us to securities litigation
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. 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.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
Since HJ Group operated as a private enterprise without public reporting obligations prior to the Share Exchange, we have committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required of a public company. Recently, we have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with joining a public company, when and as such requirements become applicable to us. Prior to taking these measures, we did not believe we had the resources and capabilities to do so. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial reporting systems and procedures, and documentation thereof. If our financial reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.
We will incur increased costs as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company prior to the Share Exchange. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including certain requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the Financial Industry Regulatory Authority (“FINRA”). We expect these rules and regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Like many smaller public companies, we face a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting and the independent auditors to attest to the effectiveness of such internal controls and the evaluation performed by management. The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements. The Public Company Accounting Oversight Board, or PCAOB, has adopted documentation and attestation standards that the independent auditors must follow in conducting its attestation under Section 404. We are currently preparing for compliance with Section 404; however, there can be no assurance that we will be able to effectively meet all of the requirements of Section 404 as currently known to us in the currently mandated timeframe. Any failure to implement effectively new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting or our independent auditors providing an adverse opinion regarding management’s assessment. Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year). Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Of the 20 million shares of our common stock outstanding as of December 17, 2009, approximately 4.2 million shares are, or will be, freely tradable without restriction, unless held by our "affiliates", as of December 17, 2009. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this Offering) may have a material adverse effect on the market price of our common stock. Under Rule 144, we estimate that our founders and service consultants who received shares in September 2009 as a result of the Share Exchange will be unable to sell these shares until September 2010.
If our founders and service consultants who received shares were to sell their shares, they would be subject to volume and/or other restrictions imposed by Rule 144.
If we fail to remain current in our reporting requirements, our securities could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
As reported in our current report on Form 8-K filed on September 24, 2009, we issued 15,800,000 shares of common stock to the shareholders of Renovation in exchange for 100% of the issued and outstanding capital stock of Renovation pursuant to Regulation D and Regulation S promulgated under the Securities Act of 1933, as amended.
None
None
None
EXHIBIT INDEX
Exhibit Number | | Description |
2.1 | |
- ------- ----------------------------------------------------------------------------------
2 Share Exchange Agreement among Kerrisdale Mining Corporation (“Kerrisdale”("Kerrisdale"),
certain stockholders of Kerrisdale,its stockholders, Renovation Investment (Hong Kong) Co., Ltd.
(“Renovation”("Renovation") and theits shareholders of Renovation dated September 17, 2009 (4) |
(1)
3.1 | | Articles of Incorporation of Kerrisdale as filed with the State of Nevada (2) |
3.2 | | Certificate of Amendment to Articles of Incorporation of Kerrisdale filed with the
Nevada Secretary of State on July 14, 2008 (3) |
3.3 | | Articles of Merger ofbetween Kerrisdale asMining and China Jo-Jo Drugstores, Inc.
filed with the Nevada Secretary of State of Nevada (4) |
on September 22, 2009 (1)
3.4 | | Bylaws of Kerrisdale (2) |
3.5 | | Text of Amendments to the Bylaws (3)
3.6 Certificate of Kerrisdale (3) |
Change Pursuant to NRS 78.209 with an effective date of April 9,
2010 (8)
4 Specimen of Common Stock Certificate (2)
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 (4) |
(1)
|
36
10.2 | Operating Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
August 1, 2009 (4) | (1)
10.3 | | Equity Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners
dated August 1, 2009 (4) |
(1)
10.4 | | Option Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
August 1, 2009 (4) |
(1)
10.5 | | Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its
owners dated August 1, 2009 (4) |
(1)
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 (4) |
(1)
10.7 | | Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
August 1, 2009 (4) |
(1)
10.8 | | Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners
dated August 1, 2009 (4) |
(1)
10.9 | | Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
August 1, 2009 (4) |
(1)
10.10 | | Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its
owners dated August 1, 2009 (4) |
(1)
10.11 | | Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou
Medical & Public Health Service Co., Ltd. ("Jiuzhou Service") dated August 1,
2009 (4) |
(1)
10.12 | | Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
August 1, 2009 (4) |
(1)
10.13 | | Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners
dated August 1, 2009 (4) |
(1)
10.14 | | Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
August 1, 2009 (4) |
(1)
10.15 | | Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its
owners dated August 1, 2009 (4) |
(1)
10.16 | | Agreement between Jiuzhou Pharmacy and Yingte Logistics dated January 1, 2009 (4) |
10.17 | | Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Pharmacy dated October 27, 2009 (5) |
10.18 | | (4)
10.17 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy
dated October 27, 2009 (5) |
10.19 | | (4)
10.18 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated
October 27, 2009 (5) |
10.20 | | (4)
10.19 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Pharmacy dated October 27, 2009 (5) |
10.21 | | (4)
10.20 Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Clinic dated October 27, 2009 (5) |
10.22 | | (4)
10.21 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Clinic
dated October 27, 2009 (5) |
10.23 | | (4)
10.22 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated
October 27, 2009 (5) |
10.24 | | (4)
10.23 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Clinic dated October 27, 2009 (5) |
10.25 | | (4)
10.24 Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Service dated October 27, 2009 (5) |
10.26 | | (4)
10.25 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Service
dated October 27, 2009 (5) |
10.27 | | (4)
10.26 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Service dated
October 27, 2009 (5) |
10.28 | | (4)
10.27 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Service dated October 27, 2009 (5) |
(4)
10.28 Director Offer Letter with Marc Thomas Serrio dated March 15, 2010 (6)
10.29 | | Indemnification Agreement with Marc Thomas Serrio dated March 15, 2010 (6)
10.30 Loanout Agreement with Worldwide Officers, Inc. dated May 14, 2010 (9)
10.31 Indemnification Agreement with Mr. Bennet Tchaikovsky dated May 14, 2010 (9)
|
37
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 *
32.2 Section 906 Certification by the Corporation's Chief Financial Officer *
99.1 Agreement between Jiuzhou Pharmacy and Yingte Logistics Co., Ltd. ("Yingte
Logistics") dated January 1, 2009 (1)
99.2 Form of CFO Services Agreement entered into between Jiuzhou Pharmacy and Worldwide
Officers, Inc. on July 30, 2009 (6)31.1 | | Section 302 Certification(5)
99.3 Agreement between Jiuzhou Pharmacy and Yingte Logistics dated January 1, 2010 (7)
99.4 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 (10)
99.5 Security Deposit Agreement between the Qianhong Local Government and Jiuzhou
Pharmacy dated February 27, 2010 (10)
* Filed herewith
(1) Incorporated by reference from the Corporation’s Chief Executive Officer (1) |
31.2 | | Section 302 CertificationRegistrant's Registration Statement on Form SB-
2 filed on November 28, 2007.
(2) Incorporated by reference from the Corporation’s Chief Financial Officer (1) |
32.1 | | Section 906 Certification by the Corporation’s Chief Executive Officer (1) |
32.2 | | Section 906 Certification by the Corporation’s Chief Financial Officer (1) |
(2) | Filed as an Exhibit to Form SB-2 filed with the SEC on June 30, 2006. |
(3) | Filed as an Exhibit to current reportRegistrant's Current Report on Form 8-K filed
with the SEC on July 15, 2008. |
(4) | Filed as an Exhibit to current report
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
with the SEC on September 24, 2009. |
(5) | Filed as an Exhibit to current report
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
with the SEC on October 30, 2009. |
(6) | Filed as an Exhibit to amendment to registration statement
(5) Incorporated by reference from the Registrant's Registration Statement on Form S-1/S-
1/A with the SECfiled on January 27, 2010. |
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on March 16, 2010.
(7) Incorporated by reference from the Registrant's Registration Statement on Form S-
1/A filed on March 23, 2010
(8) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on April 14, 2010.
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on May 17, 2010.
(10) Incorporated by reference from the Registrant's Annual Report on Form 10-K filed
on June 29, 2010.
In accordance with the requirements of the Exchange Act, the registrantRegistrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
February 8, 2010 | China Jo-Jo Drugstores, Inc. |
| |
| By: | /s/ Lei Liu |
| | Lei Liu
Chief Executive Officer
(Principal Executive Officer)
|
| |
| By: | /s/ Bennet P. Tchaikovsky |
| | Bennet P. Tchaikovsky
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
China Jo-Jo Drugstores, Inc.
(Registrant)
Date: August 16, 2010 By: /s/ Lei Liu
===============================
Lei Liu
Chief Executive Officer
Date: August 16, 2010 By: /s/ Bennet P. Tchaikovsky
===============================
Bennet P. Tchaikovsky
Chief Financial Officer
39