| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Note
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis
of presentation and consolidation The
accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”). The consolidated financial statements include the financial statements of the Company, its
wholly-owned subsidiaries and VIEs. All significant inter-company transactions and balances between the Company, its subsidiaries and
VIEs are eliminated upon consolidation. Consolidation
of variable interest entities In
accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient
equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision
making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards
of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. The
Company has concluded, based on the contractual arrangements, that Jiuzhou Pharmacy (including its subsidiaries and controlled entities),
Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly-owned subsidiary, Jiuxin Management, absorbs a
majority of the risk of loss from the activities of these companies, thereby enabling the Company, through Jiuxin Management, to receive
a majority of their respective expected residual returns. Control
and common control are defined under the accounting standards as “an individual, enterprise, or immediate family members who hold
more than 50 percent of the voting ownership interest of each entity.” Because the Owners collectively own 100% of Jiuzhou Pharmacy,
Jiuzhou Clinic and Jiuzhou Service, and have agreed to vote their interests in concert since the establishment of each of these three
companies as memorialized in the voting rights agreement, the Company believes that the Owners collectively have control and common control
of the three companies. Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service were constructively
held under common control by Jiuxin Management as of the time the Contractual Agreements were entered into, establishing Jiuxin Management
as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation, which is owned by the Company. Liquidity
and capital resources As of March 31, 2023, we had cash of approximately $31.6 million and
a working capital deficit of $2.1 million. During the year ended March 31, 2023, we had a net loss of approximately $21.1 million and
net cash used in operating activities were $3.3 million. These factors raise substantial doubt about our ability to continue as a going
concern. However, non-cash expenses such as stock-based compensation, bad debt direct write-off and provision, and investment loss accounts
for approximately $10.4 million, $7.6 million and $2.3 million, respectively. Excluding these non-cash expenses, the net loss is approximately
$0.8 million. The Company’s accounts have been prepared in accordance with
the accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a going concern basis. The going
concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed
in the financial statements. The Company’s ability to continue as a going concern depends upon aligning its sources of funding (debt
and equity) with its expenditure requirements and repayment of the short-term debts as and when they become due. In
order to meet its capital demand, the Company strived to raise funds in the capital market, increase its credit line from the local banks,
and improve its store performance in the near future. In August and October 2022 the Company raised
capital by issuing ordinary shares to private investors for a total proceeds of $4.7 million. In January, 2023, the Company closed a registered
direct offering with gross proceeds of $2.6 million from its effective shelf registration statement. The
Company has a credit line agreement from a local bank as described in detail in Note 16. As of March 31, 2023, approximately $0.29 million
of the aforementioned bank credit line was available for further borrowing. As the economy growth slows down, the national interest continues
to decrease. local banks are encouraged to provide low interest rate loans to local enterprises. The
Company has also obtained additional government insurance reimbursement certificates for its stores opened in the last two years. In
a mature store, nearly half of the revenue are generated by customers utilizing the government insurance program. With these certificates,
mature stores are able to attract more customers who are eligible for the insurance program, and its sales may significantly increase
in the next 12 months. Based
on the above factors, the Company believes it can support its operations for at least the next 12 months. Use
of estimates The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The significant estimates made in the preparation of the accompanying consolidated financial statements relate
to the assessment of the carrying values of accounts receivable, related allowance for doubtful accounts, losses. Because of the use of
estimates inherent in the financial reporting process, actual results could materially differ from those estimates. Fair
value measurements The
Company establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following: Level
1 – Quoted prices in active markets for identical assets or liabilities. Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities. Classification
within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Unless
otherwise disclosed, the fair value of the Company’s financial instruments including cash, restricted cash, accounts receivable,
advances to suppliers, other current assets, accounts payable, due to related parties, other current liabilities, short-term bank loans
and bank acceptance notes payable approximate their recorded values due to their short-term maturities. The fair value of longer term
long-term bank loan and operating lease liabilities approximate their recorded values as their stated interest rates approximate the
rates currently available. Revenue
recognition Effective
March 31, 2018, the Company began recognizing revenue under Accounting Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The impact of adopting the new revenue
standard was not material to the Company’s consolidated financial statements. The core principle of this new revenue standard is
that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied
to achieve that core principle:
● Step
1: Identify the contract with the customer
● Step
2: Identify the performance obligations in the contract
● Step
3: Determine the transaction price
● Step
4: Allocate the transaction price to the performance obligations in the contract
● Step
5: Recognize revenue when the company satisfies a performance obligation In
order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in
the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition
of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met:
● The
customer can benefit from the good or service either on its own or together with other resources that are readily available to the
customer (i.e., the good or service is capable of being distinct).
● The
entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
(i.e., the promise to transfer the good or service is distinct within the context of the contract). If
a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services
is identified that is distinct. The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration
promised in a contract with a customer may include fixed amounts, variable amounts, or both. Variable consideration is included in the
transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will
not occur when the uncertainty associated with the variable consideration is subsequently resolved. The
transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated
to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The
Company’s revenue is net of value added tax (“VAT”) collected on behalf of the PRC tax authorities with respect to the
sales of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated
balance sheets until it is paid to the relevant PRC tax authorities. Certain
contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which
the Company has received consideration, for example, membership points. The consideration received remains a contract liability until
goods or services have been provided to the retail customer. The estimated amount based on accrued membership points was deducted from
sales revenue. The
following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting
standard: Pharmacy
retail sales The
physical pharmacies sell prescription drugs, over-the-counter (“OTC”) drugs, traditional Chinese medicine, nutritional
supplements, medical devices and sundry products. Revenue from sales of prescription medicine at drugstores is recognized when the
prescription is filled and the customer picks up and pays for the prescription. Revenue from sales of other merchandise at
drugstores is recognized at the point of sale, which is when a customer pays for and receives the merchandise. Usually the majority
merchandise, such as prescription and OTC drugs, are not refundable after the customers leave the counter. Returns of other
products, such as sundry products, are minimal. Sales of drugs reimbursed by the local government medical insurance agency and
receivables from the agency are recognized when a customer pays for the drugs at a store. The Company based on historical
experience, a reserve for potential losses from denial of reimbursement on certain unqualified drugs is made to the receivables from
the government agency. Additionally, several onsite clinics adjacent to pharmacies provide limited medical services. Revenue from
medical services is recognized after the service has been rendered to a customer. As revenue from medical services is minimal
compared to pharmacy retail sales, it is included as part of the pharmacy retail sales. The
Company deduct the membership rewards directly from the retail revenue, and present such amounts in net sales as opposed to the current
reduction of operation expense classification. Membership rewards, usually membership points, are accumulated by customers based on their
historical spending levels. The Company has determined that there is an additional performance obligation to those customers at the time
of the initial transaction. The customers can then redeem these points against the prices of merchandises they purchase in the future.
At the end of each period, unredeemed membership rewards are reflected as a contract liability. Online
pharmacy sales Revenue
from online pharmacy sales is recognized when merchandise is shipped to customers. While most deliveries take one day, certain deliveries
may take longer depending on a customer’s location. Any loss caused in a shipment will be reimbursed by the Company’s courier
company. The Company’s sales policy allows for the return of certain merchandises without reason within seven days after a customer’s
receipt of the applicable merchandise. Historically, sales returns seven days after merchandise receipts have been minimal. Wholesale Jiuxin
Medicine purchases medicine in quantity and distributes products primarily to local pharmacies and medical products dealers. Revenue
from sales of merchandise to non-retail customers is recognized when the merchandise is transferred to customers. Historically, sales
returns have been minimal. The
Company’s revenue is net of VAT collected on behalf of PRC tax authorities in respect to the sales of merchandise. VAT collected
from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is
paid to the relevant PRC tax authorities. Disaggregation
of Revenue The
following table disaggregates the Company’s revenue by major source in each segment for the years ended March 31, 2023, 2022 and
2021:
2023 2022 2021
For the year ended March 31,
Retail drugstores
Prescription drugs $ 27,212,994 $ 28,503,283 $ 27,162,968
OTC drugs 32,358,339 35,658,864 30,524,057
Nutritional supplements 8,737,519 9,664,071 6,863,559
TCM 9,719,653 5,353,900 4,560,968
Sundry products 1,082,168 1,544,639 1,379,917
Medical devices 4,241,095 3,503,735 5,607,506
Total retail revenue $ 83,351,768 $ 84,228,492 $ 76,098,975
Online pharmacy
Prescription drugs $ 10,606,244 $ 10,331,652 $ 8,243,099
OTC drugs 13,870,953 11,473,177 7,559,585
Nutritional supplements 2,740,253 2,014,011 956,013
TCM 434,920 315,231 295,410
Sundry products 1,129,701 2,271,009 1,967,174
Medical devices 3,603,018 3,814,284 3,464,638
Total online revenue $ 32,385,089 $ 30,219,364 $ 22,485,919
Drug wholesale
Prescription drugs $ 21,617,636 $ 41,116,991 $ 27,477,087
OTC drugs 10,289,987 7,903,824 6,242,630
Nutritional supplements 310,909 424,210 151,657
TCM 458,502 241,828 218,758
Sundry products 64,422 93,338 28,377
Medical devices 333,663 164,508 431,230
Total wholesale revenue $ 33,075,119 $ 49,944,699 $ 34,549,739
Total revenue $ 148,811,976 $ 164,392,555 $ 133,134,633 Restricted
cash The
Company’s restricted cash consists of cash and long-term deposits in a bank as security for its notes payable. The Company has
notes payable outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions.
The notes payable are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash
is classified as a current asset. The
following represents a reconciliation of cash and cash equivalents in the consolidated balance sheets to total cash, cash equivalents
and restricted cash in the consolidated statements of cash flows as of March 31, 2023 and 2022:
March
31, 2023 March
31, 2022
Cash
and cash equivalents $ 18,807,936 $ 18,458,575
Restricted
cash 12,762,708 16,881,002
Cash,
cash equivalents and restricted cash $ 31,570,644 $ 35,339,577 Accounts
receivable Accounts
receivable represents the following: (1) amounts due from banks relating to retail sales that are paid or settled by the customers’
debit or credit cards, (2) amounts due from government social security bureaus and commercial health insurance programs relating to retail
sales of drugs, prescription medicine, and medical services that are paid or settled by the customers’ medical insurance cards,
(3) amounts due from non-bank third party payment instruments such as Alipay and certain e-commerce platforms and (4) amounts due from
non-retail customers for sales of merchandise. Accounts
receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as necessary.
In the Company’s retail business, accounts receivable mainly consist of reimbursements due from the government insurance bureaus
and commercial health insurance programs and are usually collected within two or three months. The Company directly writes off delinquent
account balances, which it determines to be uncollectible after confirming with the appropriate bureau or program each month. Additionally,
the Company also makes estimated reserves on related outstanding accounts receivable based on expected credit loss. In
the Company’s online pharmacy business, accounts receivable primarily consist of amounts due from non-bank third party payment
instruments such as Alipay and certain e-commerce platforms. To purchase pharmaceutical products from an e-commerce platforms such as
Tmall, customers are required to submit payment to certain non-bank third party payment instruments, such as Alipay, which, in turn,
reimburse the Company within seven days to a month. Except for customer returns of sold products, the receivables from these payments
instruments are rarely uncollectible. In
its wholesale business, the Company uses the expected credit loss method to estimate the allowance for anticipated uncollectible receivable
balances. At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the expected credit
loss method. When facts subsequently become available to indicate that the allowance provided requires an adjustment, a corresponding
adjustment is made to the allowance account as a change in estimate. Credit
loss roll forward With
the adoption of the current expected credit loss standard in 2020, the company estimates future expected losses on accounts receivable
and other receivables over the remaining collection period of the instrument. The roll forward for the allowance for credit losses for
the year end March 31, 2023, is as follows:
For the year end March 31, 2023
Account Other Total
Allowance for credit losses as of March 31, 2022 $ 2,478,648 1,924,887 $ 4,403,535
Credit loss expense (165,342 ) 3,404,553 3,239,211
Ending allowance for credit losses $ 2,313,306 5,329,440 $ 7,642,746 Inventories Inventories
are stated at the lower of cost or net realizable value. Cost is determined using the first in first out (FIFO) method. The Company carries
out physical inventory counts on a monthly basis at each store and warehouse location. Herbs that the Company farms are recorded at their
cost, which includes direct costs such as seed selection, fertilizer, labor costs that are spent in growing herbs on the leased farmland,
and indirect costs such as amortization of farmland development cost. All costs are accumulated until the time of harvest and then allocated
to harvested herbs costs when the herbs are sold. The Company periodically reviews its inventory and records write-downs to inventories
for shrinkage losses and damaged merchandise that are identified. The Company provides a reserve for estimated inventory obsolescence
or excess quantities on hand equal to the difference, if any, between the cost of the inventory and its estimated realizable value. Farmland
assets Herbs
that the Company farms are recorded at their cost, which includes direct costs such as seed selection, fertilizer, and labor costs that
are spent in growing herbs on the leased farmland, and indirect costs such as amortization of farmland development costs. Since April
2014, amortization of farmland development costs has been expensed instead of allocated into inventory due to unpredictable future market
value of planted gingko trees. All
related costs described in the above are accumulated until the time of harvest and then allocated to harvested herbs when they are sold. Property
and equipment Property
and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method
over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements
are amortized over the shorter of lease term or remaining lease period of the underlying assets. Following are the estimated useful lives
of the Company’s property and equipment:
Estimated Useful Life
Leasehold
improvements 3-10 years
Motor
vehicles 3-5 years
Office
equipment & furniture 3-5 years
Buildings 35 years Maintenance,
repairs and minor renewals are charged to expenses as incurred. Major additions and betterment to property and equipment are capitalized. Intangible
assets Intangible
assets are acquired individually or as part of a group of assets, and are initially recorded at their fair value. The cost of a group
of assets acquired in a transaction is allocated to the individual assets based on their relative fair values. The
estimated useful lives of the Company’s intangible assets are as follows:
Estimated Useful
Life
Land
use rights 50 years
Software 3 years
license Infinite The
Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired. Impairment
of long-lived assets The
Company evaluates long lived tangible and intangible assets for impairment, whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from its estimated future cash flows. Recoverability is measured by comparing the assets’
net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating
results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the
related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment
loss. In the year ended March 31, 2021, we evaluated the use rights of the forest land, which is currently used to cultivate Ginkgo trees.
The forest rights certificate from the local village extends the life of the lease to January 31, 2060. Based on the evaluation of the
forest land use rights, the Company recorded an impairment of $228,506. In the year ended March 31, 2022, we evaluated the use rights
of the forest land, which is currently used to cultivate Ginkgo trees. Based on the evaluation of the forest land use rights, the Company
recorded an impairment of $148,795. In the year ended March 31, 2023, we evaluated the use rights of the forest land, which is currently
used to cultivate Ginkgo trees. Based on the evaluation of the forest land use rights, the Company did not record an impairment. Notes
payable During
the normal course of business, the Company regularly issues bank acceptance bills as a payment method to settle outstanding accounts
payables with various material suppliers. The Company records such bank acceptance bills as notes payable. Such notes payable are generally
short term in nature due to their short maturity period of six to nine months. Income
taxes The
Company follows FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. The
accounting standards clarify the accounting and disclosure requirements for uncertain tax positions and prescribe a recognition threshold
and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting
standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures,
and transition. No significant penalties, uncertain tax provisions or interest relating to income taxes were incurred during the
periods ended March 31, 2023 and 2022. Value
added tax Sales
revenue represents the invoiced value of goods, net of VAT. All of the Company’s products are sold in the PRC and are subject to
a VAT on the gross sales price. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be offset by
VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products. The
Company recorded a VAT payable net of payments in the accompanying financial statements. Share-based compensation The Company complies with the accounting and
disclosure requirement of ASC Topic 718, “Compensation – Stock Compensation.” Share-based compensation to
employees and non-employees is recognized over the requisite service period based on the estimated grant-date fair value of the
awards. Share-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period
for each separately vesting portion of the award. The Company recognizes the expense for share-based compensation awards subject to
performance-based milestone vesting over the remaining service period when management determines that achievement of the milestone
is probable. Management evaluates when the achievement of a performance-based milestone is probable based on the expected
satisfaction of the performance conditions at each reporting date. Share-based compensation will be recognized in general and
administrative expense in the consolidated statements of operations. Advertising and promotion costs Advertising and promotion costs are expensed as
incurred and amounted to $491,684, $355,078 and $309,446 for the year ended March 31, 2023, 2022 and 2021, respectively. Such costs
consist primarily of print and promotional materials such as flyers to local communities. Foreign currency translation The Company uses the United States dollar (“U.S.
dollars” or “USD”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their books and
records in their functional currency the Renminbi (“RMB”), the currency of the PRC. In general, for consolidation purposes, the Company
translates the assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable exchange rates prevailing at
the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting period.
As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the
translation of the financial statements of the subsidiaries and VIEs are recorded as accumulated other comprehensive income. The balance sheet amounts, with the exception
of equity, at March 31, 2023 and 2022 were translated at 1 USD to 6.8676 RMB and at 1 USD to 6.3393 RMB, respectively. The average translation
rates applied to income and cash flow statement amounts for years ended March 31, 2023 and 2022 were at 1 USD to 6.8516 RMB and at 1 USD
to 6.4180 RMB, respectively. Recent Accounting Pronouncements The Company’s management does not believe
that any recently issued, but not yet effective, accounting standards updates, if currently adopted, would have a material effect on the
accompanying consolidated financial statements. |
