Ridgetech Inc 20-F for FY2024
Ridgetech Inc. (RDGT)
About this 20-F
Ridgetech Inc filed this 20-F on July 30, 2024, covering the fiscal year ended March 31, 2024 (FY2024).
Headline figures
Fiscal year ended March 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $154.54M
- up 3.8% from $148.81M a year earlier
- Net loss
- $4.23M
- compared with a net loss of $21.14M a year earlier
- Diluted EPS
- -$2.93
- compared with -$41.46 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For
the Fiscal year ended
OR
For the transition period from __________ to __________
Date of event requiring this shell company report ________
Commission
file number:
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English)
People’s Republic of | ||
| (Jurisdiction of incorporation or organization) | (Address of principal executive offices) |
People’s
Republic of
Tel:
(Name, telephone, Email and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
none
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
none
(Title of Class)
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or ordinary shares as of the close of the period covered
by the annual report.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒
If
this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒
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. ☒
Indicate
by check mark whether the registrant has submitted electronically 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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an “emerging growth company.” See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | ||
| Emerging growth company | ||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report.
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
| ☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If
this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). ☐ Yes
In this annual report:
| ● | References to the “Company”, “we”, “our” and “us” are to China Jo-Jo Drugstores, Inc., a Cayman Islands company, and its predecessor China Jo-Jo Drugstores, Inc., a Nevada corporation, and its consolidated subsidiaries, subsidiaries controlled by contract and therefore deemed as variable interest entities under U.S. GAAP; |
| ● | References to “China” or the “PRC” refers to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan; | |
| ● | References to “RMB” and “Renminbi” refer to the legal currency of China; | |
| ● | “US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States; | |
| ● | References to “variable interest entit[y][ies]” or “VIE[s]” refer to Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiaries of Jiuzhou Pharmacy, collectively as “HJ Group”. |
Special Note Regarding Forward-looking Statements
This report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the registrant. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words “estimate,” “anticipate,” “believe,” “expect,” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should carefully review various risks and uncertainties identified in this report, including the matters set forth under the captions “Risk Factors” and in the registrant’s other SEC filings. These risks and uncertainties could cause the registrant’s actual results to differ materially from those indicated in the forward-looking statements. The registrant undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Relating to Our Business” below, as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We file reports with the Securities and Exchange Commission (the “SEC”). You can read and copy any materials we file with the SEC at our internet address at www.jiuzhou360.com. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the registrant.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
TABLE OF CONTENTS
i
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
China Jo-Jo Drugstores, Inc. (“CJJD”, the “Company”, “we”, “our”, or “us”) is not a Chinese operating company but a holding company incorporated in the Cayman Islands. The Cayman Islands holding company has no material operations of its own. The operations are conducted through our operating entities established in the PRC, including the VIEs. We do not have any equity ownership in the business of the VIEs. Instead, we receive the economic benefits of the VIEs, are the primary beneficiary for accounting purposes, and consolidate VIEs’ financial statements through the VIE Agreements to the extent we have satisfied the conditions for consolidation of the VIEs under U.S. GAAP.. The VIE structure is used to provide contractual exposure to foreign investment in Chinese-based companies where Chinese law prohibits direct foreign investment in the operating companies, and that investors may never directly hold equity interests in the Chinese operating entities.
We are subject to certain legal and operational risks associated with the VIEs’ operations in China. PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in the VIEs’ operations, significant depreciation of the value of our ordinary shares, or a complete hindrance of our ability to offer or continue to offer our securities to investors. Rules and regulations in China can change quickly with little advance notice. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact of such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. or other foreign exchange. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless. Our current corporate structure and business operations and the market price of our ordinary shares may be affected by the newly enacted PRC Foreign Investment Law which does not explicitly classify whether VIEs that we have contractual arrangements with would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. Because we do not have ownership of the VIEs, we must rely on the shareholders of these VIEs to comply with their contractual obligations. The approval of PRC regulatory agencies may be required in connection with this offering under a PRC regulation or any new laws, rules or regulations to be enacted, and if required, we may not be able to obtain such approval.
Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us.
The recent regulatory developments in China, in particular with respect to restrictions on China-based companies raising capital offshore, may lead to additional regulatory review in China over our financing and capital raising activities in the United States. In addition, we may be subject to industry-wide regulations that may be adopted by the relevant PRC authorities, which may have the effect of limiting our service offerings, restricting the scope of our operations in China, or causing the suspension or termination of our business operations in China entirely, all of which will materially and adversely affect our business, financial condition and results of operations. We may have to adjust, modify, or completely change our business operations in response to adverse regulatory changes or policy developments, and we cannot assure you that any remedial action adopted by us can be completed in a timely, cost-efficient, or liability-free manner or at all.
1
On July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. On August 1, 2021, the China Securities Regulatory Commission (the “CSRC”) stated in a statement that it had taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese companies and the recent regulatory development in China, and that both countries should strengthen communications on regulating China-related issuers. To the best knowledge of this Company, as of the date of this annual report, current Chinese laws and regulations do not forbid us from issuing securities overseas. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”), which took effect on March 31, 2023. The Company will need to file accordingly with the CSRC within 3 working days after any future offering is completed. “Item 3. Key Information - D. Risk Factor – Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us” for more details.
On May 20, 2020 and on December 2, 2020, the U.S. Senate passed and the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act (“HFCAA”) requiring a foreign company to certify it is not owned or controlled by a foreign government if the Public Company Accounting Oversight Board (the “PCAOB”) is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the Company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a U.S. stock exchange. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law. The PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”) which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two, and that as a result, the time before our securities may be prohibited from trading or delisted would be reduced. On August 26, 2022, the PCAOB announced and signed a Statement of Protocol (the “Protocol”) with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. The Protocol provides the PCAOB with: (1) sole discretion to select the firms, audit engagements and potential violations it inspects and investigates, without any involvement of Chinese authorities; (2) procedures for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed; (3) direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates. On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination. Our auditor is headquartered in Irvine, California and will be inspected by the PCAOB on a regular basis. Our auditor is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Please see “Item 3. Key Information - D. Risk Factor – Our auditor, YCM CPA Inc., is headquartered in California, and is subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our ordinary shares could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act” for more details.
2
The following diagram illustrates our current corporate structure as of July 30, 2024:
3
Cash Transfer
Our holding company, subsidiaries and the consolidated VIEs usually operate independently and transfer funds upon capital raising. We raised capital of $17.5 million in our IPO in April 2010. In addition, we raised capital for a total amount of $39.863 million from 2015 to 2024 through various financings. Renovation Investment (HK) Co., Ltd. (“Renovation”), our Hong Kong intermediate holding subsidiary, received funds from our investors in these financings. After receiving the proceeds, Renovation typically invested these funds into Jiuxin Management, a WFOE, which then exchanged the currency of the proceeds from U.S. dollar into Chinese Yuan (“RMB”) upon the approval from local banks. Additionally, Renovation lent funds to Jiuxin Management. As of the date of this annual report, the total amount invested in and lent to Jiuxin Management is approximately $27.5 million and $8.7 million, respectively. Jiuxin Management then distributed the RMB as loans to the operating entities including Jiuzhou Pharmacy, Jiuxin Medicine, Jiuzhou Service and Jiuzhou Clinic, which are the consolidated VIEs. As of the date of this annual report, Jiuxin Management has distributed a loan of approximately $18.58 million to Jiuzhou Pharmacy, a loan of approximately $1.03 million to Jiuzhou Service, a loan of approximately $0.20 million to Jiuzhou Clinic, a loan of approximately $1.01 million to Linjia Medical, a loan of approximately $0.14 to Shouantang Bio.
Additionally, Jiuxin Medicine is the major supplier to Jiuzhou Pharmacy and Jiuzhou Pharmacy transfers funds to pay off the debts owed to Jiuxin Medicine as a result of merchandise purchases. In the last three fiscal years, the annual amount of purchases by Jiuxin Medicine from Jiuzhou Pharmacy ranges from approximately $60 million to $80 million.
All the sales and purchases between Jiuxin Medicine and Jiuzhou Pharmacy are eliminated as internal transactions. Furthermore, the ending balances owed to/from the VIEs are eliminated in the balance sheets. Below are the sales and purchases between Jiuxin Medicine and Jiuzhou Pharmacy in last three fiscal years:
| Years | Amount | |||
| Fiscal 2022 | $ | 80,712,044 | ||
| Fiscal 2023 | $ | 87,124,074 | ||
| Fiscal 2024 | $ | 76,989,329 | ||
Additional transfers between other VIEs and subsidiaries are as below:
| Amount | ||||||||||||||
| Transfer from | Transfer to | 2022 | 2023 | 2024 | ||||||||||
| Renovation | Jiuxin Management | $ | - | $ | 1,000,000 | $ | 3,000,000 | |||||||
| Jiuxin Management | Jiuzhou Pharmacy | 582,736 | 3,809,289 | 692,414 | ||||||||||
| Jiuxin Management | Jiuxin Medicine | 779,059 | 3,853,155 | (131 | ) | |||||||||
| Jiuxin Management | Qianhong Agriculture | 30,496 | 2,627 | 3,907 | ||||||||||
| Jiuxin Management | Shouantang Technology | - | 821,706 | (1,877,272 | ) | |||||||||
| Jiuzhou Pharmacy | Jiuzhou Service | 342,822 | (591,606 | ) | 3,545 | |||||||||
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. The majority of the VIEs’ and their subsidiaries’ income is received in RMB and shortages in foreign currencies may restrict our ability to pay dividends or other payments, or otherwise satisfy our foreign currency denominated obligations, if any. 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 State Administration of the Foreign Exchange (“SAFE”) in the PRC as long as certain procedural requirements are met. Approval from appropriate government authorities is required if Renminbi is 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, at its discretion, impose restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders. To the extent cash or assets in the business is in the PRC/Hong Kong or a PRC/Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside of the PRC/Hong Kong due to interventions in or the imposition of restrictions and limitations on the ability of such entities, their subsidiaries, or the consolidated VIEs by the PRC government to transfer cash or assets.
4
Supplemental Financial Information Related to the VIEs
The following tables present supplemental information provided in the form of condensed consolidated statements of operations, condensed consolidated balance sheets and condensed consolidated cash flows for China Jo-Jo Drugstores, Inc., the primary beneficiaries of the VIEs, the VIEs, and other subsidiaries for the periods as of and for the dates presented.
Condensed Consolidated Statements of Operations
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | 123,994,053 | $ | 107,536,353 | $ | (76,989,329 | ) | $ | 154,541,077 | |||||||||
| Cost of revenue | - | 118,779,423 | 81,642,435 | (76,989,329 | ) | 123,432,529 | ||||||||||||||
| Gross profit | - | 5,214,630 | 25,893,918 | - | 31,108,548 | |||||||||||||||
| Operating Expenses | 5,676 | 4,769,364 | 31,057,131 | (1,189,060 | ) | 34,643,111 | ||||||||||||||
| Loss from operations | (5,676 | ) | 445,266 | (5,163,213 | ) | 1,189,060 | (3,534,563 | ) | ||||||||||||
| Other income, net | (808 | ) | (1,194,566 | ) | 558,557 | - | (636,817 | ) | ||||||||||||
| Provision for income tax | - | (41,363 | ) | 104,225 | - | 62,862 | ||||||||||||||
| Net loss | $ | (6,484 | ) | (707,937 | ) | (4,708,881 | ) | 1,189,060 | (4,234,242 | ) | ||||||||||
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | 235,936,050 | $ | (87,124,074 | ) | $ | 148,811,976 | |||||||||
| Cost of revenue | - | (1,739 | ) | 201,729,210 | (87,195,959 | ) | 114,531,512 | |||||||||||||
| Gross profit | - | 1,739 | 34,206,840 | 71,885 | 34,280,464 | |||||||||||||||
| Operating Expenses | 10,534,233 | 4,200,530 | 40,798,397 | (327,313 | ) | 55,205,847 | ||||||||||||||
| Loss from operations | (10,534,233 | ) | (4,198,791 | ) | (6,591,557 | ) | 399,198 | (20,925,383 | ) | |||||||||||
| Other income, net | (647 | ) | (2,261,118 | ) | 2,442,912 | - | 181,147 | |||||||||||||
| Provision for income tax | - | - | 394,541 | - | 394,541 | |||||||||||||||
| Net loss | $ | (10,534,880 | ) | (6,459,909 | ) | (4,543,186 | ) | 399,198 | (21,138,777 | ) | ||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | 181,179 | $ | 244,933,524 | $ | (80,722,148 | ) | $ | 164,392,555 | |||||||||
| Cost of revenue | - | 182,732 | 208,169,174 | (80,478,391 | ) | 127,873,515 | ||||||||||||||
| Gross profit | - | (1,553 | ) | 36,764,350 | (243,757 | ) | 36,519,040 | |||||||||||||
| Operating Expenses | 43,042 | 1,479,243 | 37,583,788 | 106,857 | 39,212,930 | |||||||||||||||
| Loss from operations | (43,042 | ) | (1,480,796 | ) | (819,438 | ) | (350,614 | ) | (2,693,890 | ) | ||||||||||
| Other income, net | (258 | ) | (21,931 | ) | 617,439 | - | 595,250 | |||||||||||||
| Provision for income tax | - | 247 | 1,099,479 | - | 1,099,726 | |||||||||||||||
| Net loss | $ | (43,300 | ) | (1,502,974 | ) | (1,301,478 | ) | (350,614 | ) | (3,198,366 | ) | |||||||||
Condensed Consolidated Balance Sheets
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 55,336 | $ | 78,718,328 | $ | 64,561,889 | $ | (48,278,463 | ) | $ | 95,057,090 | |||||||||
| Total liabilities | (58,302,810 | ) | 45,398,527 | 82,268,892 | 11,399,344 | 80,763,953 | ||||||||||||||
| Current assets | 55,336 | 20,931,574 | 51,313,687 | (2,618,235 | ) | 69,682,362 | ||||||||||||||
| Current liabilities | (58,302,810 | ) | 45,398,527 | 82,268,892 | 4,995,486 | 74,360,095 | ||||||||||||||
| Working capital | 58,358,146 | (24,466,953 | ) | (30,955,205 | ) | (7,613,721 | ) | (4,677,733 | ) | |||||||||||
| Accumulated deficit | (27,677,819 | ) | (22,005,227 | ) | (20,755,517 | ) | (3,068,683 | ) | (73,507,246 | ) | ||||||||||
| Total equity | 58,358,146 | 33,319,801 | (17,707,005 | ) | (59,677,805 | ) | 14,293,137 | |||||||||||||
5
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 11,820 | $ | 49,799,950 | $ | 77,392,401 | $ | (36,233,569 | ) | $ | 90,970,602 | |||||||||
| Total liabilities | (55,763,210 | ) | 24,027,715 | 94,103,563 | 11,935,382 | 74,303,450 | ||||||||||||||
| Current assets | 11,820 | 4,296,911 | 63,064,155 | (2,890,096 | ) | 64,482,790 | ||||||||||||||
| Current liabilities | (55,763,210 | ) | 24,027,715 | 94,103,563 | 4,167,166 | 66,535,234 | ||||||||||||||
| Working capital | 55,775,030 | (19,730,804 | ) | (31,039,408 | ) | (7,057,262 | ) | (2,052,444 | ) | |||||||||||
| Accumulated deficit | (27,671,335 | ) | (16,095,498 | ) | (22,993,830 | ) | (2,512,355 | ) | (69,273,018 | ) | ||||||||||
| Total equity | 55,775,030 | 25,772,235 | (16,711,162 | ) | (48,168,951 | ) | 16,667,152 | |||||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 46,700 | $ | 55,796,336 | $ | 90,528,406 | $ | (39,987,233 | ) | $ | 106,384,209 | |||||||||
| Total liabilities | (48,578,210 | ) | 17,576,098 | 107,864,555 | 6,782,980 | 83,645,423 | ||||||||||||||
| Current assets | 46,700 | 12,676,793 | 71,423,189 | (8,694,788 | ) | 75,451,894 | ||||||||||||||
| Current liabilities | (48,578,210 | ) | 17,576,098 | 107,864,555 | (2,414,047 | ) | 74,448,396 | |||||||||||||
| Working capital | 48,624,910 | (4,899,305 | ) | (36,441,366 | ) | (6,280,741 | ) | 1,003,498 | ||||||||||||
| Accumulated deficit | (17,136,455 | ) | (5,669,391 | ) | (24,496,890 | ) | (831,757 | ) | (48,134,493 | ) | ||||||||||
| Total equity | 48,624,910 | 38,220,238 | (17,336,149 | ) | (46,770,213 | ) | 22,738,786 | |||||||||||||
Condensed Consolidated Cash Flows
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (2,596,084 | ) | $ | 2,966,213 | $ | (5,644,328 | ) | $ | 2,118,760 | $ | (3,155,439 | ) | |||||||
| Net cash used in investing activities | - | (8,156 | ) | (2,031,694 | ) | - | (2,039,850 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 2,639,600 | (5,113,399 | ) | 8,974,553 | 1,503,537 | 8,004,291 | ||||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | (57,264 | ) | 2,174,086 | (3,622,297 | ) | (1,505,475 | ) | ||||||||||||
| Net increase in cash and cash equivalents | 43,516 | (2,212,606 | ) | 3,472,617 | - | 1,303,527 | ||||||||||||||
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (7,359,880 | ) | $ | (1,882,172 | ) | $ | 3,892,614 | $ | 2,065,925 | $ | (3,283,513 | ) | |||||||
| Net cash used in investing activities | - | - | (311,719 | ) | (4,378 | ) | (316,097 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 7,325,000 | (1,320,030 | ) | (3,223,285 | ) | (415,529 | ) | 2,366,156 | ||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | (948,967 | ) | 59,506 | (1,646,017 | ) | (2,535,478 | ) | ||||||||||||
| Net increase in cash and cash equivalents | (34,880 | ) | (4,151,169 | ) | 417,117 | - | (3,768,932 | ) | ||||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (43,300 | ) | $ | 3,283,202 | $ | (10,638,849 | ) | $ | 2,012,974 | $ | (5,385,973 | ) | |||||||
| Net cash used in investing activities | - | (63,291 | ) | (242,847 | ) | - | (306,138 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 90,000 | (6,256,428 | ) | 12,810,723 | (1,807,397 | ) | 4,836,898 | |||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | 1,499,349 | 228,374 | (205,577 | ) | 1,522,146 | ||||||||||||||
| Net increase in cash and cash equivalents | 46,700 | (1,537,168 | ) | 2,157,401 | - | 666,933 | ||||||||||||||
6
Enforceability Of Civil Liabilities
We are an exempted company incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States.
Substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers, namely, Lei Liu, Chief Executive Officer and Chairman of the Board of Directors; Ming Zhao, Chief Financial Officer of the Company; Li Qi, Caroline Wang, Jiangliang He, Genghua Gu, Pingfan Wu, all of whom are directors of the Company, are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon our company or these persons, or to bring an action against our company or against these persons in the United States, in the event that you believe that your rights have been infringed under the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against our company and its officers and directors. We have appointed Pryor Cashman LLP as our agent to receive service of process in the United States.
There is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against our company or its directors or officers, predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (2) entertain original actions brought in the Cayman Islands against our company or its directors or officers, predicated upon the securities laws of the United States or any state in the United States.
Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty, € is not inconsistent with a Cayman Islands judgement of the same matter, (f) is not impeachable on grounds of fraud, and (g) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.
It is our understanding that the PRC does not have treaties with the United States and many other countries providing for the reciprocal recognition and enforcement of judgments of courts and that there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of United States courts against our company or the directors or officers of our company predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
Additionally, it is our understanding that it may be difficult for you to bring an original action against us or against our directors and officers who are nationals or residents of countries other than the United States in a PRC court in the event that you believe that your rights have been infringed under the U.S. federal securities laws, PRC laws, Cayman Islands laws or otherwise because we are incorporated under the laws of the Cayman Islands and it may be difficult for U.S. shareholders, by virtue only of holding our ordinary shares, to establish a connection to the PRC as required by the PRC Civil Procedures Law in order for a PRC court to have jurisdiction.
A. [Reserved.]
B. CAPITALIZATION AND INDEBTEDNESS.
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.
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D. RISK FACTORS.
You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.
Summary of Risk Factors
Risks Relating to Our Business in General
| ● | We face significant competition, and if we do not compete successfully against existing and new competitors, our revenue and profitability could be materially and adversely affected. | |
| ● | The continued penetration of counterfeit products into the pharmaceutical market in China may damage our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. |
| ● | We have significant cash deposits with our suppliers and landlords, which we may not be able to recover in the event of bankruptcy by our suppliers or landlords or other events beyond our control. |
| ● | If we are unable to optimize management of our procurement and distribution activities, we may be unable to meet customer demand while increasing the burden on managing our supply chain. |
| ● | We depend substantially on the continuing efforts of the Key Personnel, and our business and prospects may be disrupted if we lose their services. |
| ● | Our retail and wholesale operations require a number of permits and licenses in order to carry on their business. |
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Risks Relating to Our Pharmacy Operations
| ● | Our ability to grow our pharmacy business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current leases. |
| ● | As a distributor of pharmaceutical and other healthcare products, we are exposed to inherent risks relating to product liability and personal injury claims. |
| ● | We may be subject to fines and penalties if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under China’s National Medical Insurance Program. |
Risks Related to Our Wholesale Business
| ● | We may not able to effectively grow our wholesale business organically and growing through acquisitions may prove challenging. |
| ● | To be competitive in the wholesale business, we need to continue to invest heavily in building new platforms, attracting new customers and recruiting experiences management personnel and there is no guarantee that such efforts would be successful. |
Risks Related to Our Online Sales
| ● | We rely on computer software and hardware systems in managing our online sales, the capacity of which may restrict our growth and the failure of which could adversely affect our business, financial condition and results of operations. | |
| ● | If our online business fails to obtain and maintain the requisite assets, licenses, qualified personnel and approvals required under the complex regulatory environment for Internet-based businesses in China, the business prospects for such business may be materially and adversely affected. | |
| ● | The operation results of our online business fluctuates and we cannot assure our efforts for alternative vendors will result in the stable increase in revenues from online pharmacy in the coming years. | |
| ● | Our IT system may not perform as anticipated and is vulnerable to damage and interruption, which may lead to leakage of personal data of the employees of our end-users and our seconded employees. | |
| ● | Failure to comply with privacy, data protection and cyber security laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences. |
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. |
| ● | As a provider of medical services, we are exposed to inherent risks relating to malpractice claims. |
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Risks Related to Our Corporate Structure
| ● | If the PRC government deems that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may therefore materially reduce the value of our ordinary shares or cause them to become worthless. |
| ● | Since we rely on contractual arrangements to manage and operate HJ Group and for substantially all of our revenue, the termination of such agreements will severely and detrimentally affect our continuing business viability under our current corporate structure. |
| ● | Our current corporate structure and business operations and the market price of our ordinary shares may be affected by the newly enacted Foreign Investment Law which does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. |
| ● | 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. | |
| ● | Certain management members of HJ Group have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse. |
Risks Related to Doing Business in China
| ● | Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition. | |
| ● | We may be adversely affected by complexity, uncertainties and changes in Chinese regulation of drugstores and the practice of medicine. | |
| ● | Compliance with China’s new Data Security Law, Measures on Cybersecurity Review, Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business. |
| ● | Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us. | |
| ● | It may be difficult for U.S. regulators, such as the Department of Justice, the SEC, and other authorities, to conduct investigation or collect evidence within China. |
| ● | You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or our management based on United States or other foreign laws. |
| ● | The advent of recent healthcare reform directives from China’s central government may increase both competition and our cost of doing business. | |
| ● | Our management will have broad discretion over the use of the proceeds we receive from our financing activities and might not apply the proceeds in ways that increase the value of your investment. |
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| ● | HJ Group is subject to restrictions on making payments to us. |
| ● | Dividends we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax. |
| ● | We face risks related to disease epidemics and other outbreaks. | |
| ● | Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences. | |
| ● | If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease. |
| ● | Our auditor, YCM CPA Inc., is headquartered in California, and is subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our ordinary shares could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act. |
Risks Related to an Investment in Our Securities
| ● | The market price of our ordinary shares has fluctuated and may continue to fluctuate in the future, and we may not pay dividends on our ordinary shares. |
| ● | Our officers and directors own a substantial portion of our outstanding ordinary shares, which will enable them to influence many significant corporate actions. |
Other General Risk Factors
| ● | Changes in economic conditions and consumer confidence in China may influence the drugstore industry, consumer preferences and spending patterns. |
| ● | Uncertainties with respect to the Chinese legal system could adversely affect us. |
| ● | Techniques employed by manipulative short sellers in Chinese small-cap stocks may drive down the market price of our ordinary shares. |
Risks Relating to Our Business in General
We face significant competition, and if we do not compete successfully against existing and new competitors, our revenue and profitability could be materially and adversely affected.
Both the drugstore, online pharmacy and wholesale pharmaceutical distribution industries in China are highly competitive, and we expect competition to intensify in the future. Our primary drugstore competitors include other drugstore chains and independent drugstores. Increasingly, we also face competition from discount stores, convenience stores and supermarkets as we expand our offering of non-drug convenience products and services. We compete for customers and revenue primarily on the basis of store location, merchandise selection, price, services offered, and our brand name. Our online pharmacy competitors include other online pharmaceutical vendors. As larger traditional drugstore chain companies entered into the online sales, we face competition ranging from prices to service. Our primary wholesale competitors include regional and national players. In addition, we may be subject to additional competition from new entrants to both industries in China. We could also face increased competition from foreign companies if the Chinese government removes the restrictions on the entry of foreign companies into these industries.
Some of our larger competitors may enjoy competitive advantages, such as:
| ● | greater financial and other resources; | |
| ● | larger variety of products; | |
| ● | more extensive and advanced supply chain management systems; |
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| ● | greater pricing flexibility; | |
| ● | larger economies of scale and purchasing power; | |
| ● | more extensive advertising and marketing efforts; |
| ● | greater knowledge of local market conditions; | |
| ● | stronger brand recognition; and | |
| ● | larger sales and distribution networks. |
As a result of the aforementioned advantages, we may be unable to offer products similar to, or more desirable than, those offered by our competitors, market our products as effectively as our competitors, or otherwise respond successfully to competitive pressures. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which could require us to reevaluate our pricing structures to remain competitive. Our competitors may be able to offer larger discounts on competing products, and we may not be able to profitably match those discounts. Furthermore, our competitors may offer products that are more attractive to our customers or that render our products uncompetitive. In addition, the timing of the introduction of competing products into the market could affect the market acceptance and market share of our products. Our failure to successfully compete could materially and adversely affect our business, financial condition, results of operation, and prospects.
The continued penetration of counterfeit products into the pharmaceutical market in China may damage our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects.
Counterfeit products have continued to make their way into the Chinese pharmaceutical market. Counterfeit products are generally sold at lower prices compared to their authentic counterparts due to their low production costs, and in some cases may be very similar in appearance to their authentic counterparts. Counterfeit pharmaceuticals may or may not have the same chemical content as their authentic counterparts, and are typically manufactured without proper licenses or approvals as well as fraudulently mislabeled with respect to their content and/or manufacturer. Although China’s central government has been increasingly active in combating counterfeit pharmaceutical and other products, China does not yet have effective regulatory control or an enforcement system over counterfeit pharmaceutical products. Although we have implemented a series of quality control procedures in our procurement process, we cannot provide assurance that we may not be inadvertently selling counterfeit pharmaceutical products. Any unintentional sale of counterfeit products may subject us to negative publicity, fines and/or other administrative penalties, or may even result in litigation against us. Moreover, the increased distribution of counterfeit products and other products in recent years may reinforce the negative image of drug distributors among consumers in China. The continued proliferation of counterfeit products in China could have a material adverse effect on our business financial condition, and results of operation.
We have significant cash deposits with our suppliers and landlords in order to obtain and maintain our inventory and maintain and establish store locations, which we may not be able to recover in the event of bankruptcy by our suppliers or landlords or other events beyond our control.
Our ability to obtain products and maintain inventory at, and to establish and maintain leases for, our pharmacies, is dependent upon our ability to post and maintain significant cash deposits with our suppliers and landlords. Many vendors in China are unwilling to ship merchandise on credit and instead require cash deposits, and landlords may require security deposits consisting of the equivalent of twelve (12) months of rent. As of March 31, 2024, we had approximately $0.91 million deposited with suppliers and approximately $1.63 million deposited with landlords for our pharmacies. If we are unable or unwilling to establish such advances and deposits, our ability to generate sales and expand our business could be adversely affected. In general, we expect the amounts required for advances and deposits to increase as we undertake our expansion plans, complete store openings and expand our business through acquisitions or otherwise. We do not generally receive interest on the deposits made to suppliers or landlords, and such deposits are subject to the risk of loss as a result of the creditworthiness or bankruptcy of the party who holds our funds, as well as the risk from any illegal acts associated with the third party, such as conversion, fraud, theft or dishonesty. If these circumstances were to arise, we could find it difficult or impossible, due to the unpredictability of legal proceedings in China, to recover all or a portion of the amount on deposit with our vendors or landlords.
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If we are unable to optimize management of our procurement and distribution activities, we may be unable to meet customer demand while increasing the burden on managing our supply chain.
Since May 2011, we have been using Jiuxin Medicine’s facility as our distribution center for both our retail and wholesale businesses. Starting from March 31, 2018, we outsourced our logistic service to Astro Boy Cloud Pan (Hangzhou) Storage and Logistic Co. Ltd (“Astro Boy Logistic”). As a result, Jiuxin Medicine’s warehouse lease has been terminated. Astro Boy Logistic provides us with a facility with approximately 14,000 square meters located approximately eighteen (18) miles from our headquarters, which served as our central distribution center. Astro Boy Logistic’s staff and vehicles make regular deliveries to our pharmacies and wholesale customers. Our ability to meet customer demand may be significantly limited if we do not successfully and efficiently conduct our distribution activities, or if Astro Boy Logistic’s facility is destroyed or shut down for any reason, including as the result of natural disasters. Any disruption in the operation of our distribution activities could result in higher costs or longer lead times associated with distributing our products. Since it is difficult to predict accurate sales volume in our industry, we may be unable to optimize our distribution activities, which may result in excess or insufficient inventory, warehousing, fulfillment or distribution capacity. Furthermore, failure to effectively control product damage during the distribution process could decrease our operating margins and reduce our profitability.
All product procurements are handled through our corporate headquarters. Such centralization is intended to reduce the cost of goods sold as a result of volume purchase benefits. However, we may be less successful than anticipated in achieving these volume purchase benefits. In addition, such centralization is expected to increase the complexity of tracking inventory and could place additional burdens on the management of our supply chain. If we cannot successfully reduce our costs through centralizing procurement, our profitability and prospects could be materially and adversely affected.
We depend substantially on the continuing efforts of the Key Personnel, and our business and prospects may be severely disrupted if we lose their services.
Our future success is dependent on the continued services of Mr. Lei Liu and Ms. Li Qi (the “Key Personnel”) but we do not maintain key-man insurance. If we lose the services of either of the Key Personnel, we may not be able to locate suitable or qualified replacements, which could severely disrupt our business and prospects. Each of the Key Personnel has entered into confidentiality and non-competition agreements with us. However, if any disputes arise between us and the Key Personnel, we cannot provide assurance, in light of uncertainties associated with the PRC legal system, that any of these agreements can be enforced in China, the jurisdiction in which the Key Personnel reside and hold some of their assets. See “Risks Related to Doing Business in China - You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us or our management. ”
Our retail and wholesale operations require a number of permits and licenses in order to carry on their business.
We are required to obtain certain permits and licenses from various PRC governmental authorities, including a Drug Distribution Permit and a GSP certification. We are also required to obtain food hygiene certificates for the distribution of nutritional supplements and food products. We cannot provide any assurance that we can maintain all required licenses, permits and certifications to carry on our business at all times, and from time to time we may have not been in the past, or may not be in the future, in compliance with all such required licenses, permits and certifications. Moreover, these licenses, permits and certifications are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities and the standards of such renewal or reassessment may change from time to time. We intend to apply for renewal of these licenses, permits and certifications when required by applicable laws and regulations. Any failure by us to obtain and maintain all licenses, permits and certifications necessary to carry on our business at any time could have a material adverse effect on our business, financial condition and results of operations. In addition, any inability to renew any of these licenses, permits and certifications could severely disrupt our business, and prevent us from continuing to carry on our business. Any changes in the standards used by governmental authorities in considering whether to renew or reassess our business licenses, permits and certifications, as well as any enactment of new regulations that may restrict the conduct of our business, may also decrease our revenue and/or increase our costs, materially reducing our profitability and prospects. Furthermore, if the interpretation or implementation of existing laws and regulations changes or if new regulations come into effect requiring us to obtain any additional licenses, permits or certifications that were previously not required to operate our existing businesses, we cannot provide assurance that we can successfully obtain such licenses, permits or certifications.
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Risks Relating to Our Pharmacy Operations
Our ability to grow our pharmacy business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current leases.
Our ability to grow our pharmacy business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use regulations and other regulations applicable to the kinds of stores we seek to construct may impact our ability to find suitable locations and influence the cost of constructing our stores. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Furthermore, changing local demographics at existing store locations could materially and adversely affect revenue and profitability levels at those stores, and overall our business, financial condition, results of operation, and prospects. In fact, our growth of the pharmacy business through new store opening has slowed down significantly in recent years.
As a distributor of pharmaceutical and other healthcare products, we are exposed to inherent risks relating to product liability and personal injury claims.
Distributors of pharmaceutical and other healthcare products are exposed to risks inherent in the packaging and distribution of such products. Such risks include unintentional distribution of counterfeit, mislabeled or contaminated drugs, and, with respect to our pharmacies, improper filling of prescriptions, labeling of prescriptions and adequacy of warnings. Errors in the packaging or dispensing of pharmaceuticals could lead to serious injury or death. Furthermore, the applicable PRC laws, rules and regulations require our in-store pharmacists to offer counseling to our customers, without additional charge, about medication, dosage, delivery systems, common side effects, and other information the in-store pharmacists deem significant. Our in-store pharmacists sometimes also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects, and we may be liable for claims arising from any advice given by our in-store pharmacists. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals we sell or services we provide, and we may be required to pay for substantial monetary damages for any successful product liability or personal injury claim against us. We may, however, in product liability claims, have the right under applicable PRC laws, rules and regulations to recover from the relevant manufacturer any compensation we paid to our customers in connection with such claim. However, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources in the process, which could disrupt our business. Our reputation and our brand names may also suffer as a result of any product liability or personal injury claims against us. Like many other similar companies in China, we do not carry product liability insurance. A product recall or damage to our reputation in the event of a product liability or personal injury claim or judgment against us could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to fines and penalties if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under China’s National Medical Insurance Program.
Eligible participants in China’s national medical insurance program, mainly consisting of urban residents in China, are entitled to buy medicines using their medical insurance cards from an authorized pharmacy, provided that the medicines they purchase have been included in the national or provincial medical insurance catalogs. The pharmacy, in turn, obtains reimbursement from the relevant government social security bureaus. Moreover, the applicable PRC laws, rules and regulations prohibit pharmacies from selling goods other than pre-approved medicines when purchases are made with medical insurance cards. We have established procedures to prohibit our drugstores from selling unauthorized goods to customers who make purchases with medical insurance cards. However, we cannot provide assurance that those procedures will be strictly followed by all of our employees in all of our stores.
Risks Related to Our Wholesale Business
We may not able to effectively grow our wholesale business organically and growing through acquisitions may prove challenging.
Our wholesale business has experienced significant growth in recent years compared with other businesses; however, to maintain our position in this very competitive market, we need to grow even faster and grab more market share. We may decide that we need to grow wholesale business through acquisitions, which can be expensive and time consuming. There is no assurance that a suitable target can be found or a deal can be reached with a suitable target. If we failed to execute an acquisition, our growth in the wholesale business may be stalled.
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To remain competitive in the wholesale business, we need to continue to invest heavily in building new platforms, attracting new customers and recruiting experiences management personnel and there is no guarantee that such efforts would be successful.
In order to remain competitive in the wholesale business, we need to continue to invest heavily in building new platforms, which we believe will play a critical role in the wholesale industry going forward. Currently, supplying to our own retain business is a significant part of our wholesale business; however, to grow the business further, we need to attract and retain more outside customers. The wholesale business is relevant new to us and most of our senior management personnel including the founders, Mr. Liu and Mr. Qi, are less experienced in the whole agreement than the pharmacy retain business, where they originally started. Therefore, it is very important for us to recruit and retain highly experienced management personnel for our wholesale business. All these efforts require heavy investment in funding, resources and time of the senior management and there is no guarantee that such efforts would be successful. If these efforts are not successful, our wholesale business may suffer.
Our wholesale business has a lower gross margin compared with our pharmacy business and continued growth of the wholesale business may reduce the overall gross margin of our company at least in the short run.
Our wholesale business currently has a lower gross margin than our pharmacy business and as we will continue to focus on growing the wholesale business, we don’t expect this to change in the near term. With wholesale business growing at a faster pace than other businesses, our overall gross margin may decline at least in the short run
Risks Related to Our Online Sales
We rely on computer software and hardware systems in managing our online sales, the capacity of which may restrict our growth and the failure of which could adversely affect our business, financial condition and results of operations.
We are dependent upon our electronic commerce system to carry out our online sales. Any system failure which causes interruptions to the input, retrieval and transmission of data, or increases in service time could disrupt our normal operations. Although we believe our existing disaster recovery plan that can handle the failure of our computer software and hardware systems, we cannot provide assurance that we can effectively carry out this disaster recovery plan and that we will be able to restore our operation within a sufficiently short time frame to avoid disruption to our business. Any failure in our computer software and/or hardware systems could have a material adverse effect on our business, financial condition and results of operations. In addition, if the capacity of our computer software and hardware systems fails to meet the increasing needs of our operations, our ability to grow may be constrained.
If our online business fails to obtain and maintain the requisite assets, licenses, qualified personnel and approvals required under the complex regulatory environment for Internet-based businesses in China, the business prospects for such business may be materially and adversely affected.
Internet-based businesses in China are highly regulated by China’s central government, and numerous regulatory authorities are empowered to issue and implement regulations governing various aspects of these businesses. Our online business is operated by one of the VIEs, Jiuzhou Pharmacy, which is required to obtain and maintain certain assets relevant to its business, such as computers and other electrical equipment, as well as applicable licenses or approvals from different regulatory authorities. These assets and licenses are essential to the operation of an e-commerce business and are generally subject to annual review by the relevant governmental authorities. Furthermore, we may be required to obtain additional licenses. If we fail to obtain or maintain any of the required assets, licenses or approvals, our Internet business may be subject to various penalties, such as confiscation of income, fines, and/or the discontinuation or restriction of its operations. Any such disruption may materially and adversely affect the prospects of our online business.
The operation results of our online business fluctuates and we cannot assure our efforts for alternative vendors will result in the stable increase in revenues from online pharmacy in the coming years
Our online pharmacy sales decreased by approximately $527,206, or 1.6% for the year ended March 31, 2024, as compared to the year ended March 31, 2023. The decrease was primarily caused by a decrease in sales via e-commerce platforms such as JD and Pinduoduo. Because the online prices are transparent, to be competitive in online sales, we have to keep low prices. More competitors came into the online retail sales market. As we do not have dominating power such as lowest prices or exclusive products, we may not be able to improve our sales significantly in the near future.
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Our IT system may not perform as anticipated and is vulnerable to damage and interruption, which may lead to leakage of personal data of the employees of our end-users and our seconded employees
Our online sales is dependent on our IT system. We have in our possession a substantial amount of personal data related to the employees of our end users and our seconded employees. We are obliged to keep all the personal data in our possession in such manner required by the laws and regulations relating to personal data protection implemented in the PRC. If our IT system experiences any functional problems or there is any failure of our IT system due to power outages, hacker attacks, computer viruses, security breaches and errors in usage by our internal employees causing any breach of confidentiality by us or any failure to comply with the protection, collection, use and disclosure of personal data as prescribed under the relevant laws and regulations, resulting in personal data related to the employees of the end-users of our payroll outsourcing services or our seconded employees being leaked to or obtained by third parties, our reputation will be in jeopardy which could lead to loss of our major customers. The employees of the end-users of our payroll outsourcing services or our seconded employees may also take legal actions against us for damages and/or compensation for the loss that may have arisen or been incurred therefrom, in addition to the penalties prescribed under the relevant laws and regulations in the PRC we are subject to.
The internal control procedures we have implemented to safeguard the security and confidentiality of our customer database may not effectively prevent leakage of personal data or unauthorized access to our customer database under all circumstances. If such incident happens, we may be subject to investigation, litigation, arbitration and other forms of legal proceedings and/or dispute for breach of personal data privacy laws and regulations in the PRC, and our management team will have to divert substantial time, effort and resources to handle the legal procedures.
Failure to comply with privacy, data protection and cyber security laws and regulations could have a materially adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences
The collection, storage, hosting, transfer, processing, disclosure, use, security and retention and destruction of personal information required to provide our services is subject to national and foreign privacy, data protection and cyber security laws. These laws, which are not uniform, generally do one or more of the following: regulate the collection, storage, hosting, transfer (including in some cases, the transfer outside the country of collection), processing, disclosure, use, security and retention and destruction of personal information; require notice to individuals of privacy practices; give individuals certain access and correction rights with respect to their personal information; and regulate the use or disclosure of personal information for secondary purposes such as marketing. Under certain circumstances, some of these laws require us to provide notification to affected individuals, clients, data protection authorities and/or other regulators in the event of a data breach. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among the Company and its subsidiaries.
We believe that providing insights from data, including artificial intelligence and machine learning, will become increasingly important to the value that our solutions and services deliver to our customers. However, the ability to provide data-driven insights may be constrained by current or future regulatory requirements or ethical considerations that could restrict or impose burdensome and costly requirements on our ability to leverage data in innovative ways.
Complying with privacy, data protection and cyber security laws and requirements may result in significant costs to our business and require us to amend certain of our business practices. Further, enforcement actions and investigations by regulatory authorities related to data security incidents and privacy violations continue to increase. The future enactment of more restrictive laws, rules or regulations and/or future enforcement actions or investigations could have a materially adverse impact on us through increased costs or restrictions on our businesses and noncompliance could result in significant regulatory penalties and legal liability and damage our reputation. In addition, data security events and concerns about privacy abuses by other companies are changing consumer and social expectations for enhanced privacy and data protection. As a result, even the perception of noncompliance, whether or not valid, may damage our reputation.
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Risks Relating to Our Medical Services
If we do not attract and retain qualified physicians and other medical personnel, our ability to provide medical services would be adversely affected.
The success of our medical services will, in part, be dependent upon the number and quality of doctors, nurses and other medical support personnel that we employ and our ability to maintain good relationships with them. Our medical staff may terminate their employment with us at any time. If we are unable to successfully maintain good relationships with them, our ability to provide medical services may be adversely affected.
As a provider of medical services, we are exposed to inherent risks relating to malpractice claims.
As a provider of medical services, any misdiagnosis or improper treatment may result in negative publicity regarding us or our services, which would harm our reputation. If we are found liable for malpractice, we may be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against a malpractice claim, we could be required to spend significant management, financial and other resources in the process, which could disrupt our business, and our reputation and brand name may also suffer. Since malpractice claims are not common in China, we do not carry malpractice insurance. As a result, any imposition of malpractice liability could materially harm our business, financial condition and results of operations.
Risks Related to Our Corporate Structure
If the PRC government deems that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may therefore materially reduce the value of our ordinary shares or cause them to become worthless.
We are a holding company incorporated in the Cayman Islands. As a holding company with no material operations of our own, we conduct a substantial majority of our operations through the VIEs in the PRC, Jiuzhou Pharmacy (including its subsidiaries and controlled entities), Jiuzhou Clinic and Jiuzhou Service, in which we have no equity ownership interest and must rely on contractual arrangements to operate and manage the businesses. These contractual arrangements are not as effective in management and operations as direct ownership. For example, the VIEs may be unwilling or unable to perform its contractual obligations under our commercial agreements. Consequently, we would not be able to conduct our operations in the manner currently planned, we cannot provide assurance that the Key Personnel will act in our best interests. Under such circumstances, we may have to rely on legal remedies under Chinese law, which may not be effective in providing us any relief. In addition, the VIEs may seek to renew its agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to operates and manage the VIEs, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal remedies under PRC law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire or enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.
Since we rely on contractual arrangements to manage and operate HJ Group and for substantially all of our revenue, the termination of such agreements will severely and detrimentally affect our continuing business viability under our current corporate structure.
Since we do not own equity interests of HJ Group, the termination of our contractual arrangements with them would sever our ability to continue receiving payments from them under our current holding company structure. We cannot provide assurance that there will not be any event or reason that may cause the contractual arrangements to terminate. In the event that the contractual arrangements terminate, we will lose our management over them and their business operations and, as a result, over our primary sources of revenue. This may have a severe and detrimental effect on our continuing business viability under our current corporate structure, which in turn may affect the value of your investment. Should this occur, we may seek to acquire control of HJ Group through other means, although we cannot guarantee that we will do so, nor can we guarantee that we will be successful if we do.
Because our holding company is an exempted company incorporated in the Cayman Islands with limited liability, it is classified as a foreign enterprise under PRC laws and regulations, and our wholly foreign-owned enterprises in the PRC will be foreign-invested enterprises. As a result of these contractual arrangements, we have management over and are the primary beneficiary of the consolidated VIEs and hence consolidate its financial results as the consolidated VIEs under U.S. GAAP.
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Chinese regulations limit foreign ownership of any pharmacy operator with thirty (30) or more stores, and limit foreign ownership of medical clinics to Sino-foreign joint venture. The entities that operate our pharmacies and clinics are controlled by us through contractual arrangements. The validity of such contractual arrangements is uncertain. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in the relevant Chinese laws and regulations may materially and adversely affect our business.
Current PRC regulations limit foreign ownership of a pharmacy operator to forty nine percent (49%) if such operator owns interests in thirty (30) or more drugstores in China that sell a variety of branded pharmaceutical products sourced from different suppliers. Since we do not own any equity interests in Jiuzhou Pharmacy, but instead manage and operate it through contractual arrangements, we do not believe that the regulations limiting foreign ownership apply to us even if Jiuzhou Pharmacy or Jiuxin Medicine expands beyond thirty (30) stores. In fact, Jiuzhou Pharmacy has expended to one hundred and twenty-seven (127) stores as of March 31, 2024.
Similarly, PRC regulations restrict foreign ownership of medical practices in China to Sino-foreign joint ventures. Since we do not have any actual equity interest in Jiuzhou Clinic or Jiuzhou Service, but manage and operate these entities through contractual arrangements, we do not believe that such PRC regulations are applicable to us or our structure.
There are, however, uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of our contractual arrangements. Although the structures for operating our business in China (including our corporate structure and contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service and the Key Personnel) comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, we cannot provide assurance that a regulatory authority will not determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If any such authority determines that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements may become invalid or unenforceable, and we may not be able to consolidate the operations of HJ Group with our results of operations. In addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements that may be applicable to our contractual arrangements. For example, pursuant to the new Civil Code in China promulgated in May 2020, the pledge of any equity interests of a PRC private entity shall become effective once it is duly registered with the local branches of the SAIC. The SAIC issued the Administrative Measures for Registrations of Share Pledge on September 1, 2008, further amended to its current version on April 29, 2016, which has failed to provide detailed procedural guidance for the local SAIC offices to handle the registrations of pledged shares. In accordance with the Foreign Investment Law, the State Council promulgated and approved in 2021 a list of special administrative measures for market access of foreign investments, or the Negative List. The Negative List contains no limits or restrictions on foreign investment holdings in the pharmaceutical or retail industries. The Equity Pledge Agreement that forms a part of the contractual arrangements creates a legally binding obligation on the parties upon the execution date; however, the pledge established under such agreement does not become effective until due registration with the local SAIC office. On May 18, 2010, registration of the pledged equity interests in Jiuzhou Pharmacy was completed.
The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses, and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by the relevant governmental bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our businesses. We cannot provide assurance that our current ownership and operating structure will not be found in violation of any current or future Chinese laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease the provision of certain services. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
If we are determined to be in violation of any existing or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
| ● | revoking the business and operating licenses of the HJ Group entities; | |
| ● | discontinuing or restricting the operations of the HJ Group entities; |
| ● | imposing conditions or requirements with which we or the HJ Group entities may not be able to comply; | |
| ● | requiring us or the HJ Group entities to restructure the relevant ownership structure or operations; and/or | |
| ● | imposing fines. |
The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.
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In addition, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations and the market price of our ordinary shares. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the ability to direct the activities of the consolidated VIEs or to receive their economic benefits, we would no longer be able to consolidate the financial results of such VIEs in our consolidated financial statements, which may cause the value of our securities to materially decline. Moreover, if the PRC government determines that the contractual arrangements constituting part of the VIE structure do not comply with PRC regulations, or if these regulations change or are interpreted differently in the future, our securities may decline in value or become worthless.
Our current corporate structure and business operations and the market price of our ordinary shares may be affected by the newly enacted Foreign Investment Law which does not explicitly classify whether VIEs that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors.
The VIE structure has been adopted by many Chinese-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. On March 15, 2019, the National People’s Congress, China’s national legislative body (the “NPC”) approved the Foreign Investment Law, which took effect on January 1, 2020. On December 26, 2019, the PRC State Council approved the Implementation Rules of the Foreign Investment Law, which came into effect on January 1, 2020. The interpretations to these laws are still uncertain. The Foreign Investment Law does not explicitly classify whether variable interest entities that are managed and operated through contractual arrangements by foreign investors would be deemed as foreign-invested enterprises. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements being viewed as a form of foreign investment. Therefore, there can be no assurance that our management and operation over the consolidated VIEs through contractual arrangements will not be deemed as foreign investment in the future.
In accordance with the Foreign Investment Law, the State Council promulgated and approved in 2021 a list of special administrative measures for market access of foreign investments, or the Negative List. The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in the Negative List. The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. Pursuant to the Negative List, the Company’s four business segments ((1) retail drugstores, (2) online pharmacy, (3) wholesale of products similar to those that the Company carries in its pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine) do not fall within the “prohibited” category. However, since the Negative List has been adjusted and updated from time to time with little advance notice, we cannot assure you that the aforementioned business segments will continuously be beyond the “prohibited” category. If the management and operations to the consolidated VIEs through contractual arrangements are deemed as foreign investment in the future, and any business of the consolidated VIEs is “restricted” or “prohibited” from foreign investment under the “Negative List” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to manage and operate the consolidated VIEs may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation and the market price of our ordinary shares.
Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations and the market price of our ordinary shares.
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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 the consolidated PRC operating entities for cash requirements, including the funds required to service any debt we may incur, which are passed on to us through Jiuxin Management. If any of the consolidated operating entities incurs debt in its own name in the future, the instruments governing the debt may restrict dividends or other distributions on our equity interest to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements in a manner that would materially and adversely affect our ability to pay dividends and other distributions on our equity interest.
Furthermore, applicable PRC laws, rules and regulations permit payment of dividends by our consolidated PRC entities only out of their retained earnings, if any, determined in accordance with PRC accounting standards. Under PRC laws, rules and regulations, our consolidated PRC entities are required to set aside at least ten percent (10%) of their after-tax profit each year, based on PRC accounting standards, into their statutory surplus reserve funds until the accumulative amount of such reserves reaches fifty percent (50%) of their respective registered capital. Also, dividends cannot be distributed before any previous year’s loss has been offset. As a result, our consolidated PRC entities are restricted in their ability to transfer a portion of their net income to us whether in the form of dividends, loans or advances. As of March 31, 2024, our restricted reserves totaled $1,309,109 (RMB 9,513,278). Our restricted reserves are not distributable as cash dividends. Any limitation on the ability of our consolidated operating entities to pay dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
Certain management members of HJ Group have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.
Mr. Lei Liu, our Chief Executive Officer and Chairman of our Board of Directors, is also the executive director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic, and the supervising director of Jiuzhou Service. In addition, Mr. Liu has also lent us money out of his personal funds to help facilitate our payments of expenses in the U.S., as well as to purchase a land use right. Ms. Li Qi, a member of our Board of Directors, is the general manager of each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and a general partner of Jiuzhou Clinic. Conflicts of interests between their respective duties to our company and HJ Group may arise. As our directors and executive officers, they have a duty of loyalty and care to us under U.S. and Hong Kong law when there are any potential conflicts of interests between our company and HJ Group. We cannot provide assurance, however, that when any conflicts of interest arise, both of them will act completely in our interests or that conflicts of interests will be resolved in our favor. For example, they may determine that it is in HJ Group’s interests to sever the contractual arrangements with Jiuxin Management, irrespective of the effect such action may have on us. In addition, either one of them could violate his or her legal duties by diverting business opportunities from us to others, thereby affecting the amount of payment that HJ Group is obligated to remit to us under the Consulting Services Agreement.
In the event that you believe that your rights have been infringed under securities laws or otherwise as a result of any one of the circumstances described above, it may be difficult or impossible for you to bring an action against HJ Group, or our officers or directors who are members of the management, all of whom reside within China. Even if you are successful in bringing an action, the laws of China may render you unable to enforce a judgment against the assets of HJ Group and its management, all of which are located in China.
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Risks Related to Doing Business in China
Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.
Our business operations conducted through our PRC operating entities may be adversely affected by the current and future political environment in the PRC. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing reform policies which have adversely affected China-based operating companies whose securities are listed in the United States, with significant policies changes being made from time to time without notice. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, 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. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business. Consequently, we cannot predict the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors. Although the PRC government has been pursuing economic reform policies for more than two decades, the PRC government continues to exercise significant control over economic growth in the PRC through the allocation of resources, controlling payments of foreign currency, setting monetary policy and imposing policies that impact particular industries in different ways. We cannot assure you that the PRC government will continue to pursue policies favoring a market oriented economy or that existing policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the PRC. The Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of the securities being offered. Any adverse changes in Chinese laws and regulations and the Chinese government’s significant oversight and discretion over the conduct of our business could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless.
We may be adversely affected by complexity, uncertainties and changes in Chinese regulation of drugstores and the practice of medicine.
The Chinese government regulates drugstores and the practice of medicine, including foreign ownership and requirements for licenses and permits. These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be a violation of applicable laws and regulations.
The interpretation and application of existing Chinese laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, pharmaceutical businesses in China, including our business. We currently only have contractual management power over the HJ Group entities, and do not own them due to the restrictions on foreign ownership of such companies. However, changes to laws in the PRC may force us to restructure our ownership structure or our operations, which would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.
Uncertainties relating to the regulation of drugstores and medical practice in China also extend to evolving licensing practices, which means that permits, licenses or operations at our company may be subject to challenge. This may disrupt our business or subject us to sanctions, requirements to increase capital, or other conditions or enforcement. In turn, this could compromise enforceability of related contractual arrangements, or have other harmful effects on us.
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Compliance with China’s new Data Security Law, Measures on Cybersecurity Review, Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business.
China has implemented or will implement rules and is considering a number of additional proposals relating to data protection. China’s new Data Security Law took effect in September 2021. The Data Security Law provides that the data processing activities must be conducted based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by the Chinese government.
Additionally, China’s Cyber Security Law requires companies to take certain organizational, technical and administrative measures and other necessary measures to ensure the security of their networks and data stored on their networks. Specifically, the Cyber Security Law provides that China adopt a multi-level protection scheme (MLPS), under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered. Under the MLPS, entities operating information systems must have a thorough assessment of the risks and the conditions of their information and network systems to determine the level to which the entity’s information and network systems belong-from the lowest Level 1 to the highest Level 5 pursuant to a series of national standards on the grading and implementation of the classified protection of cyber security. The grading result will determine the set of security protection obligations that entities must comply with. Entities classified as Level 2 or above should report the grade to the relevant government authority for examination and approval.
Recently, the Cyberspace Administration of China has taken action against several Chinese internet companies in connection with their initial public offerings on U.S. securities exchanges, for alleged national security risks and improper collection and use of the personal information of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law, the Cyber Security Law and the Measures on Cybersecurity Review, which are aimed at “preventing national data security risks, maintaining national security and safeguarding public interests.” On July 10, 2021, the Cyberspace Administration of China published a revised draft of the Measures on Cybersecurity Review, expanding the cybersecurity review to data processing operators in possession of personal information of over 1 million users if the operators intend to list their securities in a foreign country.
It is unclear at the present time how widespread the cybersecurity review requirement and the enforcement action will be and what effect they will have on our business. China’s regulators may impose penalties for non-compliance ranging from fines or suspension of operations, and this could lead to us delisting from the U.S. stock market.
Also, the Personal Information Protection Law released by the National People’s Congress became effective on November 1, 2021. The law creates a comprehensive set of data privacy and protection requirements that apply to the processing of personal information and expands data protection compliance obligations to cover the processing of personal information of persons by organizations and individuals in China, and the processing of personal information of persons in China outside of China if such processing is for purposes of providing products and services to, or analyzing and evaluating the behavior of, persons in China. The law also provides that critical information infrastructure operators and personal information processing entities who process personal information meeting a volume threshold to-be-set by Chinese cyberspace regulators are also required to store in China personal information generated or collected in China, and to pass a security assessment administered by Chinese cyberspace regulators for any export of such personal information. Lastly, the draft contains proposals for significant fines for serious violations of up to RMB 50 million or 5% of annual revenues from the prior year and may also be ordered to suspend any related activity by competent authorities.
Interpretation, application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement. Compliance with the Cyber Security Law and the Data Security Law could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in the future. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection and information security, it is possible that our practices, offerings or platform could fail to meet all of the requirements imposed on us by the Cyber Security Law, the Data Security Law and/or related implementing regulations. Any failure on our part to comply with such law or regulations or any other obligations relating to privacy, data protection or information security, or any compromise of security that results in unauthorized access, use or release of personally identifiable information or other data, or the perception or allegation that any of the foregoing types of failure or compromise has occurred, could damage our reputation, discourage new and existing counterparties from contracting with us or result in investigations, fines, suspension or other penalties by Chinese government authorities and private claims or litigation, any of which could materially adversely affect our business, financial condition and results of operations. Even if our practices are not subject to legal challenge, the perception of privacy concerns, whether or not valid, may harm our reputation and brand and adversely affect our business, financial condition and results of operations. Moreover, the legal uncertainty created by the Data Security Law and the recent Chinese government actions could materially adversely affect our ability, on favorable terms, to raise capital, including engaging in follow-on offerings of our securities in the U.S. market.
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Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us.
We conduct substantially all of our business through the consolidated VIEs in China. Our operations in China are governed by PRC laws and regulations. The consolidated VIEs are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
The recent regulatory developments in China, in particular with respect to restrictions on China-based companies raising capital offshore, may lead to additional regulatory review in China over our financing and capital raising activities in the United States. In addition, we may be subject to industry-wide regulations that may be adopted by the relevant PRC authorities, which may have the effect of limiting our service offerings, restricting the scope of our operations in China, or causing the suspension or termination of our business operations in China entirely, all of which will materially and adversely affect our business, financial condition and results of operations. We may have to adjust, modify, or completely change our business operations in response to adverse regulatory changes or policy developments, and we cannot assure you that any remedial action adopted by us can be completed in a timely, cost-efficient, or liability-free manner or at all.
On July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. On August 1, 2021, the China Securities Regulatory Commission (the “CSRC”) stated in a statement that it had taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese companies and the recent regulatory development in China, and that both countries should strengthen communications on regulating China-related issuers. To the best knowledge of this Company, as of the date of this annual report, current Chinese laws and regulations do not forbid us from issuing securities overseas. On December 24, 2021, the CSRC published the Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Administrative Provisions”) and the Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Filing Measures”). The Draft Administrative Provisions and the Draft Filing Measures lay out requirements for filing and include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”), which took effect on March 31, 2023. On the same date, the CSRC circulated Supporting Guidance Rules No. 1 through No. 5, Notes on the Trial Measures, Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and relevant CSRC Answers to Reporter Questions, or collectively, the Guidance Rules and Notice, on CSRC’s official website. The Trial Measures, together with the Guidance Rules and Notice reiterate the basic principles of the Draft Administrative Provisions and Draft Filing Measures and impose substantially the same requirements for the overseas securities offering and listing by domestic enterprises, and clarified and emphasized several aspects, which include but are not limited to: (1) criteria to determine whether an issuer will be required to go through the filing procedures under the Trial Measures; (2) exemptions from immediate filing requirements for issuers including those that have already been listed in foreign securities markets, including U.S. markets, prior to the effective date of the Trial Measures, but these issuers shall still be subject to filing procedures if they conduct refinancing or are involved in other circumstances that require filing with the CSRC; (3) a negative list of types of issuers banned from listing or offering overseas, such as issuers whose affiliates have been recently convicted of bribery and corruption; (4) issuers’ compliance with web security, data security, and other national security laws and regulations; (5) issuers’ filing and reporting obligations, such as obligation to file with the CSRC after it submits an application for initial public offering to overseas regulators, and obligation after offering or listing overseas to file with the CSRC after it completes subsequent offerings and to report to the CSRC material events including change of control or voluntary or forced delisting of the issuer; and (6) the CSRC’s authority to fine both issuers and their relevant shareholders for failure to comply with the Trial Measures, including failure to comply with filing obligations or committing fraud and misrepresentation. Specifically, pursuant to the Trial Measures, our future securities offerings in the Nasdaq Capital Market where we have currently offered and listed shall also be filed with the CSRC within 3 working days after the offering is completed. As the Trial Measures are newly issued, there remain uncertainties regarding its interpretation and implementation. Therefore, we cannot assure you that we will be able to complete the filings for our future offering and fully comply with the relevant new rules on a timely basis, if at all. In addition, we cannot guarantee that we will not be subject to tightened regulatory review and we could be exposed to government interference in China.
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Since 1979, PRC 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 PRC 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.
It may be difficult for U.S. regulators, such as the Department of Justice, the SEC, and other authorities, to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with regulatory authorities in the Unities States—including the SEC and the Department of Justice—may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC territory. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or our management based on United States or other foreign laws.
We are a holding company and conduct our business through our subsidiaries and controlled companies in the PRC. In addition, all of our operating assets are located in, and all of our other senior executive officers reside within, China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon those of our senior executive officers and directors that do not reside in the United States, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts. As a result, our public shareholders may face substantially more difficulty in protecting their interests through actions against our management or directors than would shareholders of a corporation with assets and management located in the United States.
The advent of recent healthcare reform directives from China’s central government may increase both competition and our cost of doing business.
Under the auspices of the Healthy China 2020 program (the “Program”), published by China’s National Development and Reform Commission in October 2008, the central government has set in motion a series of policies in fairly rapid succession aimed to improve China’s healthcare system. Such policies include (1) discouraging hospitals from both prescribing and dispensing medication, (2) the unveiling in April 2009 of formal healthcare reform guidelines aimed at improving the availability of and subsidies for “essential” drugs, and (3) the announcement in August 2009 of China’s National Essential Drugs List (“NEDL”), initially listing approximately three hundred (300) medicines to be sold at government-controlled prices. While an underlying goal of these policies is to make drugs more accessible to China’s poorer population, these policies also serve to create opportunities that in turn will intensify business competition in the Chinese retail drugstore industry, as well as competition for skilled labor and retail spaces. Additionally, we expect the NEDL to result in a rise in the number of government-subsidized community healthcare service centers, which in turn may erode the convenience and price advantage that our drugstores traditionally enjoy against hospitals.
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Our management will have broad discretion over the use of the proceeds we receive from our financing activities and might not apply the proceeds in ways that increase the value of your investment.
Our management will have broad discretion to use the net proceeds from any offerings we may conduct from time to time, and the shareholders will be relying on the judgment of our management regarding the application of these proceeds. Except as described in our offering books, the net proceeds received by us from our offerings will be added to our general funds and will be used for general corporate purposes. Our management might not apply the net proceeds from offerings of our securities in ways that increase the value of your investment and might not be able to yield a significant return, if any, on any investment of such net proceeds. You may not have the opportunity to influence our decisions on how to use such proceeds.
HJ Group is subject to restrictions on making payments to us.
We rely substantially on our contractual arrangements with HJ Group for our revenue. The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if these companies incur debt on their own in the future, the instruments governing the debt may restrict their ability to make payments. If we are unable to receive all of the revenues from our operations through these contractual arrangements, we may be unable to pay dividends on our ordinary shares.
Dividends we receive from our subsidiaries located in the PRC may be subject to PRC withholding tax.
The Enterprise Income Tax Law (“EIT Law”) provides that a maximum income tax rate of twenty percent (20%) is applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC. However, the State Council has reduced such rate to ten percent (10%) through the implementation regulations. We are a Cayman Islands holding company and substantially all of our income is derived from our subsidiaries and controlled companies located in the PRC. Therefore, dividends paid to us from China may be subject to the ten percent (10%) income tax if we are considered a “non-resident enterprise” under the EIT Law. If we are required to pay income tax for any dividends we receive from our PRC subsidiaries under the EIT Law and its implementation regulations, it may have a material and adverse effect on our net income and materially reduce the amount of dividends, if any, and we may pay to our shareholders.
We face risks related to disease epidemics and other outbreaks.
The economy, infrastructure and livelihood of the people of the PRC or such other jurisdictions may be materially and adversely affected by acts of God, acts of war and terrorism, natural disasters, riots, epidemics and other disasters which are beyond our control. Our business, financial condition and results of operations may be adversely affected if these events occur.
For example, epidemics threaten people’s lives and may adversely affect their livelihood as well as their living and consumption patterns. The occurrence of an epidemic is beyond our control, and we cannot assure you that the outbreak of coronavirus (including COVID-19), severe acute respiratory syndrome, the H5N1 strain of avian influenza, the H1N1 strain of swine flu, the Zika virus or any other epidemics or pandemics will not happen. Any epidemic or pandemic occurring, such as the most recent outbreak of COVID-19, in the PRC, or even in areas outside of the PRC, may severely affect and restrict the level of economic activity as the government may impose regulatory administrative measures quarantining affected areas or other measures to control the outbreak of the disease, which in turn may adversely affect our business, financial condition and results of operations. Acts of war and terrorism may cause damage or disruption to us or our employees, facilities, markets, suppliers or customers, any of which may adversely impact our revenue, cost, financial condition and results of operations or the trading price of our securities. Potential war or terrorist attacks may also cause uncertainty and cause our business to suffer in ways that we cannot currently predict.
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Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in the PRC. If our competitors engage in these practices, they may receive preferential treatment in the PRC, giving them an advantage in securing business, which would put us at a disadvantage. We cannot provide assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
At various times in recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between the two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our ordinary shares.
Our auditor, YCM CPA Inc., is headquartered in California, and is subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our ordinary shares could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act.
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
Our independent registered public accounting firm issued an audit opinion on the financial statements included in our annual reports filed with the SEC. Our independent registered public accounting firm’s audit documentation related to their audit reports included in our annual reports is located in China, and audit procedures take place within China’s borders. As auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB.
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On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA, which became effective on May 5, 2021. We will be required to comply with these rules if the SEC identifies our auditors as having a “non-inspection” year under a process to be subsequently established by the SEC.
On May 13, 2021, the PCAOB proposed a new rule for implementing the HFCAA. Among other things, the proposed rule provides a framework for the PCAOB to use when determining, under the HFCAA, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The proposed rule would also establish the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the board of the PCAOB can modify or vacate its determinations. The proposed rule was adopted by the PCAOB on September 22, 2021 and approved by the SEC on November 5, 2021.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two, thus reducing the time period before the securities of such foreign companies may be prohibited from trading or delisted. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law, which officially reduce the number of years that the auditor is not subject to inspection to two consecutive years.
The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above. The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to the PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to the PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
On December 2, 2021, the SEC issued amendments to finalize the interim final rules previously adopted in March 2021, and established procedures to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC (the “Statement of Protocol”), which is intended to enable the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong. According to a statement released by the PCAOB, the Statement of Protocol (i) provides the PCAOB with sole discretion to select the firms, audit engagements and potential violations it inspects and investigates without consultation with, nor input from, Chinese authorities, (ii) puts procedures in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed and (iii) provides the PCAOB with direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates. While the Chairs of both the PCAOB and the SEC made statements supporting the Statement of Protocol, both emphasized that this is only the first step in the process. As such, uncertainties remain regarding how the Statement of Protocol will be implemented and how it will impact China-based issuers and there is no assurance that the PCAOB will be able to execute, in a timely manner, its future inspections and investigations in a manner that satisfies the Statement of Protocol. While the Statement of Protocol may lead to resolution of the previously identified issues, there can be no assurance that this will be the case.
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On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination.
While the HFCAA is not currently applicable to the Company because the Company’s current auditors are subject to PCAOB review, if this changes in the future for any reason, the Company may be subject to the HFCAA. The implications of this regulation if the Company were to become subject to it are uncertain. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted or prohibited from being traded on Nasdaq earlier than would be required by the HFCAA. If our ordinary shares is unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase the ordinary shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares.
Our auditor, the independent registered public accounting firm that issues the audit report for the year ended March 31, 2024 included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Irvine, California and has been inspected by the PCAOB in March 2023. In the event that, in the future, either there is any regulatory change or step taken by PRC regulators that does not permit YCM CPA Inc. to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the determinations so that our PRC operating entities will be subject to the HFCAA, as the same may be amended, you may be deprived of the benefits of such inspection which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including “over-the-counter” trading, may be prohibited, under the HFCAA. The recent developments would add uncertainties to our listing and we cannot assure you whether Nasdaq Capital Market or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.
Further, new laws and regulations or changes in laws and regulations in both the United States and China could affect our ability to list our shares on Nasdaq, which could materially impair the market for and market price of our ordinary shares.
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Risks Related to an Investment in Our Securities
To date, we have not paid any cash dividends and we do not estimate to distribute any cash dividends in the foreseeable future.
We do not anticipate paying cash dividends on our ordinary shares in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings for our operations.
Nasdaq may delist our ordinary shares from trading on the Nasdaq Capital Market for failing to maintain a minimum bid price of $1.00, which could limit investors’ ability to effect transactions in our ordinary shares and subject us to additional trading restrictions.
On June 15, 2023, the Company was first notified by the Nasdaq Stock Market LLC (“Nasdaq”), notifying us our failure to maintain a minimum bid price of $1.00 per share for 30 consecutive trading days under Nasdaq Listing Rules 5550(a)(2) and 5810(c)(3)(A). The Company was given its first 180-day extension, or until December 12, 2023 to regain compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum of 10 consecutive trading days.
On December 13, 2023, the Company was notified by the Nasdaq regarding a second 180-day extension from or until June 10, 2024 to regain compliance. Effective March 1, 2024, the Company effected a 1-for-20 reverse stock split.
On March 15, 2024, the Company received a compliance letter from Nasdaq notifying that as of March 14, 2024, the Company evidenced a closing bid price of its ordinary shares at or greater than the $1.00 per share minimum requirement for the last 10 consecutive business days, from March 1, 2024 through March 14, 2024. Nasdaq stated that accordingly, Jo-Jo Drugstores has regained compliance with Nasdaq Marketplace Rule 5550(a)(2).
We cannot provide assurance that we will remain compliant with the Bid Price Rule in the future. If Nasdaq delists our ordinary shares from trading on its exchange due to incompliance, we could face significant material adverse consequences including:
| ● | a limited availability of market quotations for our ordinary shares; | |
| ● | a limited amount of news and analyst coverage for our company; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
Although publicly traded, the trading market in our ordinary shares may be substantially less liquid than the average stock quoted on the Nasdaq Capital Market, and such low trading volume may adversely affect the price of our ordinary shares.
Although our securities has been listed on the Nasdaq Capital Market since April 22, 2010, the historical trading volume of our securities has generally been low. Limited trading volume will subject our ordinary shares to greater price volatility and may make it difficult for you to sell your shares at a price that is attractive to you.
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The market price for our stock may be volatile, and such volatility may subject us to securities litigation.
The market price for our stock may be volatile and, when compared to seasoned issuers, subject to wide fluctuations in response to various factors, many of which are beyond our control, including the following:
| ● | actual or anticipated fluctuations in our quarterly operating results; | |
| ● | changes in financial estimates by securities research analysts; |
| ● | conditions in the retail pharmacy markets; | |
| ● | changes in the economic performance or market valuations of other retail pharmacy operators; | |
| ● | announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments; | |
| ● | addition or departure of key personnel; | |
| ● | fluctuations of exchange rates between RMB and the U.S. dollar; | |
| ● | intellectual property litigation; and | |
| ● | general economic or political conditions in China. |
As an illustration of such volatility, the closing price of our ordinary shares during the fifty two (52) weeks preceding the date of this report ranged from a low of $2.65 to a high of $95.40. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
Techniques employed by manipulative short sellers in Chinese small-cap stocks may drive down the market price of our ordinary shares.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from the difference in the sale price of the borrowed securities and the purchase price of the replacement shares. As it is therefore in the short seller’s best interests for the price of the stock to decline, there have been incidents of short sellers publishing, or arranging to publish negative opinions in order to create negative market momentum. While traditionally these disclosed shorts have been limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firms and independent research analysts. These short attacks have, in the past, resulted in the selling of shares in the market, on occasion on a large scale and broad base. Issuers with business operations based in the PRC, that have limited trading volumes and that are susceptible to higher volatility levels than U.S. domestic large-cap stocks can be particularly vulnerable to such short attacks.
These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the SEC in Regulation Analyst Certification and, accordingly, the opinions they express may be based on distortion of the actual facts or, in some cases, fabrication of the facts. In light of the limited risks involved in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.
While we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called Anti-SLAPP statutes), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack and the rumors not dismissed by market participants, our stock will likely suffer from a temporary, or possibly long term, decline in market price.
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Other General Risk Factors
Changes in economic conditions and consumer confidence in China may influence the drugstore industry, consumer preferences and spending patterns.
Our business and revenue growth primarily depend on the size of the pharmaceutical market in China. As a result, our revenue and profitability may be negatively affected by changes in national, regional or local economic conditions and consumer confidence in China. In particular, as we focus on our expansion of pharmacies in metropolitan markets, where living standards and consumer purchasing power are relatively high, we are especially susceptible to changes in economic conditions, consumer confidence and customer preferences of the urban Chinese population. External factors beyond our control that affect consumer confidence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions, and acts of war or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our front-end and pharmacy sales and negatively impact our profitability. In addition, acts of war or terrorism may cause damage to our facilities, disrupt the supply of the products and services we offer in our stores, or adversely impact consumer demand. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to timely identify or otherwise effectively respond to changing customer preferences, and we may fail to optimize our product offering and inventory position.
The pharmaceutical industry in China is rapidly evolving and is subject to rapidly changing customer preferences that are difficult to predict. Our success depends on our ability to anticipate and identify customer preferences, and adapt our product selection to meet these preferences. In particular, we must optimize our product selection and inventory positions based on sales trends. We cannot provide assurance that our product selection, especially our selection of nutritional supplements and food products, will accurately reflect customer preferences at any given time. If we fail to accurately anticipate either the market for our products or customers’ purchasing habits or fail to respond to customers’ changing preferences promptly and effectively, we may not be able to adapt our product selection to customer preferences or make appropriate adjustments to our inventory positions, which could significantly reduce our revenue and have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to establish effective advertising, marketing and promotional programs.
Our success depends on our ability to establish effective advertising, marketing and promotional programs, including pricing strategies implemented in response to competitive pressures and/or to drive demand for our products. Our advertisements are designed to promote our brand, our corporate image and the prices of products available for sale in our stores. Our pricing strategies and value propositions must be appropriate for our target customers. If we are not able to maintain and increase the awareness of our pharmacy’s brand and the products and services we provide, we may not be able to attract and retain customers and our reputation may also suffer. We expect to incur substantial expenses in our marketing and promotional efforts to both attract and retain customers. However, our marketing and promotional activities may be less successful than we anticipate, and may not be effective at building our brand awareness and customer base. In addition, the government may impose restrictions on how marketing and promotional activities can be conducted. We cannot provide assurance that our current and proposed budget for marketing activities will be adequate to support our future growth. Failure to successfully execute our advertising, marketing and promotional programs may result in material decreases in our revenue and profitability.
Failure to maintain optimal inventory levels could increase our inventory holding costs or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.
We need to maintain sufficient inventory levels to operate both of our retail and wholesale businesses successfully as well as meet customer expectations. However, we must also guard against the risk of accumulating excess inventory. We are exposed to inventory risks as a result of rapid changes in product life cycles, changing consumer preferences, uncertainty of the success of product launches, seasonality, and manufacturer backorders and other vendor-related problems. We cannot provide assurance that we can accurately predict these trends and events and avoid over-stocking or under-stocking products. In addition, demand for products could change significantly between the time product inventory is ordered and the time it is available for sale.
When we begin selling a new product, it is particularly difficult to accurately forecast product demand. The purchase of certain types of inventory may require significant lead-time. As we carry a broad selection of products and maintain significant inventory levels for a substantial portion of our merchandise, we may be unable to sell such inventory in sufficient quantities or during the relevant selling seasons. Carrying excess inventory could increase our inventory holding costs, and failure to have inventory in stock when a customer orders or purchases it could cause us to lose that order or that customer, either of which could have a material adverse effect on our business, financial condition and results of operations.
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We may need additional capital, and the sale of equity securities could result in dilution to our shareholders, while debts may require us to make covenants restricting how we operate.
We believe that the aggregate amount of our current cash, anticipated cash flow from operations, available borrowings under our existing bank facilities, and personal loans from our principal shareholders should be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain credit facilities. The sale of additional equity securities could result in the dilution of our existing shareholders. We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. Even if we are able to obtain any requisite financing, the incurrence of additional indebtedness would result in increased debt service obligations, and could result in further operating and financing covenants that would restrict our freedom to operate our business, such as conditions that:
| ● | limit our ability to pay dividends or require us to seek consent for the payment of dividends; | |
| ● | increase our vulnerability to general adverse economic and industry conditions; | |
| ● | require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and | |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and our industry. |
Our brand names, trade secrets and other intellectual property are valuable assets. If we are unable to protect them from infringement, our business and prospects may be harmed.
We consider our pharmacy brand names to be valuable assets. We may be unable to prevent third parties from using such brand names without authorization, which may adversely affect our business and reputation, including the perceived quality and reliability of our products and services. We have five registered trademarks. We also own three domain names that we actively use in our business.
We rely on trade secrets to protect our know-how and other proprietary information, including pricing, purchasing, promotional strategies, customer lists and/or suppliers lists. As a result, our employees are required to sign employment agreements that contain confidentiality provisions as a condition of their employment with us. However, trade secrets are difficult to protect. While we believe we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. In addition, confidentiality agreements executed by the aforementioned individuals may not be enforceable or provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure.
If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, such efforts could be expensive and time-consuming, and the outcome unpredictable. Additionally, if our competitors independently develop information that is equivalent to our trade secrets or other proprietary information, we have little recourse to enforce our rights, and our business and prospects could be harmed.
Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights of others. However, since the validity, enforceability and scope of protection of intellectual property rights in the PRC are uncertain and still evolving, we may not be successful in prosecuting these cases. In addition, any litigation, proceeding or other efforts to protect our intellectual property rights could result in substantial costs and diversion of our resources, and could seriously harm our business and operating results. Furthermore, the degree of future protection of our proprietary rights is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. If we are unable to protect our trade names, trade secrets and other propriety information from infringement, our business, financial condition and results of operations may be materially and adversely affected.
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We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.
Our success depends, in large part, on our ability to use our proprietary information and know-how without infringing third party intellectual property rights. As litigation becomes more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of whom have substantial resources, may have or may obtain intellectual property protection that will prevent, limit or interfere with our ability to conduct our business in China. Moreover, the defense of intellectual property suits, including trademark infringement suits and related legal and administrative proceedings, can be both costly and time consuming and may significantly divert the efforts and resources of our management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:
| ● | pay damage awards; | |
| ● | seek licenses from third parties; | |
| ● | pay ongoing royalties; | |
| ● | redesign our product offerings; or | |
| ● | be restricted by injunctions, |
Each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase from our stores, which could have a material adverse effect on our financial condition and results of operations.
We face competition that could adversely affect our results of operations.
Our clinics compete with a large number and variety of healthcare facilities in their respective markets. There are numerous government-run and private hospitals and clinics available to the general populace. There can be no assurance that these or other clinics, hospitals or other facilities will not commence or expand such operations, which would increase their competitive position. Furthermore, there can be no assurance that a healthcare organization that having greater resources in the provision or management of healthcare services will not decide to engage in operations similar to those being conducted by us in Hangzhou.
We may need to obtain additional governmental approvals to open new drugstores. Our inability to obtain such approvals will have a material adverse effect on our business and growth.
According to the Measures on the Administration of Foreign Investment in the Commercial Sector (the “Measures”) promulgated by China’s Ministry of Commerce (the “MOC”), which became effective on June 1, 2004, a company that is directly owned by a foreign invested enterprise needs to obtain relevant governmental approvals before it opens new retail stores. However, there are no specific laws, rules or regulations with respect to whether such approvals are necessary for a company that is contractually controlled by a foreign invested enterprise. In addition, the Measures state that the MOC will promulgate a detailed implementation regulation to govern foreign invested enterprises engaging in drug sale. However, such implementation regulation has not yet been promulgated. Therefore, we cannot provide assurance that the MOC will not require such approvals to be obtained, or as to when any regulation of such requirements may be implemented. If additional governmental approvals are deemed to be necessary and we are unable to obtain such approvals on a timely basis or at all, our business, financial condition, results of operations and prospects, as well as the trading price of our ordinary shares, will be materially and adversely affected.
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The PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs.
In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008 (the “LC Law”). The LC Law formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, the LC Law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the LC Law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for ten (10) consecutive years or more or has had two (2) consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of implementing rules for the LC Law and the precedents for the enforcement of such a law, the standards and procedures set forth under the LC Law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the LC Law, downsizing of either more than twenty (20) people or more than ten percent (10%) of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract impossible. To date, there has been very little guidance and precedent as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the LC Law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, the LC Law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.
Fluctuations in the value of the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the U.S. dollar is affected by, among other things, changes in PRC’s political and economic conditions. We receive substantially all of our revenues in RMB. Under our current structure, our income is primarily derived from payments from the three (3) HJ Group companies. Shortages in the availability of foreign currency may restrict the ability of our subsidiaries and our PRC affiliated entities to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing Chinese foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The Chinese government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
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On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. In 2017, the RMB appreciated approximately 6.3% against the U.S. dollar. In 2018, however, the RMB depreciated approximately 5.7% against the U.S. dollar, and the trend continued in 2019. In 2020 and 2021, the RMB appreciated approximately 8.7% against the U.S. Dollar, but the RMB has sharply depreciated against the U.S. Dollar by 7.8% and 2.9%, respectively, in 2022 and 2023.With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces, international relations especially the trade tensions between U.S. and China, or government policies of PRC or U.S. may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
Fluctuations in the value of RMB may have a material adverse effect on your investment.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Our revenues, costs, and financial assets are mostly denominated in RMB, while our reporting currency is the U.S. dollar. Accordingly, this may result in gains or losses from currency translation on our financial statements. We rely entirely on fees paid to us by our affiliated entities in China. Therefore, any significant fluctuation in the value of RMB may materially and adversely affect our cash flows, revenues, earnings, financial position, and the value of, and any dividends payable on, our stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would, to the extent that we need to convert U.S. dollars into RMB for such purposes, make any new RMB denominated investments or expenditures more costly to us. An appreciation of RMB against the U.S. dollar would result in foreign currency translation gains for financial reporting purposes when we translate our RMB denominated financial assets into U.S. dollars, as the U.S. dollar is our reporting currency.
In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollars without giving effect to any underlying change in our business or results of operations. The income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.
The economy of China had experienced unprecedented growth. This growth has slowed in the recent years, and if the growth of the economy continues to slow or if the economy contracts, our financial condition may be materially and adversely affected.
The rapid growth of the Chinese economy had historically resulted in widespread growth opportunities for industries across China. This growth has slowed in the recent years. As a result of the global financial crisis due to COVID-19, and Ukraine War, and the inability of enterprises to gain comparable access to the same amounts of capital available in past years, there may be an adverse effect on the business climate and growth of private enterprises in China. An economic slowdown could have an adverse effect on our sales and may increase our costs. Further, if economic growth continues to slow, and if, in conjunction, inflation continues unchecked, our costs would be likely to increase, and there can be no assurance that we would be able to increase our prices to an extent that would offset the increase in our expenses.
In addition, a tightened labor markets in our geographic region may result in fewer qualified applicants for job openings in our facilities. Further, higher wages, related labor costs and other increasing cost trends may negatively impact our results.
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ITEM 4. INFORMATION ON THE COMPANY.
A. HISTORY AND DEVELOPMENT OF THE COMPANY.
Overview
We are a retailer and wholesale distributor of pharmaceutical and other healthcare products in the People’s Republic of China (“PRC” or “China”). Prior to acquiring Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”) in August 2011 (see “Our Corporate History and Structure - HJ Group” below), we were primarily a retail pharmacy operator. As of March 31, 2024, we have one hundred and twenty-seven (127) store locations under the store brand “Jiuzhou Grand Pharmacy” in Hangzhou city. We acquired four single drugstores in fiscal 2021. After the acquisition, we liquidated them and then opened four new stores with the four licenses of local government medical insurance reimbursement program. On the other side, we have been concentrating on new stores within Hangzhou metropolitan area and opened fourteen stores in the fiscal year 2024. As China has been successfully controlling the spread of COVID-19, and the recurrences of the pandemic have not materially affected our business, the negative impacts are limited.
We currently operate in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale business selling products similar to those we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”). All of the above business are performed in China with no international sales.
Our stores provide customers with a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, TCM, personal and family care products, and medical devices, as well as convenience products, including consumable, seasonal, and promotional items. Additionally, we have doctors licensed in both western medicine and TCM on site for consultation, examination and treatment of common ailments at scheduled hours. Four (4) stores have adjacent medical clinics offering urgent care (to provide treatment for minor ailments such as sprains, minor lacerations, and dizziness that can be treated on an outpatient basis), TCM (including acupuncture, therapeutic massage, and cupping) and minor outpatient surgical treatments (such as suturing). Our stores vary in size, but presently average close to 200 square meters per store. We attempt to tailor each store’s product offerings, physician access, and operating hours to suit the community where the store is located.
We operate our pharmacies (including the medical clinics) through the following companies in China that we manage through contractual arrangements (refer to “Contractual Arrangements with HJ Group and the Key Personnel” below in this report regarding the details of contractual arrangements:
| ● | Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), which we control contractually, operates our “Jiuzhou Grand Pharmacy” stores; |
| ● | Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) (“Jiuzhou Clinic”), which we control contractually, operates one (1) of our three (3) medical clinics; and |
| ● | Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”), which we control contractually, operates our other medical clinics. |
We also offer OTC drugs and nutritional supplements for sale through a website (www.dada360.com) operated by Jiuzhou Pharmacy. For the fiscal year ended March 31, 2024, retail revenue, including pharmacies, medical clinics accounted for approximately 49.0% of our total revenue, while online pharmacy revenue accounted for 20.6% of our total revenue.
Since August 2011, we have operated a wholesale business through Jiuxin Medicine, distributing third-party pharmaceutical products (similar to those carried by our pharmacies) primarily to trading companies throughout China. Jiuxin Medicine is wholly owned by Jiuzhou Pharmacy. For the fiscal year March 31, 2024, wholesale revenue accounted for approximately 30.4% of our total revenue. In addition, Jiuxin Medicine supplies 96.8% of the inventory of Jiuzhou Pharmacy worth $77,054,670 in the fiscal year March 31, 2024.
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We also have a herb farming business cultivating and wholesaling herbs used for TCM. This business is conducted through Hangzhou Qianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned subsidiary. During the fiscal year ended March 31, 2024, our herb farming business generated approximately 0% of our retail revenue.
Throughout this report, we will sometimes refer to Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiaries of Jiuzhou Pharmacy, collectively as “HJ Group.”
Corporate History
Information relating to our corporate history is incorporated by reference from our annual report on Form 20-F for the fiscal year March 31, 2023 filed with the SEC on June 15, 2023 (the “2023 Annual Report”) under the caption “Corporate History.”
Contractual Arrangements with HJ Group and the Key Personnel
Information relating to the contractual arrangements with HJ Group and the Key Personnel is incorporated by reference from our 2023 Annual Report under the caption “Contractual Arrangements with HJ Group and the Key Personnel.”
Corporate Information
Our principal executive office is located at 4th Floor, Building 5, Renxin Yaju, Gong Shu District, Hangzhou City, Zhejiang Province, and China. Our main telephone number is +86-571-88219579. Our website is www.jiuzhou360.com. We routinely post important information on our website. The information contained on our website is not a part of this annual report.
Our transfer agent is Equiniti Trust Company, , LLC, whose address is 48 Wall Street, Floor 23 New York, NY 10005, and whose telephone number is (800) 468-9716.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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B. BUSINESS OVERVIEW.
Pharmacies
As of March 31, 2024, we currently have one hundred and twenty-seven (127) pharmacies throughout Hangzhou, the provincial capital of Zhejiang and neighborhood cities. Pharmacy sales accounted for approximately 95.4% of our retail revenue, and 46.7% of our total revenue, for the fiscal year ended March 31, 2024. We offer primarily third-party products at our pharmacies, including:
| ● | Approximately 1,460 prescription drugs (345 of which require a physician’s prescription and the remainder requiring customer personal information registration only), sales of which accounted for approximately 33.4% of our retail revenue for the fiscal year ended March 31, 2024; |
| ● | Approximately 1,722 OTC drugs, sales of which accounted for approximately 41.7% of our retail revenue for the fiscal year ended March 31, 2024; |
| ● | Approximately 916 nutritional supplements, including a variety of healthcare supplements, vitamin, mineral and dietary products, sales of which accounted for approximately 13.1% of our retail revenue for the fiscal year ended March 31, 2024; |
| ● | TCM, including drinkable herbal remedies and pre-packaged herbal mixtures for making soup, sales of which accounted for approximately 4.5% of our retail revenue for the fiscal year ended March 31, 2024; |
| ● | Sundry products (i.e., personal care products such as skin care, hair care and beauty products, convenience products such as soft drinks, packaged snacks, and other consumable, cleaning agents, stationeries, and seasonal and promotional items tailored to local consumer demand for convenience and quality), sales of which accounted for approximately 1.5% of our retail revenue for the fiscal year ended March 31, 2024; and |
| ● | Medical devices (i.e., family planning and birth control products, early pregnancy test products, portable electronic diagnostic apparatus, rehabilitation equipment, and surgical tools such as hemostats, needle forceps and surgical scissors), sales of which accounted for approximately 5.9% of our retail revenue for the fiscal year ended March 31, 2024. |
We favor retail locations in well-established residential communities with relatively concentrated consumer purchasing power or are located in close proximity to local hospitals, and evaluate potential store sites to assess consumer traffic, visibility and convenience. Depending on its size, each drugstore has between two (2) to twenty-five (25) pharmacists on staff, all of whom are properly licensed. We only accept prescriptions from licensed health care providers, and verify the validity, accuracy, and completeness of all prescriptions. We also ask all prescription customers to disclose their drug allergies, current medical conditions, and current medications. Most pharmacies also maintain a TCM counter staffed by licensed herbalists.
After opening, a location without SHI (Social Health Insurance) coverage may take up to one year to achieve our projected revenue goals for that particular location. Various factors influence individual store revenue including, but not limited to: location, nearby competition, local population demographics, square footage, and government insurance coverage.
All of our one hundred and twenty-seven (127) of our drugstores are located in Hangzhou city.
To enhance our customers’ experience, we have licensed physicians available at several of our “Jiuzhou Grand Pharmacy” locations for consultation, examination and treatment of common ailments at scheduled hours. In addition, our Daguan, Wenhua, Xiasha and Yueming stores have adjoining medical clinics that provide urgent care (for conditions such as sprains, minor lacerations, and dizziness), TCM treatments (including acupuncture, therapeutic massage, moxibustion, and cupping), and minor outpatient surgical treatments (such as suturing).
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To ensure quality and personal attention for patients, we employ only licensed doctors and certified nurses and technicians. Patient treatment at our five (5) Jiuzhou Clinics and Jiuzhou Service, follow nationally established clinical practice guidelines from China’s Ministry of Health. We currently have seventy-seven (77) physicians and thirty-eight (38) clinic staff. In-store consultations and examinations by our physicians are provided free-of-charge to ensure that customers are being prescribed and taking the appropriate medication for their ailments, and to afford customers convenience.
We view our medical services as more consumer-driven than other health care specialties, because consumers requiring the types of medical services that we provide often seek treatment on their own accord. We have developed our medical services to respond to the public need for convenient access to medical consultations and/or care and the significant savings that we can provide as compared to a more traditional medical setting such as a hospital. Many of our patients often need immediate access to medical services, do not have a regular physician, or may lack suitable alternatives. Patient flow is derived from the physical presence of our drugstores, not from pre-existing doctor-patient relationships or referrals from other healthcare providers.
We generate limited revenue directly from our clinics. However, our clinic brings patients into our stores, where they then purchase medical products.
Online Sales
Since May 2010, we have been retailing OTC drugs and nutritional supplements on the Internet at www.dada360.com. Before November 2015, our subsidiary Quannuo Technology operated and maintained the website pursuant to the Internet Pharmaceutical Transaction Service Qualification Certificate issued by the National Medical Products Administration (the “NMPA”) of Zhejiang Province, which allows us to engage in online retail pharmaceutical sales throughout China. As we sold all our equity interests in Quannuo Technology in November 2015, we have transferred our online pharmacy operation function to Jiuzhou Pharmacy. We have established payment methods with banks and online intermediaries such as Alipay or Wechat Pay, and are cooperating with business-to-consumer online vendors such as Taobao, JD.com or Pinduoduo. By using Taobao’s platform in addition to our own website as mentioned above, we can be exposed to a wider range of customers.
Online sales accounted for approximately 20.6% of our total revenue, for the fiscal year ended March 31, 2024. Online sales accounted for approximately 21.8% of our total revenue, for the fiscal year ended March 31, 2023. Online sales accounted for approximately 18.4% of our total revenue, for the fiscal year ended March 31, 2022.
Wholesale
Since acquiring Jiuxin Medicine in August 2011, we have been distributing third-party products primarily to drug distributors throughout China, including:
| ● | Approximately 1,542 prescription drugs, the sales of which accounted for approximately 65.5% of our wholesale revenue for the fiscal year ended March 31, 2024 as compared to approximately 1,615 prescription drugs, the sales of which accounted for approximately 65.4% of our wholesale revenue for the fiscal year ended March 31, 2023; |
| ● | Approximately 1,793 OTC drugs, the sales of which accounted for approximately 24.1% of our wholesale revenue for the fiscal year ended March 31, 2024 as compared to approximately 1,886 OTC drugs, the sales of which accounted for approximately 31.1% of our wholesale revenue for the fiscal year ended March 31, 2023; |
| ● | Approximately 841 nutritional supplements, the sales of which accounted for approximately 1.6% of our wholesale revenue for the fiscal year ended March 31, 2024 as compared to approximately 813 nutritional supplements, the sales of which accounted for approximately 0.9% of our wholesale revenue for the fiscal year ended March 31, 2023; |
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| ● | TCM products, the sales of which accounted for approximately 0.8% of our wholesale revenue for the fiscal year ended March 31, 2024; |
| ● | Sundry products, the sales of which accounted for approximately 1.5% of our wholesale revenue for the fiscal year ended March 31, 2024; and |
| ● | Medical devices, the sales of which accounted for approximately 6.5% of our wholesale revenue for the fiscal year ended March 31, 2024. |
Wholesale revenue increased primarily as a result of our ability to resell certain products, which our retail stores made large orders on, to other vendors. As our retail drugstores achieved large quantity sales of certain brand name merchandise, we were able to negotiate for lower purchase prices than the market level on such merchandise. As a result, certain vendors who were unable to obtain better prices than ours, will turn to us for such merchandise, leading the wholesale volume to grow. On the other side, we have been trying to act as a local agent for well-known health products in Zhejiang Province. For example, we kept a strategic cooperation agreement with Dong’a Gelatin (DEEJ) and act as its local sale agent in Zhejiang Province.
Herb Farming
From 2010 to the third quarter of fiscal 2013, we had been cultivating and harvested ten (10) types of herbs, such as fructusrubi (used in TCM to promote blood circulation), white atractylodes rhizome (used in TCM to treat physical and mental fatigue), atractylodesmacrocephala (used in TCM to control sweating), ginkgo seeds (used in TCM to treat asthma), and ginkgo trees used for TCM on approximately forty eight (48) acres of leased land in Lin’an, approximately thirty (30) miles from Hangzhou.
A ginkgo tree may have a growth period of up to twenty years before it is mature enough to harvest. Typically, the longer the plant grows, the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their market value in the future. We may continue growing trees and cultivating other herbs in the future.
Since we have not harvested any ginkgo trees, herb farming revenue accounted for no revenue for the fiscal years ended March 31, 2024 and 2023.
Our Customers
Retail Customers
For the fiscal year ended March 31, 2024, our pharmacies collectively served an average of 23,253 customers per day. We periodically conduct qualitative customer surveys to help us build a stronger understanding of our market position and our customers’ purchasing habits.
Pharmacy customers pay by cash, debit or credit cards, mobile devices or medical insurance cards under Hangzhou and Zhejiang’s medical insurance programs. During the fiscal year ended March 31, 2024, approximately 3% of our pharmacy revenue came from cash sales, 39% from Hangzhou’s and Zhejiang’s medical insurance cards (where most of our pharmacies are located), and 58% from debit and credit cards, Alipay and other charge cards.
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We maintain strict cash control procedures at our pharmacies. Our integrated information management system records the details of each sale, which we control from our headquarters. Depending on each location’s sales activities, cash may be deposited daily or several times per week in designated bank accounts.
For sales made to eligible participants in the national medical insurance program, we generally obtain payments from the relevant government social security bureaus on a monthly basis. See “Relevant PRC Regulations - Reimbursement under the National Medical Insurance Program.” According to relevant regulations, a drugstore usually needs to operate for at least one (1) year before it can apply to be licensed to accept Hangzhou’s medical insurance cards. As of the date of this report, one hundred and twenty-five (125) of our one hundred and twenty-seven (127) “Jiuzhou Grand Pharmacy” stores are licensed to accept medical insurance cards. Those of our stores that accept medical insurance cards are designated as such by clear signage on their storefront windows.
Online Sales Customers
Our online customers consist primarily of consumers between the ages of 20 and 40. While our website is accessible throughout China, approximately thirty percent (30%) of our online sales during the fiscal year ended March 31, 2024, were from Zhejiang and neighboring Jiangsu and Shanghai.
Wholesale Customers
Our wholesale customers are primarily third-party trading companies that purchase from us to resell to pharmacies throughout China. We also supply some hospitals and pharmacies, although they collectively make up less than 10.0% of our wholesale customers currently.
Herb Farming Customers
Our farming customers primarily include local herb vendors. For the fiscal year ended March, 31, 2024, we had not harvested or sold any herbs.
Marketing and Promotion
Information relating to our marketing and promotion activities is incorporated by reference from our 2023 Annual Report under the caption “Marketing and Promotion.” The updates relating to our marketing and promotion during the fiscal year of 2024 is as follows:
For the fiscal year ended March 31, 2024, approximately 39% of our customers used their rewards cards to make purchases.
Logistics
Information relating to our logistics is incorporated by reference from our 2023 Annual Report under the caption “Logistics.”
Suppliers
We currently source retail products from approximately 26 suppliers, including trading companies and direct manufacturers. We source wholesale products from approximately 401 suppliers, including many of those that provide our retail products. For the fiscal year ended March 31, 2024, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for thirteen point five percent (13.5%) of our total purchases. The suppliers are neither related to nor affiliated with us. For the fiscal year ended March 31, 2023, one supplier, HuaDong Pharmaceutical Co., Ltd. accounted for fifteen point eight percent (15.8%) of our total purchases. The suppliers are neither related to nor affiliated with us.
We believe that competitive sources are readily available for substantially all of the products we require for our retail and wholesale businesses. As such, we believe that we can change suppliers without any material interruption to our business. To date, we have not experienced any significant difficulty in sourcing our suppliers.
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Quality Control
Information relating to our quality control is incorporated by reference from our 2023 Annual Report under the caption “Quality Control.”
Competition
Information relating to the competition we face is incorporated by reference from our 2023 Annual Report under the caption “Competition.”
Intellectual Property
Information relating to the our intellectual property is incorporated by reference from our 2023 Annual Report under the caption “Intellectual Property.”
Employees
As of March 31, 2024, we had 1,003 employees combined in our retail and wholesale operations, consisting of 939 full-time and 64 part-time employees. The number of employees for each area of operations, and such employees as a percentage of our total workforce, are as follows:
| As of March 31, 2024 | ||||||||
| Employees | Percentage | |||||||
| Non-pharmacist store staff | 464 | 46.2 | % | |||||
| Pharmacists | 327 | 32.6 | % | |||||
| Management - non-pharmacists | 30 | 3.0 | % | |||||
| Physicians | 77 | 7.7 | % | |||||
| Non-physician clinic staff | 38 | 3.8 | % | |||||
| Wholesale - non-warehouse | 20 | 2.0 | % | |||||
| Online pharmacy - technicians | 2 | 0.2 | % | |||||
| Online pharmacy - non-technicians | 45 | 4.5 | % | |||||
| Total | 1,003 | 100.00 | % | |||||
We closely monitor the quality of the service provided by our employees at all levels, including in-store pharmacists and store staff who directly interact with our customers. We provide extensive training for newly recruited employees in the first three months of their employment. The training is designed to encompass a number of areas, such as knowledge of our products and effective customer service. In addition, we regularly carry out training programs on medicinal information, nutritional information, and selling skills for our store staff and in-store pharmacists. We believe these programs have played an important role in strengthening the capabilities of our employees.
Various drug manufacturers also pay us to have their representatives in our drugstores, and accordingly, we train them under our store policies and procedures.
Relevant PRC Regulations
Information relating to the relevant PRC Regulations is incorporated by reference from our 2023 Annual Report under the caption “Relevant PRC Regulations.” Please also refer to the above Risk Factor sections “Risks Related to Our Corporate Structure” and “Risks Related to Doing Business in China”.
Dividend Distribution
As of March 31, 2024, the accumulated balance of our statutory reserve funds reserves amounted to $1.31 million, and the accumulated losses of our consolidated PRC entities amounted to $40.85 million.
Environmental Matters
Information relating to the environmental matters is incorporated by reference from our 2023 Annual Report under the caption “Environmental Matters.”
42
C. ORGANIZATIONAL STRUCTURE
The following diagram illustrates our current corporate structure as of July 30, 2024:
The table below summarizes the status of the registered capital of our PRC subsidiaries and controlled companies as of the date of this report:
| Entity Name | Entity Type | Registered Capital | Registered Capital Paid | Due Date for Unpaid Registered Capital | ||||
| Jiutong Medical | Subsidiary | USD 2,600,000 | USD 2,600,000 | N/A | ||||
| Jiuzhou Clinic | VIE | N/A | N/A | N/A | ||||
| Jiuzhou Pharmacy | VIE | USD 733,500 | USD 733,500 | N/A | ||||
| Jiuzhou Service | VIE | USD 73,350 | USD 73,350 | N/A | ||||
| Jiuxin Management | Subsidiary | USD 30,000,000 | USD 27,500,000 | N/A | ||||
| Jiuxin Medicine | Subsidiary | USD 1,564,000 | USD 1,564,000 | N/A | ||||
| Qianhong Agriculture | Subsidiary | USD 1,497,000 | USD 1,497,000 | N/A | ||||
| Shouantang Technology | Subsidiary | USD 11,000,000 | USD 11,000,000 | N/A | ||||
| Shouantang Bio | Subsidiary | USD 162,900 | USD 162,900 | N/A | ||||
| Jiuyi Technology | Subsidiary | USD 5,000,000 | USD 2,500,000 | September 25, 2026 | ||||
| Linjia Medical | VIE | USD 2,979,460 | USD 1,489,730 | N/A | ||||
| Hongtong Service | VIE | USD 14,615 | USD 0 | N/A | ||||
| Jiuzhen Health | VIE | USD 14,615 | USD 14,615 | N/A | ||||
| Shouantang Clinic | VIE | USD 14,615 | USD 14,615 | N/A |
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The following is the tabular form condensed consolidating schedule depicting the financial position, cash flows and results of operations for the parent, the consolidated variable interest entity, and any consolidation adjustments separately - as of and for the years ending March 31, 2024, 2023 and 2022.
Consolidating Statements of Income Information
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | 123,994,053 | $ | 107,536,353 | $ | (76,989,329 | ) | $ | 154,541,077 | |||||||||
| Cost of revenue | - | 118,779,423 | 81,642,435 | (76,989,329 | ) | 123,432,529 | ||||||||||||||
| Gross profit | - | 5,214,630 | 25,893,918 | - | 31,108,548 | |||||||||||||||
| Operating Expenses | 5,676 | 4,769,364 | 31,057,131 | (1,189,060 | ) | 34,643,111 | ||||||||||||||
| Loss from operations | (5,676 | ) | 445,266 | (5,163,213 | ) | 1,189,060 | (3,534,563 | ) | ||||||||||||
| Other income, net | (808 | ) | (1,194,566 | ) | 558,557 | - | (636,817 | ) | ||||||||||||
| Provision for income tax | - | (41,363 | ) | 104,225 | - | 62,862 | ||||||||||||||
| Net loss | $ | (6,484 | ) | (707,937 | ) | (4,708,881 | ) | 1,189,060 | (4,234,242 | ) | ||||||||||
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | 235,936,050 | $ | (87,124,074 | ) | $ | 148,811,976 | |||||||||
| Cost of revenue | - | (1,739 | ) | 201,729,210 | (87,195,959 | ) | 114,531,512 | |||||||||||||
| Gross profit | - | 1,739 | 34,206,840 | 71,885 | 34,280,464 | |||||||||||||||
| Operating Expenses | 10,534,233 | 4,200,530 | 40,798,397 | (327,313 | ) | 55,205,847 | ||||||||||||||
| Loss from operations | (10,534,233 | ) | (4,198,791 | ) | (6,591,557 | ) | 399,198 | (20,925,383 | ) | |||||||||||
| Other income, net | (647 | ) | (2,261,118 | ) | 2,442,912 | - | 181,147 | |||||||||||||
| Provision for income tax | - | - | 394,541 | - | 394,541 | |||||||||||||||
| Net loss | $ | (10,534,880 | ) | (6,459,909 | ) | (4,543,186 | ) | 399,198 | (21,138,777 | ) | ||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Revenue | $ | - | $ | 181,179 | $ | 244,933,524 | $ | (80,722,148 | ) | $ | 164,392,555 | |||||||||
| Cost of revenue | - | 182,732 | 208,169,174 | (80,478,391 | ) | 127,873,515 | ||||||||||||||
| Gross profit | - | (1,553 | ) | 36,764,350 | (243,757 | ) | 36,519,040 | |||||||||||||
| Operating Expenses | 43,042 | 1,479,243 | 37,583,788 | 106,857 | 39,212,930 | |||||||||||||||
| Loss from operations | (43,042 | ) | (1,480,796 | ) | (819,438 | ) | (350,614 | ) | (2,693,890 | ) | ||||||||||
| Other income, net | (258 | ) | (21,931 | ) | 617,439 | - | 595,250 | |||||||||||||
| Provision for income tax | - | 247 | 1,099,479 | - | 1,099,726 | |||||||||||||||
| Net loss | $ | (43,300 | ) | (1,502,974 | ) | (1,301,478 | ) | (350,614 | ) | (3,198,366 | ) | |||||||||
44
Consolidating Balance Sheets Information
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 55,336 | $ | 78,718,328 | $ | 64,561,889 | $ | (48,278,463 | ) | $ | 95,057,090 | |||||||||
| Total liabilities | (58,302,810 | ) | 45,398,527 | 82,268,892 | 11,399,344 | 80,763,953 | ||||||||||||||
| Current assets | 55,336 | 20,931,574 | 51,313,687 | (2,618,235 | ) | 69,682,362 | ||||||||||||||
| Current liabilities | (58,302,810 | ) | 45,398,527 | 82,268,892 | 4,995,486 | 74,360,095 | ||||||||||||||
| Working capital | 58,358,146 | (24,466,953 | ) | (30,955,205 | ) | (7,613,721 | ) | (4,677,733 | ) | |||||||||||
| Accumulated deficit | (27,677,819 | ) | (22,005,227 | ) | (20,755,517 | ) | (3,068,683 | ) | (73,507,246 | ) | ||||||||||
| Total equity | 58,358,146 | 33,319,801 | (17,707,005 | ) | (59,677,805 | ) | 14,293,137 | |||||||||||||
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 11,820 | $ | 49,799,950 | $ | 77,392,401 | $ | (36,233,569 | ) | $ | 90,970,602 | |||||||||
| Total liabilities | (55,763,210 | ) | 24,027,715 | 94,103,563 | 11,935,382 | 74,303,450 | ||||||||||||||
| Current assets | 11,820 | 4,296,911 | 63,064,155 | (2,890,096 | ) | 64,482,790 | ||||||||||||||
| Current liabilities | (55,763,210 | ) | 24,027,715 | 94,103,563 | 4,167,166 | 66,535,234 | ||||||||||||||
| Working capital | 55,775,030 | (19,730,804 | ) | (31,039,408 | ) | (7,057,262 | ) | (2,052,444 | ) | |||||||||||
| Accumulated deficit | (27,671,335 | ) | (16,095,498 | ) | (22,993,830 | ) | (2,512,355 | ) | (69,273,018 | ) | ||||||||||
| Total equity | 55,775,030 | 25,772,235 | (16,711,162 | ) | (48,168,951 | ) | 16,667,152 | |||||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Total assets | $ | 46,700 | $ | 55,796,336 | $ | 90,528,406 | $ | (39,987,233 | ) | $ | 106,384,209 | |||||||||
| Total liabilities | (48,578,210 | ) | 17,576,098 | 107,864,555 | 6,782,980 | 83,645,423 | ||||||||||||||
| Current assets | 46,700 | 12,676,793 | 71,423,189 | (8,694,788 | ) | 75,451,894 | ||||||||||||||
| Current liabilities | (48,578,210 | ) | 17,576,098 | 107,864,555 | (2,414,047 | ) | 74,448,396 | |||||||||||||
| Working capital | 48,624,910 | (4,899,305 | ) | (36,441,366 | ) | (6,280,741 | ) | 1,003,498 | ||||||||||||
| Accumulated deficit | (17,136,455 | ) | (5,669,391 | ) | (24,496,890 | ) | (831,757 | ) | (48,134,493 | ) | ||||||||||
| Total equity | 48,624,910 | 38,220,238 | (17,336,149 | ) | (46,770,213 | ) | 22,738,786 | |||||||||||||
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Consolidating Cash Flows Information
| Year Ended March 31, 2024 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (2,596,084 | ) | $ | 2,966,213 | $ | (5,644,328 | ) | $ | 2,118,760 | $ | (3,155,439 | ) | |||||||
| Net cash used in investing activities | - | (8,156 | ) | (2,031,694 | ) | - | (2,039,850 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 2,639,600 | (5,113,399 | ) | 8,974,553 | 1,503,537 | 8,004,291 | ||||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | (57,264 | ) | 2,174,086 | (3,622,297 | ) | (1,505,475 | ) | ||||||||||||
| Net increase in cash and cash equivalents | 43,516 | (2,212,606 | ) | 3,472,617 | - | 1,303,527 | ||||||||||||||
| Year Ended March 31, 2023 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (7,359,880 | ) | $ | (1,882,172 | ) | $ | 3,892,614 | $ | 2,065,925 | $ | (3,283,513 | ) | |||||||
| Net cash used in investing activities | - | - | (311,719 | ) | (4,378 | ) | (316,097 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 7,325,000 | (1,320,030 | ) | (3,223,285 | ) | (415,529 | ) | 2,366,156 | ||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | (948,967 | ) | 59,506 | (1,646,017 | ) | (2,535,478 | ) | ||||||||||||
| Net increase in cash and cash equivalents | (34,880 | ) | (4,151,169 | ) | 417,117 | - | (3,768,932 | ) | ||||||||||||
| Year Ended March 31, 2022 | ||||||||||||||||||||
| PARENT | SUBSIDIARIES | VIE | Eliminations | Consolidated | ||||||||||||||||
| Net cash (used in)/provided by operating activities | $ | (43,300 | ) | $ | 3,283,202 | $ | (10,638,849 | ) | $ | 2,012,974 | $ | (5,385,973 | ) | |||||||
| Net cash used in investing activities | - | (63,291 | ) | (242,847 | ) | - | (306,138 | ) | ||||||||||||
| Net cash (used in)/provided by financing activities | 90,000 | (6,256,428 | ) | 12,810,723 | (1,807,397 | ) | 4,836,898 | |||||||||||||
| Effect of exchange rate on cash and cash equivalents | - | 1,499,349 | 228,374 | (205,577 | ) | 1,522,146 | ||||||||||||||
| Net increase in cash and cash equivalents | 46,700 | (1,537,168 | ) | 2,157,401 | - | 666,933 | ||||||||||||||
46
D. PROPERTY, PLANTS AND EQUIPMENT
We are headquartered in Hangzhou, China. We own three properties. Additionally, our current leased properties are as follows:
| Description | Location | Size (square meters) |
Lease
expiration date | |||
| Principal executive office | Renxin Yaju Building 5 Floor 4 Gong Shu District,Hangzhou City, Zhejiang Province, China |
184 | January 31, 2034 | |||
| Pharmacies (1) | Various locations in Hangzhou, Zhejiang Province, China | Range from 79 to 1,713 |
July
2022 to October 2033 | |||
| Farmland for herb cultivation (2) | Qianhong Township, Hangzhou, Zhejiang Province, China | 196,677 | February 1, 2040 | |||
| Land (2) | Lin’An District, Hangzhou, Zhejiang Province, China | 18,616 | February 1, 2040 |
| (1) | As of the date of this report, we maintain operating leases in connection with our 127 pharmacies. See Note 11, “Long Term Deposits”. The leases do not contain any material escalating lease payments or contingent rental payment terms. We must negotiate with the landlords for an extension of the current leases or enter into new leases upon their termination, upon which our landlords may request a rent increase. Under applicable PRC law, we have priority over other potential lessees with respect to the leased store space on the same terms. We also do not expect any significant difficulties in renewing the existing leases upon their expiration, where desired. Our community stores are normally relatively small in size and the fixtures inside such stores are easily movable. As a result, we do not expect our drugstore operations to be materially and adversely affected by any failure to renew current leases or enter into new leases. |
| (2) | We lease the land from the People’s Government of Qianhong Village under a 30-year lease entered in February 2010. The rent for the land was prepaid in full in May 2010. See Note 12, “Other Noncurrent Assets,” and Note 14, “Intangible Assets,” to the Financial Statements. |
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS.
The following discussion and analysis of our results of operations and financial condition for the fiscal years ended March 31, 2024, 2023 and 2022 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and “Description of Business” sections and elsewhere in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” “predict” and similar expressions to identify forward-looking statements. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this report. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future other than in compliance with the SEC rules and regulations.
Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See “Exchange Rates” at the end of this section for information concerning the exchanges rates at which Renminbi (“RMB”) were translated into U.S. Dollars (“USD” or “$”) at various pertinent dates and for pertinent periods.
Overview
We currently operate in four business segments in China: (1) retail drugstores, (2) online pharmacy, (3) wholesale of products similar to those that we carry in our pharmacies, and (4) farming and selling herbs used for traditional Chinese medicine (“TCM”).
47
Our drugstores offer customers a wide variety of pharmaceutical products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, TCM, personal and family care products, medical devices, and convenience products, including consumable, seasonal, and promotional items. Additionally, we have licensed doctors of both western medicine and TCM on site for consultation, examination and treatment of common ailments at scheduled hours. During the year ended March 31, 2021, the Company sold its Lin’An Jiuzhou Pharmacy Co., Ltd (“Lin’An Jiuzhou”), which runs ten stores in Linan City, to local investors for total proceeds of $125,514. On the other side, we have been concentrating on new stores within Hangzhou metropolitan area. As of March 31, 2024, we had 127 pharmacies in Hangzhou city under the store brand of “Jiuzhou Grand Pharmacy”.
Since May 2010, we have also been selling certain OTC drugs, medical devices, nutritional supplements and other sundry products online. Our online pharmacy sells through several third-party platforms such as Alibaba’s Tmall, JD.com and Amazon.com, and the Company’s own platform all over China. In fiscal year 2020, in order to keep competitive in certain third-party platforms such as Tmall, we have spent reasonable resources on marketing our products through these third-party platforms. Our sales through our own platform are primarily generated by customers who use their private commercial medical insurances package.
We operate a wholesale business through Jiuxin Medicine distributing third-party pharmaceutical products (similar to those carried by our pharmacies) primarily to trading companies and other local drugstores in China. We also farm certain herbs used in TCM but have not made sales in the year ended March 31, 2024.
During the COVID-19 outbreak, we experienced a decline in the number of customer visits at our stores. To avoid face-to-face contact, customers tended to shop online. In order to keep pace with customers’ change in their ways of shopping, we strengthened our O2O service team, which takes orders online, i.e. via mobile phone app, and delivers products to local community from our stores. The spread of the disease has been effectively controlled in China. In December 2022, the local government has eased its control and the demand on medical products surged therefrom. Currently, COVID-19 has no significant impact on our operation.
Critical Accounting Policies and Estimates
In preparing our audited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ materially from those estimates.
We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements.
When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. The critical accounting policies and related judgments and estimates used to prepare our financial statements are identified in Note 2 to our audited consolidated financial statements accompanying in this report.
Revenue recognition
In May 2014, the FASB issued ASU No. 2014-09, which creates Topic 606, Revenue from Contracts with Customers. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method. On April 1, 2018, we adopted the guidance in ASC 606 and all the related amendments and applied the new revenue standard to all contracts using the modified retrospective method. Based on the new standard our revenue recognition policies related to membership rewards programs has changed. Membership rewards, usually membership points, are accumulated by customers based on their historical spending levels. The Company has determined that there is an additional performance obligation to those customers at the time of the initial transaction. The customers can then redeem these points against the prices of merchandises they purchase in the future. At the end of each period, unredeemed membership rewards are reflected as a contract liability. The adoption of the new revenue standard was not material and is not expected to be material to our net income on an ongoing basis.
48
Impairment of definite-lived intangible assets
The Company evaluates the recoverability of definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. These long-lived assets are grouped and evaluated for impairment at the lowest level at which individual cash flows can be identified. When evaluating these long-lived assets for potential impairment, the Company first compares the carrying amount of the asset group to the asset group’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than that carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges).
The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns.
In the years ended March 31, 2024 and 2023, 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 did not record an impairment for the years ended March 31, 2024 and 2023.
Results of Operations
Comparison of years ended March 31, 2024, 2023 and 2022
The following table summarizes our results of operations for the years ended March 31, 2024, 2023 and 2022:
| Years ended December 31, | ||||||||||||||||||||||||
| 2024 | 2023 | 2022 | ||||||||||||||||||||||
| Amount | Percentage of total revenue | Amount | Percentage of total revenue | Amount | Percentage of total revenue | |||||||||||||||||||
| Revenue | $ | 154,541,077 | 100.0 | % | $ | 148,811,976 | 100.0 | % | $ | 164,392,555 | 100.0 | % | ||||||||||||
| Cost of goods sold | $ | 123,432,529 | 79.9 | % | 114,531,512 | 77.0 | % | 127,873,515 | 77.8 | % | ||||||||||||||
| Gross profit | $ | 31,108,548 | 20.1 | % | $ | 34,280,464 | 23.0 | % | $ | 36,519,040 | 22.2 | % | ||||||||||||
| Selling expenses | $ | 27,385,587 | 17.7 | % | $ | 29,177,163 | 19.6 | % | $ | 30,876,959 | 18.8 | % | ||||||||||||
| General and administrative expenses | $ | 7,257,524 | 4.7 | % | $ | 15,668,684 | 10.5 | % | $ | 8,187,176 | 5.0 | % | ||||||||||||
| Stock based compensation | $ | - | 0 | % | $ | 10,360,000 | 7.0 | % | $ | - | 0 | % | ||||||||||||
| Impairment of long-lived assets | $ | - | 0 | % | $ | - | 0 | % | $ | 148,795 | 0.1 | % | ||||||||||||
| Loss from operations | $ | (3,534,563 | ) | (2.3 | )% | $ | (20,925,383 | ) | (14.1 | )% | $ | (2,693,890 | ) | (1.6 | )% | |||||||||
| Other Expense, net | $ | (636,817 | ) | (0.4 | )% | $ | 181,147 | 0.1 | % | $ | 595,250 | 0.4 | % | |||||||||||
| Change in fair value of derivative liability | $ | - | 0.0 | % | $ | - | 0.0 | % | $ | - | 0.0 | % | ||||||||||||
| Income tax expense | $ | 62,862 | 0.0 | % | $ | 394,541 | 0.3 | % | $ | 1,099,726 | 0.7 | % | ||||||||||||
| Net loss | $ | (4,234,242 | ) | (2.7 | )% | $ | (21,138,777 | ) | (14.2 | )% | $ | (3,198,366 | ) | (1.9 | )% | |||||||||
49
Revenue by Segment
Comparison of years ended March 31, 2024 and 2023
The following table breaks down the revenue for our four business segments for the years ended March 31, 2024 and 2023:
| For the years ended March 31, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| Amount | % of total revenue | Amount | % of total revenue | Variance by amount | % of change | |||||||||||||||||||
| Revenue from retail drugstores | $ | 75,678,470 | 49.0 | % | $ | 83,351,768 | 56.0 | % | $ | (7,673,298 | ) | (9.2 | )% | |||||||||||
| Revenue from online sales | 31,857,883 | 20.6 | % | 32,385,089 | 21.8 | % | (527,206 | ) | (1.6 | )% | ||||||||||||||
| Revenue from wholesale business | 47,004,724 | 30.4 | % | 33,075,119 | 22.2 | % | 13,929,605 | 42.1 | % | |||||||||||||||
| Revenue from farming business | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Total revenue | $ | 154,541,077 | 100.0 | % | $ | 148,811,976 | 100.0 | % | $ | 5,729,101 | 3.8 | % | ||||||||||||
Retail drugstores sales, which accounted for approximately 49.0% of total revenue for the year ended March 31, 2024, decreased by $7,673,298, or 9.2% compared to the year ended March 31, 2023, to $75,678,470. Same-store sales decreased by approximately $9,071,271 or 10.9%, while new stores contributed approximately $1,397,972 in revenue in the year ended March 31, 2024. However, after removing the impact of exchange rate fluctuation, the actual retail drugstores sales decreased 5.0%.
The decrease in our retail drugstore sales is primarily due to local consumption cutback, extremely competitive market and the temporary surge of sale in the second half of fiscal 2023, which is nonrecurring and is due to Chinese government’s sanction lift on COVID-19.
Because of the economy slowdown, local people tend to be more frugal and spend less. Except for prescription medicines, the sale of other products such as nutritional supplements and upscale merchandises used as gifts decreased. Unless the economy recovers quickly, the retail sales may continue to slow down.
The retail drugstore market has become saturated in China. In Hangzhou City, over 4,000 drugstores, including chain stores and single stores, make the city one of the most competitive drugstore markets in China. The local population per store becomes as low as 2,000. As such, the sales per store were negatively affected. In order to keep competitive, we have to adjust our product category or lower our prices continually, therefore, our store sales decreased.
In the second half of 2023, the government lifted the sanction on Covid 19. People were no longer quarantined and were able to travel, so we quickly experienced a Covid 19 outbreak. Because people had not prepared enough preventive and therapeutic medicines, they flooded into local drugstores for medicines. Our retail sales surged in that time period. However, the increase was temporary and we were able to achieve the same level of sales in fiscal 2024.
Our new stores have also contributed additional sales. Our store count is 114 at March 31, 2023 and 127 at March 31, 2024.
Our online pharmacy sales decreased by approximately $527,206 or 1.6% for the year ended March 31, 2024, as compared to the year ended March 31, 2023. The decrease was primarily caused by a decrease in sales via e-commerce platforms such as JD and Pinduoduo. Because the online prices are transparent, to be competitive in online sales, we have to keep low prices. More competitors came into the online retail sales market. As we do not have dominating power such as lowest prices or exclusive products, we may not be able to improve our sales significantly in the near future.
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Wholesale revenue increased by $13,929,605 or 42.1%. In the year ended March 31, 2024, Online platforms such as Pharmacist Help, Yiyao Help and Yao Help have become popular ways to transact medical products by bulk. The platforms attract a plenty of buyers and sellers, so both parties have extended opportunities to expose themselves. We have spent significant efforts in exploring these buyers with certain products at reasonable prices as a result, we are able to attract more buyers and promote our sales. We believe that selling on the modern wholesale platform may be a new growth point. Therefore, we are actively looking for potential acquisition targets with trading platform to strengthen our wholesale business.
In the years ended March 31, 2024 and 2023, we have not harvested and generated revenue from our farming business. We planted ginkgo trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the longer it grows the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their market value in the future.
Comparison of years ended March 31, 2023 and 2022
The following table breaks down the revenue for our four business segments for the years ended March 31, 2023 and 2022:
| For the years ended March 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Amount | % of total revenue | Amount | % of total revenue | Variance by amount | % of change | |||||||||||||||||||
| Revenue from retail drugstores | $ | 83,351,768 | 56.0 | % | $ | 84,228,492 | 51.2 | % | $ | (876,724 | ) | (1.0 | )% | |||||||||||
| Revenue from online sales | 32,385,089 | 21.8 | % | 30,219,364 | 18.4 | % | 2,165,725 | 7.2 | % | |||||||||||||||
| Revenue from wholesale business | 33,075,119 | 22.2 | % | 49,944,699 | 30.4 | % | (16,869,580 | ) | (33.8 | )% | ||||||||||||||
| Revenue from farming business | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Total revenue | $ | 148,811,976 | 100.0 | % | $ | 164,392,555 | 100.0 | % | $ | (15,580,579 | ) | (9.5 | )% | |||||||||||
Retail drugstores sales, which accounted for approximately 56.0% of total revenue for the year ended March 31, 2023, decreased by $876,724 or 1.0% compared to the year ended March 31, 2022, to $83,351,768. Same-store sales decreased by approximately $1,569,549, or 1.9%, while new stores contributed approximately $692,824 in revenue in the year ended March 31, 2023.However, after removing the impact of exchange rate fluctuation, the actual retail drugstores sales increased 5.6%.
The actual increase in our retail drugstore sales is primarily due to continuous efforts in promoting non-NHSA covered products, close cooperation with major suppliers, and contribution from the new store sales.
Due to stricter budget control on medical reimbursement program from local National Healthcare Security Administration (“NHSA”) and competitive market condition, we spent significant efforts in selecting and replacing our merchandises at stores. To minimize the effect from local NHSA’s budget control, we expand the categories of our merchandises. As a result, we were able to depend less on the medical reimbursement program and increase our cash sales.
In addition, to fight against our competitors, we have been closely working with our suppliers to conduct a series of market promotions in local communities. As a major player in local retail pharmaceutical market, our stores are densely located in major communities in Hangzhou City. As a prime local sales network, we were able to attract large pharmaceutical manufacturers to support us in performing a series of sale campaigns, in which large manufacturers provide ads, prices cutback and specialist support. As a result, our sales were able to increase slightly although NHSA tightened its budget.
Our new stores have also contributed additional sales. Our store count is 111 at March 31, 2022 and 114 at March 31, 2023.
Our online pharmacy sales increased by approximately $2,165,725, or 7.2% for the year ended March 31, 2023, as compared to the year ended March 31, 2022. The increase was primarily caused by an increase in sales via e-commerce platforms such as Tmall. We maintained a membership care program targeted at chronic disease customers. We have closely interacted with our members via WeChat by providing healthcare knowledge and reminding our customers to refill medicine. By implementing a personalized customer care program, we were able to promote our sales. Additionally, we increasingly cooperate with certain manufacturers to promote their products such as Dendrobium Candidum. These manufacturers reward us with lower supply prices and more advertising supports. As a result, we are able to better promote our sales.
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Prescription drugs used to be prohibited from sales online due to safety concern. However, because the nation has lifted the ban order, online prescription drug sales become popular. As a result, the sale of prescription drugs was $10,606,244 in the year ended March 31, 2023 as compared to $10,331,652 in the year ended March 31, 2022.
Wholesale revenue decreased by $16,869,580 or 33.8%. Hospitals are still the dominant drug distributors in China. Local hospitals usually have strong ties with their existing suppliers and we have not been able to make significant progress in becoming a major supplier to local hospitals. As a relatively small wholesale distributor in pharmaceutical products, our sales are subject to significant variance. Wholesale business usually carries low gross profit margin. However, we incurred labor, logistic and tax cost for our wholesale business. As a result, to keep reasonable profitability, we abandoned certain wholesales at low gross profit margin in the year ended March 31, 2023. As a result, the wholesale revenue declined.
In the years ended March 31, 2023 and 2022, we have not harvested and generated revenue from our farming business. We planted ginkgo trees during the year ended March 31, 2013. A ginkgo tree may have a growth period of up to twenty years before it is mature enough for harvest. Usually, the longer it grows the more valuable it becomes. We plan to continue cultivating the trees in order to maximize their market value in the future.
Gross Profit
The average gross margins for each of our four business segments for the years ended March 31, 2024, 2023 and 2022 are as follows:
| Year ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Average gross margin for retail drugstores | 29.9 | % | 32.2 | % | 32.0 | % | ||||||
| Average gross margin for online sales | 11.3 | % | 12.0 | % | 11.9 | % | ||||||
| Average gross margin for wholesale business | 10.4 | % | 10.9 | % | 12.0 | % | ||||||
| Average gross margin for farming business | N/A | N/A | N/A | |||||||||
Comparison of years ended March 31, 2024 and 2023
Gross profit decreased by $3,171,916 or 9.3% period over period primarily as a result of a decrease in gross profit provided by retail drugstores, which decreased significantly in the year ended March 31, 2024. At the same time, gross margin decreased from 23.0% to 20.1% due to lower retail drugstores profit margins.
Retail gross margins decreased. In order to control its budget, the local municipal health insurance agency adjusted down certain prices of drugs reimbursed by it from time to time. We actively negotiated with suppliers to lower the purchase price as well, so we can keep reasonable profit margin. However, certain pharmaceutical giant companies are not willing to lower their prices. On the other side, as overall drugstore market becomes more competitive, we had to lower our prices to keep our market shares. Unless the economy quickly recovers, we do not expect to keep a high retail profit margin.
Gross margin of online pharmacy sales decreased only slightly primarily due to the competitive market. Although we have spent significant efforts in promoting our profit margin, due to the competitive market, we have to keep competitive prices as online customers are very sensitive to prices, which are easily comparable among different website vendors. We do not expect significant increase in gross margin our online sales.
Wholesale gross margin slightly decreased primarily due to certain products with low profit margin we carried and sold to certain pharmaceutical vendors. In the year ended March 31, 2024,we have been actively looking for new buyers in certain emerging new platforms such as . As we have price advantages in quite a few products, we have attracted quite a few customers such as other local drugstores and clinics across the country. In order to attract these customers, we offered competitive prices. However, as we accumulate the sale volume by selling to more customers, we may negotiate and obtain lower purchase prices from our vendors. Eventually, we may be able to increase our wholesale profit margin.
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Comparison of years ended March 31, 2023 and 2022
Gross profit decreased by $2,238,576 or 6.1% period over period primarily as a result of a decrease in gross profit provided by wholesale business, which decreased significantly in the year ended March 31, 2023. At the same time, gross margin increased from 22.2% to 23.0% due to higher retail drugstores profit margins.
Retail gross margins increased slightly primarily reflecting our stable and balanced operation. As described in detail below, in order to increase the gross margin of our store sales, we have introduced certain popular products with high profit margin and lowered the sale percentile of DTC (Direct-to-Customer) products. However, extremely high profit margin products may hinder certain customers. As a matter of fact, certain popular brand products usually do not carry high profit margin but are crucial to retain customers. In other words, extremely high profit margin may have negative effect on overall sales volume. As a result, we try to balance our sales profit margin and sales volume.
Gross margin of online pharmacy sales increased only slightly primarily due to the competitive market. Although we have spent significant efforts in promoting our profit margin, due to the competitive market, we have to keep competitive prices as online customers are very sensitive to prices, which are easily comparable among different website vendors. We do not expect significant increase in gross margin our online sales.
Wholesale gross margin decreased primarily due to various products with different profit margin we carried and sold to certain pharmaceutical vendors. Although we have attempted to market our products to major local hospitals and other pharmacies, we have not been able to make significant progress. We are also actively looking at possible acquisition opportunities to increase our customer base in the wholesale business.
Selling and Marketing Expenses
Sales and marketing expenses for the year ended March 31, 2024 decreased by $1,791,576 or 6.1% as compared to the year ended March 31, 2023, primarily due to a decrease in expense related to Normal Nucleic Acid Testing (“NNAT”) requested by local government and a decrease in the sales and marketing expenses. In fiscal 2023, in response to the local government, we set up NNAT outposts adjacent to our stores. We subsidized our staff with each test they performed. As a comparison, we incurred no such expense in fiscal 2024. As a result, the expense related to NNAT decreased by approximately $0.88 million period over period. The sales and marketing expenses decreased by approximately $0.87 million, which primarily attributable to the decrease in fee charged by distribution channels resulting from the decrease in retail drugstores and online pharmacy sales. Overall, such expenses as a percentage of our revenue were 17.7% and 19.6% respectively, in the years ended March 31, 2024 and 2023.
Sales and marketing expenses for the year ended March 31, 2023 decreased by $1,699,796 or 5.5% as compared to the year ended March 31, 2022, primarily due to decrease in rent, offset by increase in the sales and marketing expenses. Because the COVID-19 National Control continued to impose restrictions in 2022 and impeded the local business significantly, we made significant efforts in renegotiating our rental agreements. As a result, the rent expense decreased by approximately $3.39 million. The sales and marketing expenses increased by approximately $1.91 million, which primarily reflects the increase in fee charged by distribution channels such as Tmall and JD as a percentage of online pharmacy sales. Overall, such expenses as a percentage of our revenue were 19.6% and 18.8% respectively, in the years ended March 31, 2023 and 2022.
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General and Administrative Expenses
General and administrative expenses for the year ended March 31, 2024 decreased by $8,411,160 or 53.7% as compared to the year ended March 31, 2023, primarily due to the decrease in bad debt expense. Such expenses as a percentage of revenue decreased to 4.7% from 10.5% for the same period a year ago. In the year ended March 31, 2024, we recorded a reduction of $0.22 million in the allowance account for bad debts as compared to the increase of $7.58 million in the allowance account for bad debts in FY2023.
General and administrative expenses for the year ended March 31, 2023 increased by $7,481,508 or 91.4% as compared to the year ended March 31, 2022, primarily due to the increase in bad debt expense. Such expenses as a percentage of revenue increased to 10.5% from 5.0% for the same period a year ago. In the year ended March 31, 2023, we recorded an increase in the allowance for bad debts of $7.58 million as compared to the increase in the allowance for bad debts of $1.32 million in FY2022.
Share-based Compensation
We recorded stock-based compensation of $0, $10,360,000 and $0 for the years ended March 31, 2024, 2023 and 2022. In April and December 2022, we issued a total of 3,000,000 shares of ordinary shares and recorded stock-based compensation of approximately $10.36 million.
Impairment of Long-lived Assets
We recorded an impairment of long-lived assets of $0, $0 and $148,795 for the year ended March 31, 2024, 2023 and 2022. In the year ended March 31, 2024, we evaluated the forest land use rights and did not record an impairment. In the year ended March 31, 2023, we evaluated the forest land use rights and did not record an impairment. In the year ended March 31, 2022, we evaluated the forest land use rights and recorded an impairment of $148,795.
Loss from Operations
As a result of the above, loss from operations was $3,534,563, $20,925,383 and $2,693,890 for the years ended March 31, 2024, 2023 and 2022, respectively. Our operating margin for the year ended March 31, 2024, 2023 and 2022 was (2.3) %, (14.1) % and (1.6) %, respectively.
Income Taxes
Our income tax expense for the year ended March 31, 2024 decreased by $331,679 as compared to the year ended March 31, 2023 due to a decrease in the effective rate resulting from an increase in profits in several business lines.
Our income tax expense for the year ended March 31, 2023 decreased by $705,185 as compared to the year ended March 31, 2022 due to an increase in the effective rate resulting from a decrease in profits in several business lines.
Net Loss
As a result of the foregoing, net loss was $4,234,242, $21,138,777 and $3,198,366 in the years ended March 31, 2024, 2023 and 2022.
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Accounts receivable
Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses. To prepare for potential loss in such accounts, we made corresponding reserves.
Our accounts receivable aging was as follows for the periods described below:
| From date of invoice to customer | Retail drugstores | Online Pharmacy | Drug wholesale | Herb farming | Total amount | |||||||||||||||
| 1- 3 months | $ | 6,663,872 | $ | 2,682,630 | $ | 5,225,356 | $ | - | $ | 14,571,858 | ||||||||||
| 4- 6 months | 2,806 | 909,673 | 932,319 | - | 1,844,798 | |||||||||||||||
| 7- 12 months | 43,068 | 8,589 | - | - | 51,657 | |||||||||||||||
| Over one year | 225,750 | 36,528 | 17,178 | - | 279,456 | |||||||||||||||
| Allowance for doubtful accounts | (704,482 | ) | (112,273 | ) | (106,911 | ) | - | (923,666 | ) | |||||||||||
| Total accounts receivable | $ | 6,231,014 | $ | 3,525,147 | $ | 6,067,942 | $ | - | $ | 15,824,103 | ||||||||||
Accounts receivable from our retail business mainly consist of reimbursements from local government health insurance bureaus and commercial health insurance programs. In the year ended March 31, 2024, we wrote off an approximately $56,170 collectible from provincial and Hangzhou City government insurance, as such amounts have been determined by the health insurance bureaus to be unqualified for reimbursement.
Accounts receivables from our online pharmacy business mainly consist of receivables from insurance company and a service company handling with insurance companies. As we continue to expand our business with commercial insurance company, our receivables from them increased. Additionally, certain receivables are from third-party platforms such as JD.com where we sell products. Usually, the third-party platforms will collect from customers ordering on their platforms and then reimburse us at a later date, such reimbursement periods times ranging from several days to a month after orders are placed.
Accounts receivable from our drug wholesale business consist of receivables from our customers such as pharmaceutical distributors and local drugstores primarily in Zhejiang Province. In fiscal 2023, we accelerated collection of certain aged accounts from customers which we no longer or rarely sold products to. By doing so, we are able to take better use of our cash. As a result, the overall reserve on wholesale accounts receivables decreased.
Subsequent to March 31, 2024 and through June 30, 2024, we collected approximately $6.1 million in receivables relating to our drugstore business, approximately $2.9 million in receivables relating to our online pharmacy business, approximately $5.4 million relating to our wholesale business, and $0 relating to our herb farming business.
Advances to suppliers
Advances to suppliers are mainly prepayments to secure certain products or services at favorable pricing. Since the acquisition of Jiuxin Medicine, we have gradually transferred almost all logistics services of our retail drugstores to Jiuxin Medicine. Jiuzhou Pharmacy only purchases certain non-medical products such as sundry. As a result, our retail chain made few advances to suppliers as of March 31, 2024. At the end of 2024 we had outstanding advances to suppliers with which we have ceased doing business. These advances have been fully reserved.
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Advances to suppliers for our drug wholesale business consist of prepayments to our vendors such as pharmaceutical manufacturers and other distributors. We typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery from and payments to our vendors while maintaining a provision for estimated credit losses based upon past experience and any supplier-specific issues such as the discontinuation of inventory supply that have been identified. If we are having difficulty receiving products from a vendor, we take the following steps: cease purchasing products from the vendor, ask for return of our prepayment promptly, and if necessary, take legal action. If all of these steps are unsuccessful, management then determines whether or not the prepayments should be reserved or written off. In fiscal 2024, in order to use our cash more efficiently, we accelerated the collection of deposits from quite a few suppliers, especially aged accounts. We chose to only leave deposits with critical suppliers who supply large quantities of merchandise. As a result, the outstanding advances to suppliers decreased dramatically.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations:
| Payments due by period | ||||||||||||||||||||
| Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Short-term loan payable | $ | 276,997 | 276,997 | - | - | - | ||||||||||||||
| Notes payable | 31,676,335 | 31,676,335 | - | - | - | |||||||||||||||
| Long-term loan payable | - | - | - | - | - | |||||||||||||||
| Total | $ | 31,953,332 | 31,953,332 | - | - | - | ||||||||||||||
Off-balance Sheet Arrangements
We do not have any outstanding financial guarantees or commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Exchange Rates
Our subsidiaries, the VIEs and affiliated companies in the PRC maintain their books and records in RMB, the lawful currency of the PRC. In general, for consolidation purposes, we translate their assets and liabilities into USD using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial statements are recorded as accumulated other comprehensive income.
The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the audited consolidated financial statements or otherwise disclosed in this report were as follows:
| March
31, 2024 |
March
31, 2023 |
March
31, 2022 | ||||
| Balance sheet items, except for the registered and paid-up capital, as of end of period/year | USD1: RMB 7.2203 | USD1: RMB 6.8676 | USD1: RMB 6.3393 | |||
| Amounts included in the statement of Operations and statement of cash flows for the period/ year ended | USD1: RMB 7.1671 | USD1: RMB 6.8516 | USD1: RMB 6.4180 |
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Inflation
We believe that inflation has not had a material effect on our operations to date.
B. LIQUIDITY AND CAPITAL RESOURCES
Our cash flows for the periods indicated are as follows:
| For the year ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net cash used in operating activities | $ | (3,155,439 | ) | $ | (3,283,513 | ) | $ | (5,385,973 | ) | |||
| Net cash used in investing activities | $ | (2,039,850 | ) | $ | (316,097 | ) | $ | (306,138 | ) | |||
| Net cash provided by financing activities | $ | 8,004,291 | $ | 2,366,156 | $ | 4,836,898 | ||||||
Net cash used in operating activities
For the year ended March 31, 2024 cash used in operating activities amounted to $(3,155,439), as compared to $(3,283,513) a year ago. The change is primarily attributable to an increase in net income of $16,904,535, an increase in accounts receivable of $727,315, an increase in cash provided by accounts payable of $4,236,698 and an increase in cash provided by other payables and accrued liabilities of $2,210,422, offset by a decrease in bad debt direct write-off and provision of $6,789,437, a decrease in inventories and biological assets of $1,177,071 and a decrease in stock compensation of $10,360,000.
For the year ended March 31, 2023 cash used in operating activities amounted to $(3,283,513), as compared to $(5,385,793) a year ago. The change is primarily attributable to a decrease in cash provided by inventories and biological assets of $2,045,648, a decrease in cash provided by customer deposits of $1,714,057, a decrease in cash provided by net loss of $17,940,411 offset by an increase of $10,360,000 in stock compensation, an increase in cash provided by accounts payable of $5,323,538.
Net cash used in investing activities
For the year ended March 31, 2024, net cash used in investing activities amounted to $(2,039,850), as compared to $(316,097) provided by investing activities a year ago. The change is primarily attributable to investment in a joint venture and purchases of long-term assets.
For the year ended March 31, 2023, net cash used in investing activities amounted to $(316,097), as compared to $(306,138) provided by investing activities a year ago. The change is primarily attributable to purchases of long-term assets.
Net cash provided by financing activities
For the year ended March 31, 2024, net cash provided by financing activities amounted to $8,004,291, as compared to $2,366,156 a year ago. The change is primarily due to notes payable and proceeds from short-term bank loan.
For the year ended March 31, 2023, net cash provided by financing activities amounted to $2,366,156, as compared to $4,836,898 a year ago. The change is primarily due to repayment of notes payable and proceeds from equity and debt financing.
As of March 31, 2024, we had cash of approximately $32,874,171. Our total current assets as of March 31, 2024, were $69,682,362 and total current liabilities were $74,360,095, which resulted in a working capital deficit of $4,677,733.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The Company has no research and development policy for the past three years.
D. TREND INFORMATION.
Industry and Market Outlook
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended March 31, 2024 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions.
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E. CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
The critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this annual report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. DIRECTORS AND SENIOR MANAGEMENT.
The following table identifies our current executive officers and directors as of the date of this report, their respective offices and positions, and their respective dates of election or appointment:
| Name | Age(1) | Position | Date
of Appointment | |||
| Lei Liu | 59 | Chief Executive Officer and Chairman of the Board of Directors | September 17, 2009 | |||
| Ming Zhao | 48 | Chief Financial Officer | August 1, 2011 | |||
| Li Qi | 52 | Director | October 23, 2009 | |||
| Caroline Wang (2) (3) (4) | 37 | Director | March 29, 2017 | |||
| Jiangliang He (2) (3) (4) | 61 | Director | September 4, 2018 | |||
| Genghua Gu (2) (3) (4) | 73 | Director | March 28, 2014 |
| (1) | As of the date of this report. |
| (2) | Member of the Audit Committee. |
| (3) | Member of the Compensation Committee. |
| (4) | Member of the Nominating Committee. |
Biographical Information of Our Current Directors and Executive Officers
Lei Liu has served as our Chief Executive Officer and Chairman of our Board of Directors since September 17, 2009. Mr. Liu is one of the three founders of Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Service & Public Health Service Co., Ltd. (“Jiuzhou Service”) (Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiaries of Jiuzhou Pharmacy, collectively as “HJ Group”), and has been the executive director of Jiuzhou Pharmacy since September 2003 and the supervising director of Jiuzhou Service since November 2005. From December 1997 to August 2003, Mr. Liu worked in Tai He Drugstore as a general manager. From September 1992 to November 1997, Mr. Liu was an administration official of Hangzhou Medical Junior College, his alma mater, where he was also a researcher and an anatomy instructor from September 1983 to July 1992. Mr. Liu has been a licensed researcher in the PRC since September 1988. As the founder and CEO responsible for our strategies and directions, Mr. Liu has been valuable to us and our Board of Directors.
Ming Zhao has served as our Chief Financial Officer since August 2011. From September 2010 to July 2011, Mr. Zhao was a senior manager at CFO Oncall, Inc., a financial consulting firm providing CFO services to U.S.-listed, China-based publicly traded companies. From December 2006 through August 2010, Mr. Zhao was a senior auditor at Sherb & Co., LLP. From January through June 2003, Mr. Zhao worked as a financial analyst at Microsoft Corporation. Mr. Zhao is a licensed certified public accountant. He graduated with a bachelor’s degree in accounting from Central University of Finance and Economic in Beijing in July 1999, and obtained a master’s degree in professional accounting from the University of Washington in December 2002.
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Li Qi is one of the three founders of HJ Group. Ms. Qi had served as our secretary since October 23, 2009 to September 4, 2018, and is currently the general manager of both Jiuzhou Pharmacy and Jiuzhou Service. From January 2000 to June 2003, Ms. Qi worked in Zhejiang Yikang Drugstore as a general manager. From October 1991 to January 2000, Ms. Qi worked in the Branch Hospital of Hangzhou No. 1 People’s Hospital as a nurse. Ms. Qi is a licensed TCM pharmacist in the PRC and is a 1991 graduate of Hangzhou Nurse School. As a founder and general manager of our two subsidiaries overseeing our day-to-day corporate operations, Ms. Qi is qualified to serve on our Board of Directors.
Caroline Wang has been a member of our Board since March 29, 2017. Ms. Wang has been a project manager with JC Group, a comprehensive industrial financial group which serves the “city management”, performing internal audit and projects management for a variety of financial products since October 2015. Prior to that, Ms. Wang served as a CFO assistant of Kandi Technologies Group, Inc. (Nasdaq: KNDI), a company engaged in the research, development, manufacturing, and sales of vehicle products. She was mainly responsible for consolidation of financial reports and internal control audits. From 2012 to 2015, Ms. Wang was an audit department assistant manager with KPMG Huazhen LLP Hangzhou Branch, conducting financial report audits and internal control audits for listing companies and also providing audit services to pre-IPO companies. None of these companies are related to or affiliated with the registrant. Ms. Wang holds a master’s degree in public administration from the London School of Economics and Political Science, and a bachelor’s degree in finance from Beijing Language and Culture University. The Board has determined that Ms. Wang has the qualification to serve as a member of the Board given her extensive financial, accounting and auditing experience, as well as her English and Chinese bilingual capabilities to facilitate the Board’s supervision of the management.
Jiangliang He, has extensive experience as a professional attorney. He has served as a partner in Dentons China, a large law firm with a presence in approximately 45 cities in China, since August 2008. From July 1997 to July 2008, he was a partner in the Zhejiang Jiuyao law firm. From July 1984 to June 1997, he was a professor at Hangzhou School of Law. Mr. He received his bachelor’s degree in law from Beijing University.
Genghua Gu is a retired physician, professor and published scientific researcher in the field of stomatology. From 2003 to 2013, Dr. Gu was a member of the Standing Committee of Zhejiang Province Political Consultative Conference. From 2000 to 2009, Dr. Gu was the Vice President of the Women’s Hospital of Zhejiang University’s School of Medicine (the “School of Medicine”), where, in addition to being a chief physician, professor and researcher, he was also in charge of logistics and financial control as part of the hospital’s management. From 1998 to 2000, Dr. Gu was the Vice President of the Second Affiliate Hospital of the School of Medicine (the “Affiliate Hospital”), where, in addition to his medical, teaching and research duties, he was also in charge of the hospital’s logistics. From 1995 to 1998, Dr. Gu served as the Deputy Magistrate with the Shuichang County Government in Zhejiang Province, in charge of the county’s culture, education and hygiene programs. From 1988 to 1995, Dr. Gu was the Head of the Medical Department at the Affiliate Hospital and was involved in planning and management of the medical department. Dr. Gu served as an oral surgeon from 1977 to 1988 at the Affiliate Hospital. Dr. Gu graduated from Shanghai Jiaotong University’s School of Medicine, Department of Stomatology in 1977. The Board has determined that Dr. Gu should serve as a director given his extensive medical and scientific research experience, as well as his government and hospital management and logistics experience.
Family Relationships
There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.
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Board Diversity
The Nominating Committee does not have a formal policy with respect to diversity. However, the Board of Directors and the Nominating Committee believe that it is essential that the members of the Board of Directors represent diverse viewpoints. In considering candidates for the Board of Directors, the Board of Directors and the Nominating Committee consider the entirety of each candidate’s credentials in the context of the factors mentioned above. The Company is currently in compliance with the diversity requirements of Nasdaq Rule 5605(f) and 5606, with three female Asian directors and three male Asian directors.
| Board Diversity Matrix (as of the date of this annual report) | ||
| Country of Principal Executive Offices | China | |
| Foreign Private Issuer | Yes | |
| Disclosure Prohibited under Home Country Law | No | |
| Total Number of Directors | 5 | |
| Part I: Gender Identity | Female | Male | Non- Binary |
Did
Not Disclose Gender |
||||||||||||
| Directors | 2 | 3 | 0 | 0 | ||||||||||||
| Part II: Demographic Background | ||||||||||||||||
| Underrepresented Individual in Home Country Jurisdiction | 0 | 0 | 0 | 0 | ||||||||||||
| LGBTQ+ | 0 | 0 | 0 | 0 | ||||||||||||
| Did Not Disclose Demographic Background | 0 | 0 | 0 | 0 | ||||||||||||
B. COMPENSATION.
Compensation of Directors and Executive Officers
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our principal executive officer and principal financial officer during the last two (2) fiscal years. No other executive officer received compensation in excess of $100,000 during the fiscal year ended March 31, 2024 and 2023.
| Summary Compensation Table | |||||||||||||||||||||||||||||||||||
| Name and Principal Position | Fiscal Year ended March 31, | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||||||
| Lei Liu, | 2024 | 90,000 | -0- | - | -0- | -0- | -0- | -0- | 90,000 | ||||||||||||||||||||||||||
| CEO (2) | 2023 | 90,000 | -0- | 1,691,800 | -0- | -0- | -0- | -0- | 1,781,800 | ||||||||||||||||||||||||||
| Ming Zhao, | 2024 | 88,000 | -0- | - | -0- | -0- | -0- | -0- | 88,000 | ||||||||||||||||||||||||||
| CFO | 2023 | 88,000 | -0- | 101,000 | -0- | -0- | -0- | -0- | 189,000 | ||||||||||||||||||||||||||
| (1) | Reflects the full fair value of stock issued during the applicable fiscal year for financial statement reporting purposes. |
| (2) | Salary as reported is based on interbank exchange rate of RMB 6.8516 to $1.00 on March 31, 2023 and RMB 7.1671 to $1.00 on March 31, 2024. |
Employment Agreements, Termination of Employment and Change-in-Control Arrangements
Except as described below, we currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control.
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Agreement with Ming Zhao
We entered into an employment agreement with Mr. Zhao dated as of August 1, 2011, under which Mr. Zhao is serving as our Chief Financial Officer for a term of two years commencing August 1, 2011, for annual compensation of $100,000, payable in monthly installments, as well as a one-time grant of 3,333 shares of our ordinary shares (the “Shares”) under our 2010 Equity Incentive Plan. The term of his employment was extended verbally for another two (2) years with an amended annual compensation of $88,000 starting from October 2012. The term of this employment was extended verbally for another one (1) year automatically (unless providing prior notice otherwise) with an annual compensation of $88,000 starting from October 2015. During his employment, Mr. Zhao is subject to certain restrictive covenants, including (i) prohibition against engaging in any work that competes with us and our business and soliciting our customers, potential customers and employees, and (ii) requirement to maintain our confidential information.
Mr. Zhao’s employment agreement terminates upon his death or disability. If Mr. Zhao is unable to perform his duties for 60 days during any 12 month period, we may terminate the employment agreement upon 30-day written notice. We may also terminate the employment agreement for cause, upon notice if at any time Mr. Zhao commits (a) fraudulent, unlawful or grossly negligent conduct in connection with his employment duties; (b) willful misconduct; (c) willful and continued failure to perform his duties; (d) any felony or any crime involving moral turpitude; (e) any violation of any of our material policies; or (f) any material breach of any written agreement with us. Mr. Zhao may terminate his employment agreement immediately upon written notice if we breach our agreement with him.
Outstanding Equity Awards at Fiscal Year Ended March 31, 2024
| Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||||
| Name | Number
of securities underlying unexercised options exercisable |
Equity incentive plan awards: number of securities underlying unexercised options unexercisable |
Equity incentive plan awards: number of securities underlying unexercised unearned options |
Option
exercise price ($) |
Option
expiration date |
Number
of shares or units of stock that have not vested |
Market value of shares or units of stock that have not vested ($) |
Equity incentive plan awards: number of unearned shares, units or other rights that have not vested |
Equity
incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($) |
||||||||||||||||||||||||||
| Lei Liu | - | - | - | - | - | - | - | - | $ | - | |||||||||||||||||||||||||
| Ming Zhao | - | - | - | - | - | - | - | - | $ | - | |||||||||||||||||||||||||
| Li Qi | - | - | - | - | - | - | - | - | $ | - | |||||||||||||||||||||||||
Equity Compensation Plan Information
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted- average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | |||||||||
| Equity compensation plans approved by security holders | - | - | - | |||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| TOTAL | - | - | - | |||||||||
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Discussion of Summary Compensation and Grants of Plan-based Awards Tables
A summary of certain material terms of our existing compensation plans and arrangements is set forth below.
On September 21, 2010, our Board of Directors approved a stock incentive plan for officers, directors, employees, and consultants entitled “China Jo-Jo Drugstores, Inc. 2010 Equity Incentive Plan” (the “Plan”). The maximum number of shares that may be issued under the Plan is 168,750 shares of our ordinary shares. The Plan was approved by our shareholders at our annual meeting held on November 2, 2010. On February 24, 2015, our Board of Directors adopted and approved Amendment No. 1 to the Plan to increase the number of shares of the Company’s ordinary shares available for issuance thereunder from 168,750 share limit to 360,417 shares. Amendment No. 1 was approved by the stockholders at the annual shareholders meeting on March 23, 2015. On January 27, 2016, our Board of Directors adopted and approved Amendment No. 2 to the Plan to increase the number of shares of the Company’s ordinary shares available for issuance thereunder from 360,417 share limit to 597,917 shares. Amendment No. 2 was approved by the stockholders at the annual shareholders meeting on March 23, 2016. Under the Plan, the Company may issue ordinary shares and/or options to purchase ordinary shares to our officers, directors, employees and consultants. The Plan is administered either by our Board of Directors or a committee that it designates comprising of at least two (2) “non-employee” directors. The board (or the committee, if one is designated) has full and complete authority, in its discretion, but subject to the express provisions of the Plan, to grant awards, to determine the number of awards to be granted and the time or times at which awards shall be granted; to establish the terms and conditions upon which awards may be exercised; to remove or adjust any restrictions and conditions upon awards; to specify, at the time of grant, provisions relating to exercisability of awards and to accelerate or otherwise modify the exercisability of any awards; and to adopt such rules and regulations and to make all other determinations deemed necessary or desirable for the administration of the Plan. On February 14, 2017, our Board of Directors adopted and approved Amendment No. 3 to the Plan to increase the number of shares of the Company’s ordinary shares available for issuance thereunder from 597,917 share limit to 808,039 shares. Amendment No. 3 was approved by the stockholders at the annual shareholders meeting on March 29, 2017. On March 26, 2018, the shareholders of the Company approved the Amendment No. 4 to the Plan which increased the total shares of ordinary shares available for issuance thereunder to 1,016,372. On June 30, 2018, the Compensation Committee of the Board approved the Amendment No. 5 to the Plan as The Tax Cuts and Jobs Act of 2017 removed the 162(m) qualified performance based compensation exemption to the $1 million cap on deductions for compensation to covered executives. Section 1.3.2 was in the Plan to permit grants under the Plan to fit within that exemption. As that exemption no longer applies for grants made in 2018 or thereafter, the Plan had been amended to remove the provisions intended to comply with that exemption, including the one in Section 1.3.2. of the Plan. On March 5, 2020, the shareholders of the Company approved the Amended and Restated 2010 Equity Incentive Plan, which in addition to the incorporation of the Amendment No. 4 and Amendment No. 5 to the Plan, clarified the term of the Plan in order to render the Plan being available for incentive stock options grants in the future and approved the proposal of adding a ten-year term to the Plan. The Plan, effective since November 2, 2010, shall terminate automatically on January 14, 2030 (the tenth anniversary of the Board’s approval of this Plan), unless terminated earlier by the Board, except with respect to Awards then outstanding. The Plan, as amended and restated, has authorized, with the stockholders’ approval previously obtained, to reserve a total of 1,016,372 shares of our ordinary shares for issuance under the Plan. As of March 31, 2024, there were 0 ordinary share available for future issuance under the Plan.
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Director Compensation
The following table provides compensation information for our directors during the fiscal year ended March 31, 2024:
| Director Compensation Table | |||||||||||||||||||||||||||||||
| Name | Fiscal Year ended March 31, |
Fees
Earned or Paid in Cash ($) |
Stock
Awards ($)(1) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($) |
Nonqualified
Deferred Compensation Earnings ($) |
All
Other Compensation ($) |
Total
($) |
|||||||||||||||||||||||
| Lei Liu (2) | 2024 | 90,000 | -0- | -0- | -0- | -0- | -0- | 90,000 | |||||||||||||||||||||||
| Li Qi (2) | 2024 | 68,000 | -0- | -0- | -0- | -0- | -0- | 68,000 | |||||||||||||||||||||||
| Caroline Wang | 2024 | 11,162 | -0- | -0- | -0- | -0- | -0- | 11,162 | |||||||||||||||||||||||
| Genghua Gu | 2024 | 5,000 | -0- | -0- | -0- | -0- | -0- | 5,000 | |||||||||||||||||||||||
| Jiangliang He | 2024 | 5,023 | -0- | -0- | -0- | -0- | -0- | 5,023 | |||||||||||||||||||||||
| Pingfan Wu | 2024 | 8,757 | -0- | -0- | -0- | -0- | -0- | 8,757 | |||||||||||||||||||||||
| (1) | Reflects dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes. |
| (2) | Compensation is reflected in the Summary Compensation Table on page 60 above. |
| (3) | On May 31, 2024, Ms. Pingfan Wu had resigned from her position as a member of the board of directors (the “Board”) due to personal reasons. The resignation of Ms. Wu did not result from any disagreement with the Company on any matter relating to the Company’s business operations, financial reporting or controls, policies or practices |
We do not currently have an established policy to provide compensation to members of our Board of Directors for their services in that capacity, although we have entered into certain agreements with some of our directors as described below. We intend to develop such a policy in the near future.
Agreement with Genghua Gu
On December 9, 2013, we entered into an agreement with Dr. Gu in the form of a director offer letter, pursuant to which we have agreed to compensate him $6,000 annually for his services, payable in monthly installments on the last day of each month. Additionally, he is entitled to be included as an insured under our directors and officers insurance policy.
Agreement with Caroline Wang
On March 29, 2017, we entered into an agreement with Ms. Wang in the form of a director offer letter pursuant to which we agreed to compensate her $11,162 (RMB80,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.
Agreement with Jiangliang He
On September 4, 2018, we entered into an agreement with Mr. He in the form of a director offer letter pursuant to which we agreed to compensate her $5,023 (RMB36,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy.
Agreement with Pingfan Wu
On October 26, 2018, we entered into an agreement with Ms. Wu in the form of a director offer letter pursuant to which we agreed to compensate her $9,349 (RMB60,000) annually for her services. Additionally, she is entitled to be included as an insured under our directors and officers insurance policy. On May 31, 2024, Ms. Pingfan Wu had resigned from her position as a member of the board of directors (the “Board”) due to personal reasons.
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C. BOARD PRACTICES.
The Board of Directors and Committees
We seek directors with established strong professional reputations and experience in areas relevant to the strategy and operation of our businesses. We also seek directors who possess the qualities of integrity and candor, who have strong analytical skills, and who are willing to engage with the management and each other in a constructive and collaborative fashion. We also seek directors who have the ability and commitment to devote significant time and energy to service on the board and its committees. We believe that all of our directors meet the foregoing qualifications.
Based on the information submitted by Ms. Caroline Wang, Mr. Jiangliang He, Ms. Pingfan Wu and Dr. Genghua Gu, our Board of Directors has determined that each of them is independent under Rule 5605(a)(2) of The Nasdaq Listing Rules.
Our Board of Directors has three (3) committees. During the fiscal year ended March 31, 2024, our Board of Directors and its committees held the following number of meetings and took the following number of actions by unanimous written consent:
| Meetings | Unanimous written consents | |||
| Board of Directors | 2 | 3 | ||
| Audit Committee | 1 | 1 | ||
| Compensation Committee | 1 | 0 | ||
| Nominating Committee | 1 | 0 |
Audit Committee
Our Audit Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”, and is composed of our three (3) independent directors. Our Board of Directors has determined, based on information furnished by Ms. Caroline Wang and other available information, that she meets the requirements of an “audit committee financial expert” as that term is defined in the rules promulgated under the Securities Act and the Exchange Act, and has accordingly designated her as such. Our Board of Directors has also appointed her chairperson of the committee.
The responsibilities of our Audit Committee include:
| ● | meeting with our management periodically to consider the adequacy of our internal control over financial reporting and the objectivity of our financial reporting; |
| ● | appointing the independent registered public accounting firm, determining the compensation of the independent registered public accounting firm, and pre-approving the engagement of the independent registered public accounting firm for audit and non-audit services; |
| ● | overseeing the independent registered public accounting firm, including reviewing its independence and quality control procedures, as well as the experience and qualifications of the audit personnel that are providing audit services to us; |
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| ● | meeting with the independent registered public accounting firm and reviewing the scope and significant findings of the audits performed by them, and meeting with management and internal financial personnel regarding these matters; and |
| ● | reviewing our financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the activities and recommendations of the auditors and our reporting policies and practices, and reporting recommendations to our full Board of Directors for approval. |
Compensation Committee
Our Compensation Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”, and is made up of our three (3) independent directors. Jiangliang He is chairperson of the committee. Our Compensation Committee oversees and, as appropriate, makes recommendations to the Board of Directors regarding the annual salaries and other compensation of our executive officers and our employees, and other employee policies; it also provides assistance and recommendations with respect to our compensation policies and practices.
Nominating Committee
Our Nominating Committee operates under a written charter, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”, and is made up of our four (4) independent directors. Genghua Gu is chairperson of the committee. Our Nominating Committee assists in the selection of director nominees, approves director nominations to be presented for stockholder approval at our annual general meeting, fills any vacancies on our Board of Directors, considers any nominations of director candidates validly made by shareholders, and reviews and considers developments in corporate governance practices.
Code of Ethics
The Company’s Code of Ethics, which applies to all officers, directors and employees, was adopted by the Board on March 15, 2010. The Code of Ethics was filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2010, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”.
D. EMPLOYEES.
As of March 31, 2024, we had 1,003 employees combined in our retail and wholesale operations, consisting of 939 full-time and 64 part-time employees. The number of employees for each area of operations, and such employees as a percentage of our total workforce, are as follows:
| As of March 31, 2024 | ||||||||
| Employees | Percentage | |||||||
| Non-pharmacist store staff | 464 | 46.2 | % | |||||
| Pharmacists | 327 | 32.6 | % | |||||
| Management - non-pharmacists | 30 | 3.0 | % | |||||
| Physicians | 77 | 7.7 | % | |||||
| Non-physician clinic staff | 38 | 3.8 | % | |||||
| Wholesale - non-warehouse | 20 | 2.0 | % | |||||
| Online pharmacy - technicians | 2 | 0.2 | % | |||||
| Online pharmacy - non-technicians | 45 | 4.5 | % | |||||
| Total | 1,003 | 100.00 | % | |||||
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E. SHARE OWNERSHIP.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding our ordinary shares beneficially owned on July 30, 2024 or the latest applicable date prior to that date, for (i) each stockholder known to be the beneficial owner of five percent (5%) or more of our outstanding ordinary shares, (ii) each executive officer and director, and (iii) all executive officers and directors as a group. To the best of our knowledge, subject to community and marital property laws, all persons named have sole voting and investment power with respect to such shares, except as otherwise noted.
| Ordinary Shares Beneficially Owned | ||||||||
| Executive officers and directors: (1) | Number of Shares beneficially owned (2) | Percentage of class beneficially owned (3) | ||||||
| Lei Liu, Chief Executive Officer and Chairman of the Board of Directors (4) | 511,568 | 7.7 | % | |||||
| Ming Zhao, Chief Financial Officer | 3,331 | 0.1 | % | |||||
| Li Qi, Director (4) | 25,125 | 0.4 | % | |||||
| Caroline Wang, Director (5) | - | * | % | |||||
| Genghua Gu, Director (6) | 42 | * | % | |||||
| Jiangliang, He, Director | - | * | % | |||||
| All directors and executive officers as a group (6 persons) | 7.8 | % | ||||||
| 5% Shareholders: (1) | ||||||||
| N/A | ||||||||
| * | Less than 0.1%. |
| (1) | Unless otherwise noted, the address for each of the named beneficial owners is: Renxin Yaju Building 5 Floor 4 Gong Shu District, Hangzhou City, Zhejiang Province, China, 310008. |
| (2) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of ordinary shares actually outstanding. |
| (3) | Unless otherwise noted, the number and percentage of outstanding shares of ordinary shares is based upon 6,654,077 shares outstanding as of July 30, 2024. |
| (4) | The address of Super Marvel Limited (“Super Marvel”) is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The owners of Super Marvel are Lei Liu (56.7%) and Li Qi (43.3%). They are also its directors. As such, they are deemed to have or share investment control over Super Marvel’s portfolio. According to Rule 13d-5, when two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of sections 13(d) and (g) of the Exchange Act, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such persons. As a result, 25,125 ordinary shares held by Super Marvel reported herein as beneficially owned by each of Mr. Liu and Ms. Qi, which they in turn own indirectly through their respective ownership of Super Marvel. |
| (5) | Ms. Wang’s address is: 3601B The Center, Changle Road, Xuhui District, and Shanghai, China. |
| (6) | Dr. Gu’s address is: No.1, Xueshi Road, Hangzhou, China. |
F. Disclosure of a registrant’s action to recover erroneously awarded compensation.
None.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS
Please refer to Item 6.E “Directors, Senior Management and Employees — Share Ownership.”
To our knowledge, (A) we are not directly or indirectly owned or controlled by (i) another corporation or (ii) any foreign government and (B) there are no arrangements (including any announced or expected takeover bid), the operation of which may at a subsequent date result in a change in our control.
The voting rights of our major shareholders do not differ from the voting rights of other holders of the same class of shares.
B. RELATED PARTY TRANSACTIONS. BUSINESS RELATIONSHIPS.
Our Officers and Directors’ Relationship with Us, Our Subsidiaries and VIE
As described in “Business - Our Corporate History and Structure” above, we control HJ Group through contractual arrangements between Jiuxin Management, our wholly-owned subsidiary, and each of Jiuzhou Pharmacy, Jiuzhou Service and Jiuzhou Clinic. HJ Group is owned by Mr. Lei Liu and Mr. Li Qi (the “Key Personnel”), whom also hold positions as our executive officers and/or directors. Because the Key Personnel also collectively own a substantial amount of our issued and outstanding ordinary shares, we believe that our interests are aligned with those of HJ Group and the Key Personnel. However, see ” Risk Factors - Risks Related to Our Corporate Structure - Our contractual arrangements with HJ Group and the Key Personnel may not be as effective in providing control over these entities as direct ownership,” and “Management members of HJ Group have potential conflicts of interest with us, which may adversely affect our business and your ability for recourse.”
Other Related Party Transactions
| Due from related parties: | March 31, 2024 | March 31, 2023 | ||||||
| Hangzhou Kahamadi Biotechnology Co., Ltd | 32,825 | - | ||||||
| Others (the directors of subsidiaries)(1) | 280,521 | - | ||||||
| Total | $ | 313,346 | $ | - | ||||
| Due to related parties: | March 31, 2024 | March 31, 2023 | ||||||
| Due to a director and CEO (2): | 1,580,057 | 683,560 | ||||||
| Other(3): | 253,452 | - | ||||||
| Total | $ | 1,833,509 | $ | 683,560 | ||||
| (1) | Advances to directors of our subsidiaries. |
| (2) | Due to foreign exchange restrictions, the Company’s director and CEO, Mr. Lei Liu personally lent U.S. dollars to the Company to facilitate its payments of expenses in the United States. The Company leases a retail space from Mr. Lei Liu. The lease will expire in September 2025. The amounts owed under the lease for the twelve months ended March 31, 2024 were paid to Mr. Liu as of March 31, 2024. |
| (3) | Linjia Medical borrowed from its non-controlling shareholder. |
C. INTERESTS OF EXPERTS AND COUNSEL.
Not applicable.
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ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
See “Item 18. Financial Statements.”
Legal Proceedings
From time to time, we may be subject to legal proceedings, investigations and claims during the ordinary course of our business. We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder holding more than five percent of our ordinary shares, is an adverse party or has a material interest adverse to our company.
Dividend Policy
While there are no restrictions that limit our ability to pay dividends, we have not paid, and do not currently intend to pay cash dividends on our ordinary shares in the foreseeable future. Our policy is to retain all earnings, if any, to provide funds for the operation and expansion of our business. The declaration of dividends, if any, will be subject to the discretion of our Board of Directors, who may consider such factors as our results of operations, financial condition, capital needs and acquisition strategy, among others, in making its determination.
Our ability to receive dividends from our subsidiaries may limit our ability to pay dividends on our ordinary shares. See Risk Factors – Risks Related to Doing Business in China – Our holding company structure may limit the payment of dividends” and “Item 10. Additional Information – D. Exchange Controls – Dividend Distribution”.
B. SIGNIFICANT CHANGES.
N/A
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
Not Applicable.
B. PLAN OF DISTRIBUTION.
Not Applicable.
C. MARKETS.
Our ordinary shares trade on the Nasdaq Capital Market under the symbol “CJJD”.
Based on the records of our transfer agent, we had 6,654,077 shares of ordinary shares issued and outstanding as of July 30, 2024.
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL
See “Item 10. Additional Information – Memorandum and Articles of Association”.
On April 7, 2022, the Company effected a 1-for-12 reverse stock split on its ordinary shares. Upon the effectiveness of the reverse stock split, every 12 shares of the Company’s issued and outstanding ordinary shares were automatically be converted into one issued and outstanding ordinary share. No fractional shares were issued as a result of the reverse stock split. Instead, any fractional shares that would have resulted from the split were rounded up to the next whole number. The reverse stock split affects all shareholders uniformly and will not alter any shareholder’s percentage interest in the Company’s outstanding ordinary shares, except for adjustments that may result from the treatment of fractional shares.
On March 1, 2024, the Company effected a 1-for-20 reverse stock split on its ordinary shares. Upon the effectiveness of the reverse stock split, every 20 shares of the Company’s issued and outstanding ordinary shares were automatically be converted into one issued and outstanding ordinary share. No fractional shares were issued as a result of the reverse stock split. Instead, any fractional shares that would have resulted from the split were rounded up to the next whole number. The reverse stock split affects all shareholders uniformly and will not alter any shareholder’s percentage interest in the Company’s outstanding ordinary shares, except for adjustments that may result from the treatment of fractional shares.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We are an exempted company incorporated with limited liability under the laws of the Cayman Islands and our affairs are governed by our Memorandum and Articles of Association, the Companies Law (as amended) of the Caymans Islands, which is referred to as the Companies Law below, and common law of the Cayman Islands. Our authorized share capital is US$36,010,000 divided into (i) 150,000,000 Ordinary Shares of a par value of US$0.24 each, and (ii) 10,000,000 preferred shares of a par value of US$0.001 each.
We have included summaries of material provisions of our amended and restated memorandum and articles of association insofar as they relate to the material terms of our share capital. The summaries do not purport to be complete and are qualified in their entirety by reference to our amended and restated memorandum and articles of association, which is filed as Exhibit 1.1 to this annual report.
Ordinary Shares
All of our outstanding ordinary shares are fully paid and non-assessable.
Issuance of Shares and Changes to Capital
Our board of directors with the power for the Company, insofar as is permitted by law, is able to redeem or purchase any of its shares and to increase or reduce the said share capital subject to the provisions of the Companies Act (Revised) and the Articles of Association of the Company and to issue any part of its capital, whether original, redeemed or increased, with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions; and so that, unless the conditions of issue shall otherwise expressly declare, every issue of shares, whether declared to be preference or otherwise, shall be subject to the power otherwise regulated in our Second Amend and Restated Memorandum and Articles of the Association.
Subject to the Law, these Articles and, where applicable, the rules of the Designated Stock Exchange and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, the unissued shares of the Company (whether forming part of the original or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the Board may in its absolute discretion determine but so that no shares shall be issued at a discount, except in accordance with the provisions of Law. In particular and without prejudice to the generality of the foregoing, the Board is hereby empowered to authorize by resolution or resolutions from time to time the issuance of one or more classes or series of preferred shares and to fix the designations, powers, preferences and relative, participating, optional and other rights, if any, and the qualifications, limitations and restrictions thereof, if any, including, without limitation, the number of shares constituting each such class or series, dividend rights, conversion rights, redemption privileges, voting powers, full or limited or no voting powers, and liquidation preferences, and to increase or decrease the size of any such class or series (but not below the number of shares of any class or series of preferred shares then outstanding) to the extent permitted by Law. Without limiting the generality of the foregoing, the resolution or resolutions providing for the establishment of any class or series of preferred shares may, to the extent permitted by law, provide that such class or series shall be superior to, rank equally with or be junior to the preferred shares of any other class or series. Neither the Company nor the Board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares to Members or others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the Board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever. The Board may issue options, warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribe for, purchase or receive any class of shares or securities in the capital of the Company on such terms as it may from time to time determine.
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The Company may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by the Law. Subject to the Law, the commission may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one and partly in the other.
Except as required by law, no person shall be recognized by the Company as holding any share upon any trust and the Company shall not be bound by or required in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any fractional part of a share or (except only as otherwise provided by these Articles or by law) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.
Subject to the Law and these Articles, the Board may at any time after the allotment of shares but before any person has been entered in the Register as the holder, recognize a renunciation thereof by the allottee in favor of some other person and may accord to any allottee of a share a right to effect such renunciation upon and subject to such terms and conditions as the Board considers fit to impose.
Dividends
Subject to the Companies Law, our shareholders may, by resolution passed by a simple majority of the voting rights entitled to vote at the general meeting, declare dividends (including interim dividends) to be paid to our shareholders but no dividend shall be declared in excess of the amount recommended by our board of directors. Dividends may be declared and paid out of funds lawfully available to us. Except as otherwise provided by the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid. All dividends shall be paid in proportion to the number of ordinary shares a shareholder holds during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividend as from a particular date, that share shall rank for dividend accordingly. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law.
Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared, the Board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind and in particular of paid up shares, debentures or warrants to subscribe securities of the Company or any other company, or in any one or more of such ways, and where any difficulty arises in regard to the distribution the Board may settle the same as it thinks expedient, and in particular may issue certificates in respect of fractions of shares, disregard fractional entitlements or round the same up or down, and may fix the value for distribution of such specific assets, or any part thereof, and may determine that cash payments shall be made to any Members upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend, and such appointment shall be effective and binding on the Members. The Board may resolve that no such assets shall be made available to Members with registered addresses in any particular territory or territories where, in the absence of a registration statement or other special formalities, such distribution of assets would or might, in the opinion of the Board, be unlawful or impracticable and in such event the only entitlement of the Members aforesaid shall be to receive cash payments as aforesaid. Members affected as a result of the foregoing sentence shall not be or be deemed to be a separate class of Members for any purpose whatsoever.
Voting and Meetings
As a condition of admission to a shareholders’ meeting, a shareholder must be duly registered as our shareholder at the applicable record date for that meeting and all calls or installments then payable by such shareholder to us in respect of our ordinary shares must have been paid. Subject to any special rights or restrictions as to voting then attached to any shares, at any general meeting every shareholder who is present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative not being himself or herself a shareholder entitled to vote) shall have one vote per share.
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As a Cayman Islands exempted company, we are not obliged by the Companies Law to call annual general meetings; however, our Second Amended And Restated Memorandum and Articles of Association provide that in each year we will hold an annual general meeting of shareholders at a time determined by our board of directors. Also, we may, but are not required to (unless required by the Law), in each year hold any other extraordinary general meeting.
The Companies Law of the Cayman Islands provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Second Amended and Restated Memorandum And Articles of Association provide that upon the requisition of shareholders representing not less than two-thirds of the voting rights entitled to vote at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, shareholders may propose only ordinary resolutions to be put to a vote at such meeting and shall have no right to propose resolutions with respect to the election, appointment or removal of directors or with respect to the size of the board. Our amended and restated memorandum and articles of association provide no other right to put any proposals before annual general meetings or extraordinary general meetings. Subject to regulatory requirements, our annual general meeting and any extraordinary general meetings must be called by not less than ten (10) clear days’ notice prior to the relevant shareholders meeting and convened by a notice discussed below. Alternatively, upon the prior consent of all holders entitled to attend and vote (with regards to an annual general meeting), and the holders of 95% in par value of the shares entitled to attend and vote (with regard to an extraordinary general meeting), that meeting may be convened by a shorter notice and in a manner deemed appropriate by those holders.
We will give notice of each general meeting of shareholders by publication on our website and in any other manner that we may be required to follow in order to comply with Cayman Islands law, Nasdaq and SEC requirements. The holders of registered shares may be convened for a shareholders’ meeting by means of letters sent to the addresses of those shareholders as registered in our shareholders’ register, or, subject to certain statutory requirements, by electronic means. We will observe the statutory minimum convening notice period for a general meeting of shareholders.
A quorum for a general meeting consists of any one or more persons holding or representing by proxy not less than one-third of our issued voting shares entitled to vote upon the business to be transacted.
A resolution put to the vote of the meeting shall be decided on a poll. An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes cast by, or on behalf of, the shareholders entitled to vote present in person or by proxy and voting at the meeting. A special resolution requires the affirmative vote of no less than two-thirds of the votes cast by the shareholders entitled to vote who are present in person or by proxy at a general meeting (except for certain matters described below which require an affirmative vote of two-thirds). Both ordinary resolutions and special resolutions may also be passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Law and our amended and restated memorandum and articles of association.
Our Second Amended and Restated Memorandum and Articles of Association provide that the affirmative vote of no less than two-thirds of votes cast by the shareholders entitled to vote who are present in person or by proxy at a general meeting shall be required to approve a) to reduce its share capital or any capital redemption reserve or other undistributable reserve; b) the necessary quorum (whether at a separate general meeting or at its adjourned meeting) shall be a person or persons or (in the case of a Member being a corporation) its duly authorized representative together holding or representing by proxy not less than one-third in nominal value of the issued voting shares of that class; c) every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him; and d) any holder of shares of the class present in person or by proxy or authorized representative may demand a poll.
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Transfers of Shares
Subject to these Articles and the requirements of the Designated Stock Exchange, any Member may transfer all or any of his shares by an instrument of transfer in the usual or common form or in a form prescribed by the Designated Stock Exchange or in any other form approved by the Board and may be under hand or, if the transferor or transferee is a clearing house or a central depository house or its nominee(s), by hand or by machine imprinted signature or by Electronic Signature or by such other manner of execution as the Board may approve from time to time. The Board may, in its absolute discretion, and without giving any reason therefor, refuse to register a transfer of any share made in accordance with Article 46 but only where such share is not a fully paid up share (and being transferred to a person of whom it does not approve), or any share issued under any share incentive scheme for employees or pursuant to any other agreement, contract or other such arrangement, upon which a restriction on transfer imposed thereby still subsists, and it may also, without prejudice to the foregoing generality, refuse to register a transfer of any share to more than four joint holders.
The Board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the Register to any branch register or any share on any branch register to the Register or any other branch register. In the event of any such transfer, the shareholder requesting such transfer shall bear the cost of effecting the transfer unless the Board otherwise determines.
Unless the Board otherwise agrees (which agreement may be on such terms and subject to such conditions as the Board in its absolute discretion may from time to time determine, and which agreement the Board shall, without giving any reason therefore, be entitled in its absolute discretion to give or withhold), no shares upon the Register shall be transferred to any branch register nor shall shares on any branch register be transferred to the Register or any other branch register and all transfers and other documents of title shall be lodged for registration, and registered, in the case of any shares on a branch register, at the relevant Registration Office, and, in the case of any shares on the Register, at the Office or such other place at which the Register is kept in accordance with the Law.
Liquidation
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the Members of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members in proportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distribution amongst the Members as such shall be insufficient to repay the whole of the paid-up capital such assets shall be distributed so that, a nearly as may be, the losses shall be borne by the Members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively.
If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Law, divide among the Members in specie or kind the whole or any part of the assets of the Company and whether or not the assets shall consist of properties of one kind or shall consist of properties to be divided as aforesaid of different kinds, and may for such purpose set such value as he deems fair upon any one or more class or classes of property and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of the Members as the liquidator with the like authority shall think fit, and the liquidation of the Company may be closed and the Company dissolved, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.
Anti-Takeover Provisions
Some provisions of our Second Amended And Restated Memorandum and Articles Of Association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
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Inspection of Books and Records
Holders of ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. No Member (other than a Director) shall have any right of inspecting any accounting record or book or document of the Company except as conferred by law or authorized by the Board or the Company in general meeting. Notwithstanding the above, our Second Amended and Restated Memorandum and Articles of Association provide our shareholders with the right to receive annual audited financial statements. Such right to receive annual audited financial statements may be satisfied by filing such annual reports as we are required to file with the SEC.
Register of Shareholders
Under Cayman Islands law, we must keep a register of shareholders that includes: the names and addresses of the shareholders, a statement of the shares held by each member, and of the amount paid or agreed to be considered as paid, on the shares of each member; the date on which the name of any person was entered on the register as a member; and the date on which any person ceased to be a member.
Exempted Company
We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. An exempted company:
| ● | does not have to file an annual return of its shareholders with the Registrar of Companies; | |
| ● | is not required to open its register of members for inspection; | |
| ● | does not have to hold an annual general meeting; | |
| ● | may issue shares with no par value; | |
| ● | may obtain an undertaking against the imposition of any future taxation; | |
| ● | may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; | |
| ● | may register as a limited duration company; and | |
| ● | may register as a segregated portfolio company. |
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the Company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Preferred Shares
Our board of directors is empowered to designate and issue from time to time one or more classes or series of preferred shares and to fix and determine the relative rights, preferences, designations, qualifications, privileges, options, conversion rights, limitations and other special or relative rights of each such class or series so authorized. Such action could adversely affect the voting power and other rights of the holders of our ordinary shares or could have the effect of discouraging any attempt by a person or group to obtain control of us.
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C. MATERIAL CONTRACTS.
All material contracts concluded by the Company during the two years preceding the date of this annual report were entered into in the ordinary course of business, except for those entered into in connection with the recent registered direct financings of the Company prior to the date of this report, a form of such agreement is listed under the Exhibit Index of this annual report and incorporated by reference from the filings as indicated thereunder.
D. EXCHANGE CONTROLS.
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively. Under Circular 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change with respect to the offshore company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment, debt investment, or creation of any security interest over any assets located in the PRC.
Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction. Therefore, failure to comply with such registration may subject us to certain restrictions on, including but not limited to, the increase of the registered capital of our PRC subsidiary, making loans to our PRC subsidiary, and making distributions to us from our on-shore companies.
Dividend Distribution
Under current applicable laws and regulations, each of our consolidated PRC entities, including WFOEs and domestic companies, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our consolidated PRC entities is required to deposit at least ten percent (10%) of its after-tax profit based on PRC accounting standards each year into its statutory surplus reserve fund until the accumulative amount of such reserve reaches fifty percent (50%) of its registered capital. These reserves are not distributable as cash dividends. As of March 31, 2024 the accumulated balance of our statutory reserve funds reserves amounted to $1.31 million, and the accumulated losses of our consolidated PRC entities amounted to $40.83 million.
Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions
As per China’s commitments to the World Trade Organization, “Foreign service suppliers are permitted to establish joint venture hospitals or clinics with local Chinese partners with quantitative limitations in line with China’s needs. Foreign majority ownership is permitted.” In accordance with the Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions issued jointly by the Ministry of Health (“MOH”) and the Ministry of Commerce (“MOFCOM”) in 2000, the Chinese party of Sino-foreign joint ventures and cooperative medical institutions shall hold no less than thirty percent (30%) of shares and legal rights or interest, which also mean foreign investors are allowed to hold a maximum stake of seventy percent (70%). Such regulations also specify that the establishment of Sino-foreign joint venture and cooperative medical institutions should be approved respectively by MOH and MOFCOM. In other words, foreigners are allowed to run hospitals or clinics in the form of equity or co-operative joint ventures with an equity interest of up to seventy percent (70%) lasting up to twenty (20) years.
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E. TAXATION
The current PRC Enterprise Income Tax Law (the “EIT Law”), and the implementation regulations for the EIT Law issued by China’s State Council, became effective as of January 1, 2008. Under the EIT Law, enterprises are classified as either resident or non-resident enterprises. An enterprise established outside of China with its “de facto management bodies” located within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law defines a “de facto management body” as a managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise; however, it remains unclear whether the PRC tax authorities would deem our managing body as being located within China. Due to the relatively short history of the EIT Law and lack of applicable legal precedents, the PRC tax authorities determine the PRC tax resident treatment of entities organized under the laws of foreign jurisdictions on a case-by-case basis.
If the PRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of PRC tax consequences could follow. First, we may be subject to enterprise income tax at a rate of twenty five percent (25%) on our respective worldwide taxable income, as well as PRC enterprise income tax reporting obligations. Second, although the EIT Law provides that “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” is exempted income, and the implementing rules of the EIT Law refer to “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” as the investment proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, it is still unclear whether the dividends we receive from Jiuxin Management would be classified as “dividends between qualified resident enterprises” and therefore qualify for tax exemption.
If we are treated as a non-resident enterprise under the EIT Law, any dividends that we receive from Jiuxin Management (assuming such dividends are deemed to be sourced from within the PRC) (i) may be subject to a five percent (5%) PRC withholding tax, provided that we own more than twenty five percent (25%) of the registered capital of Jiuxin Management incessantly within twelve (12) months immediately prior to obtaining such dividends from Jiuxin Management, and if the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Arrangement”) is applicable, or (ii) if the Arrangement does not apply (i.e. the PRC tax authorities may deem us to be a conduit not entitled to treaty benefits), may be subject to a ten percent (10%) PRC withholding tax. Similarly, if we are treated as a non-resident enterprise, and Renovation is treated as a resident enterprise, then any dividends that we receive from Renovation (assuming such dividends were considered sourced within the PRC) may be subject to a ten percent (10%) PRC withholding tax. Any such taxes on dividends could materially reduce the amount of dividends, if any, that we could pay to our shareholders.
Finally, the new “resident enterprise” classification could result in a situation in which a ten percent (10%) PRC tax is imposed on dividends we pay to our investors that are non-resident enterprises so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite the existence of such establishment of place of business in China, the relevant income is not effectively connected with such establishment or place of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a ten percent (10%) PRC income tax if such gain is regarded as income derived from sources within China. In such event, we may be required to withhold a ten percent (10%) PRC tax on any dividends paid to our investors that are non-resident enterprises. Our investors that are non-resident enterprises also may be responsible for paying PRC tax at a rate of ten percent (10%) on any gain realized from the sale or transfer of our common shares in certain circumstances. We would not, however, have an obligation to withhold PRC tax with respect to such gain.
Moreover, the State Administration of Taxation issued the Notice on Strengthening the Administration of Enterprise Income Tax on Share Transfer Income of Non-Resident Enterprises No. 698 (“Circular 698”) on December 10, 2009, which reinforces taxation on transfer of non-listed shares by non-resident enterprises through overseas holding vehicles. Circular 698 applies retroactively and was deemed to be effective as of January 2008. Pursuant to Circular 698, where (i) a foreign investor who indirectly holds equity interest in a PRC resident enterprise through an offshore holding company indirectly transfers equity interests in a PRC resident enterprise by selling the shares of the offshore holding company, and (ii) the offshore holding company is located in a jurisdiction where the effective tax rate is lower than twelve and a half percent (12.5%) or where the offshore income of its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that PRC resident enterprise with certain relevant information within thirty (30) days of the transfer. The tax authorities in charge will evaluate the offshore transaction for tax purposes. In the event that the tax authorities determine that such transfer is abusing forms of business organization and there is no reasonable commercial purpose other than avoidance of PRC enterprise income tax, the tax authorities will have the power to conduct a substance-over-form re-assessment of the nature of the equity transfer. A reasonable commercial purpose may be established when the overall offshore structure is set up to comply with the requirements of supervising authorities of international capital markets. If the State Administration of Taxation’s challenge of a transfer is successful, they will deny the existence of the offshore holding company that is used for tax planning purposes. Since Circular 698 has a brief history, there is uncertainty as to its application.
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F. DIVIDENDS AND PAYING AGENTS.
Not applicable.
G. STATEMENT BY EXPERTS.
None.
H. DOCUMENTS ON DISPLAY.
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended. As a foreign private issuer we are exempt from the rules and regulations under the Securities Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. Nasdaq rules generally require that companies send an annual report to shareholders prior to the annual general meeting, however we rely upon an exception under the Nasdaq rules. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.
The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, and our SEC reports can be viewed or downloaded there. The address of this web site is http://www.sec.gov. In addition, information that we furnish or file with the SEC, including annual reports on Form 20-F, current reports on Form 6-K, proxy and information statements and any amendments to, or exhibits included in, those reports are available to be viewed or download, free of charge, on our website at www.jiuzhou360.com as soon as reasonably practicable after such materials are filed or furnished with the SEC. Information contained, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein, and we have included our website address in this annual report solely for informational purposes.
I. SUBSIDIARY INFORMATION
For a listing of our subsidiaries, see “Item 4. Information on the Company – C. Organizational Structure.”
J. ANNUAL REPORT TO SECURITY HOLDERS
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Exchange Rate Risk
While our reporting currency is the U.S. dollar, the majority of our revenues and costs are denominated in RMB and a significant portion of our assets and liabilities are denominated in RMB. As a result, we are exposed to foreign exchange risk because our revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. To the extent that the Company needs to convert the U.S. dollar into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against the U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into the U.S. dollar for the purpose of making payments for dividends on ordinary shares, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company. In addition, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of the Company’s earnings or losses. Since 2005, China reformed its exchange rate regime and the RMB is no longer pegged to the U.S. dollar. In 2010, the People’s Bank of China decided to move to further reform the RMB exchange rate regime to enhance the flexibility of the RMB exchange rate. For RMB against U.S. dollar, there was depreciation of approximately 6.8% and depreciation of approximately 5.1% during the years ended March 31, 2023 and 2024, respectively. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future, but the RMB may appreciate or depreciate more significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with reference to a basket of currencies.
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While the Chinese RMB is freely convertible under the current account, it remains strictly regulated in the capital account. Chinese authorities have expressed their willingness to allow the RMB to be fully convertible in the near future.
To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure. Accordingly, we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have a negative impact on our financial condition and results of operations.
Interest Rate Risk
We had cash, cash equivalents, restricted cash and certificate of deposit totaling $31.68 million and notes receivable of $0.00 million as of March 31, 2024. Cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. As of March 31, 2024, we had $0 million of short-term bank loans and $0 million of long-term loans outstanding. Our exposure to interest rate risk primarily relates to the interest income generated from cash held in bank deposits and notes receivable, and interest expenses generated from short-term bank loans. We believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates due to the short term nature of our cash equivalents. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
Inflation Rate Risk
According to the Consumer Price Index (CPI) released by National Bureau of Statistics of China, in 2022, the average annual inflation rate in China ranged at around 2 percent compared to the previous year. Projections by the IMF published in April 2021 expect the average annual inflation rate to reach about 2.1 percent in the year of 2023. In March 2023, the monthly inflation rate in China ranged at 0.7 percent compared to the same month in the previous year, up from 1.5 percent in the previous month.
Economic and Political Risks
Our operations in China are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment in China and foreign currency exchange. Our performance may be adversely affected by changes in the political and social conditions in China, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Credit Risk
Credit risk is one of the most significant risks for the Company’s business.
77
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. Cash held at major financial institutions located in the PRC are not insured by the government. While we believe that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.
Accounts receivable are typically unsecured and derived from revenue earned from customers, thereby exposed to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. The Company manages credit risk through in-house research and analysis of the Chinese economy and the underlying obligors and transaction structures. To minimize credit risk, the Company normally require prepayment from the customers prior to begin production or delivery products. The Company identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
A. DEBT SECURITIES.
Not applicable.
B. WARRANTS AND RIGHTS.
Not applicable.
C. OTHER SECURITIES.
Not applicable.
D. AMERICAN DEPOSITARY SHARES.
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of March 31, 2024, the end of the fiscal year covered by this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures.
Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2024, our disclosure controls and procedures were ineffective. They reached this conclusion due to the presence of material weaknesses in internal controls over financial reporting as described below. Management anticipates that our disclosure controls and procedures will remain ineffective until such material weaknesses are remediated.
Management’s Report on Internal Control over Financial Reporting
We assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2024. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO) in the Internal Control-Integrated Framework. We are responsible for establishing and maintaining adequate internal control over financial reporting. Based on our evaluation, management concluded that our internal control over financial reporting was ineffective as of March 31, 2024 due to the following material weaknesses:
Accounting and Finance Personnel Weaknesses
Management concluded that in light of the inexperience of our accounting staff with respect to the requirements of U.S. GAAP-based reporting and SEC rules and regulations, we did not maintain effective controls and did not implement adequate and proper supervisory review to ensure that significant internal control deficiencies can be detected or prevented.
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Management’s assessment of the control deficiency over accounting and finance personnel as of March 31, 2024 considered the same factors, including:
| ● | the number of adjustments proposed by our independent auditors during our quarterly review and annual audit processes; | |
| ● | how adequately we complied with U.S. GAAP on transactions; and | |
| ● | how accurately we prepared supporting information to provide to our independent auditors on a quarterly and annual basis. |
Based on the above factors, management concluded that the lack of timely reconciliation of booking and recording from China GAAP to US GAAP, lack of accounting staff with sufficient US GAAP experience, and lack of timely reconciliation of revenue and accounts receivable collectability are material weaknesses as of March 31, 2024.
Remediation of Material Weakness for the year ended March 31, 2024
Subsequent to the identification of the material weakness, we have enhanced existing controls and design and implemented new controls. We have devoted significant time and attention to remediate the above material weaknesses. For example, we redesigned our system to retrieve data faster, so we are able to identify and reconcile the GAAP difference more efficiently. In addition, we trained our accounting staff with US GAAP knowledge, so they can meet the requirement from our auditors more efficiently. Additionally, we plan to more closely monitor the collection of our accounts receivables. We will check more often about the collectability of their receivables. If we determine that the accounts are uncollectible, we will quickly seek the potential recovery and recognize any potential loss soon. These improvements to our internal control infrastructure were implemented, and were in place in connection with the preparation of our financial statements for the year ended March 31, 2024. As such, we believe that the remediation initiative outlined above will be sufficient to remediate as the changes become operational for future years the material weakness in internal control over financial reporting as discussed.
Changes in Internal Control over Financial Reporting
In the year ended March 31, 2024, we linked our SAP system, a leading ERP system from Germany that was installed in 2017 with a series of local banks, so it can provide a view of overall and instant cash information. In addition, we hired specialized managers who are able to program and develop improved procedure in the system. Furthermore, we have been training our staff in implementing the management system continually. We expect to continually improve our internal control system. There have been no other changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or Rule 15d-15 that occurred during the year ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Item 16. [Reserved]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
Our Board of Directors has determined, based on information furnished by Ms. Caroline Wang and other available information, that she meets the requirements of an “audit committee financial expert” as that term is defined in the rules promulgated under the Securities Act and the Exchange Act, and has accordingly designated her as such. Our Board of Directors has also appointed her chairperson of the committee.
ITEM 16B. CODE OF ETHICS.
The Company’s Code of Ethics, which applies to all officers, directors and employees, was adopted by the Board on March 15, 2010. The Code of Ethics was filed as Exhibit 14 to the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2010, a copy of which is available on our website at http://www.jiuzhou360.com under the tabs “Investor”–“Corporate Governance”–“Documents”.
80
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our current principal independent auditor is YCM CPA Inc. (“YCM”) whom we engaged on May 31, 2022. The following table shows the fees for audit and other services provided by YCM in relation to our 2024 and 2023 fiscal years:
| For the Fiscal Years ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Audit Fees (1) | $ | 190,000 | $ | 180,000 | ||||
| Audit-Related Fees (2) | - | - | ||||||
| Tax Fees (3) | - | - | ||||||
| All Other Fees (4) | - | 40,721 | ||||||
| Total | $ | 190,000 | $ | 220,721 | ||||
| (1) | Audit Fees: This category includes the audit of our annual financial statements, review of financial statements included in our interim semi-annual report on Form 6-K, and services that are normally provided by independent auditors in connection with statutory and regulatory filings or the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements. |
| (2) | Audit-Related Fees: This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” |
| (3) | Tax Fees: This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (4) | All Other Fees: This category consists of fees for other miscellaneous items. |
Pre-Approval Policies and Procedures of the Audit Committee
The Audit Committee approves the engagement of our independent auditors and is also required to pre-approve all audit and non-audit expenses. Prior to engaging its accountants to perform particular services, the Audit Committee obtains an estimate for the service to be performed. All of the services described above were approved by the Audit Committee in accordance with its procedure.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not applicable.
81
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE.
Our ordinary shares are listed on Nasdaq. In order to list on Nasdaq, we are required to comply with certain of the Nasdaq Rules. As a foreign private issuer, we may follow our home country’s corporate governance practices in lieu of certain of the Nasdaq Rules. Nevertheless, there are no significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of Nasdaq other than disclosed below.
NASDAQ Listing Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year end. However, NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement. We follow home country practice with respect to annual meetings and may forgo annual shareholder meetings from time to time.
NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20% or more of the company’s ordinary shares or voting power for less than the greater of market or book value (ii) resulting in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval requirements. The Cayman Islands do not require shareholder approval prior to any of the foregoing types of issuances. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above. The Board of Directors of the Company has elected to follow the Company’s home country rules as to such issuances and will not be required to seek shareholder approval prior to entering into such a transaction.
ITEM 16H. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
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ITEM 16J. INSIDER TRADING POLICIES.
We have considered and
The following procedure is an excerpt to the requirements to the confidentiality of the material non-public information and shall be followed by the Company’s employees, officers and directors:
“Employees, officers, and directors who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business.”
“Employees should take all appropriate measures to avoid inadvertent disclosure of confidential information. Materials that contain or might contain confidential information such as presentations, memoranda, working papers, data storage devices or disks, and laptop computers should be stored and maintained in a secure location. Unauthorized release or posting of information concerning our business via internet is prohibited, including discussions (anonymous or not) about the Company’s business in “web logs” (also known as “blogs”) and “chat rooms.” All Company-related correspondence, e-mail, voicemail, and electronic communications are presumed to be confidential and should not be disseminated outside of the Company, except for legitimate business purposes.”
The following procedure is an excerpt to the requirements to the communications with third parties that are related to insider trading:
“INSIDER TRADING; COMMUNICATIONS WITH THIRD PARTIES
Employees, officers, and directors who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of our business.”
Insider Trading
“Inside information is material information about a publicly traded company that is not known by the public. Information is deemed “material” if it could affect the market price of a security or if a reasonable investor would attach importance to the information in deciding whether to buy, sell, or hold a security. Inside information typically relates to financial conditions, such as progress toward achieving revenue and earnings targets or projections of future earnings or losses of the Company. Inside information also includes changes in strategy regarding a proposed merger, acquisition or tender offer, new products or services, contract awards, and other similar information. Inside information is not limited to information about the Company. It also includes material non-public information about others, including the Company’s customers, suppliers, and competitors.
Insider trading is prohibited by law. It occurs when an individual with material, non-public information trades securities or communicates such information to others who trade. The person who trades or “tips” information violates the law if he or she has a duty or relationship of trust and confidence not to use the information.
Trading or helping others trade while aware of inside information has serious legal consequences, even if the insider does not receive any personal financial benefit. Insiders may also have an obligation to take appropriate steps to prevent insider trading by others.”
ITEM 16K. CYBERSECURITY.
Risk Management and Strategy
We have implemented cybersecurity risk assessment procedures to ensure effectiveness in cybersecurity management, strategy and governance and reporting cybersecurity risks. We have also integrated cybersecurity risk management into our overall enterprise risk management system.
As of the date of this Report, we have not experienced any material cybersecurity incidents or identified any material cybersecurity threats that have affected or are reasonably likely to materially affect us, our business strategy, results of operations or financial condition.
Governance
Our Board of Directors is responsible for overseeing the Company’s cybersecurity risk management and be informed on risks from cybersecurity threats. The Board shall review, approve and maintain oversight of the disclosure (i) on Form 6-K for material cybersecurity incidents (if any) and (ii) related to cybersecurity matters in the periodic reports (including annual report on Form 20-F) of the Company. In addition, our management team, including those with experience in dealing with confidentiality-related cybersecurity issues, oversee and manage cybersecurity related matters and formulate policies as necessary. Our Board review on an annual basis regarding assessment, identification and management on material risks from cybersecurity threats happened in the ordinary course of our business operations. If a cybersecurity incident occurs, our Board will promptly organize relevant personnel for internal assessment and, depending on the situation, seek the opinions of external experts and legal advisors. If it is determined that the incident could potentially be a material cybersecurity event, our Board will decide on the relevant response measures and whether any disclosure is necessary. If such disclosure is determined to be necessary, such disclosure material will be prepared and reviewed by our Board before it is disseminated to the public.
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PART III
ITEM 17. FINANCIAL STATEMENTS.
We have elected to provide financial statements and related information specified in Item 18.
ITEM 18. FINANCIAL STATEMENTS.
See “Index to Consolidated Financial Statements” for a list of all financial statements filed as part of this annual report. The Financial Statements begin on page F-1.
ITEM 19. EXHIBITS.
See the Exhibit Index following the signature page of this report, which is incorporated herein by reference.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| CHINA JO-JO DRUUGSTORES, INC. | ||
| By: | /s/ Lei Liu | |
| Lei Liu | ||
|
Chief Executive Officer (Principal Executive Officer) | ||
July 30, 2024
85
INDEX
The following documents are filed as part of this annual report on Form 20-F.
86
| * | Filed herewith |
| (1) | Incorporated by reference from the predecessor of the registrant’s Registration Statement on Form SB-2 filed on November 28, 2007 |
| (2) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on July 15, 2008 |
| (3) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on September 24, 2009 |
| (4) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on October 30, 2009 |
| (5) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on March 16, 2010 |
| (6) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on April 14, 2010 |
| (7) | Incorporated by reference from the predecessor of the registrant’s Annual Report on Form 10-K filed on June 29, 2010 |
| (8) | [Reserved] |
| (9) | Incorporated by reference from the predecessor of the registrant’s Quarterly Report on Form 10-Q filed on February 14, 2011 |
| (10) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on May 17, 2012 |
| (11) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on November 30, 2012 |
| (12) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on January 4, 2013 |
| (13) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on December 12, 2013 |
| (14) | [Reserved] |
| (15) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on October 26, 2018 |
| (16) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on November 24, 2014 |
| (17) | [Reserved] |
| (18) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on December 2, 2015 |
| (19) | [Reserved] |
| (20) | Incorporated by reference from the predecessor of the registrant’s Exhibit A to the proxy statement on Schedule 14A filed on January 21, 2020 |
| (21) | Incorporated by reference from Exhibit 10.33 of the predecessor of the registrant’s Annual Report on Form 10-K filed on June 29, 2017 |
| (22) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on September 6, 2018 |
| (23) | Incorporated by reference from the predecessor of the registrant’s Current Report on Form 8-K filed on May 14, 2021 |
| (24) | Incorporated by reference to Exhibit 99.2 on Form 6-K filed with the Securities and Exchange Commission on March 1, 2022 |
| (25) | Incorporated by reference on Form 20-F filed with the Securities and Exchange Commission on June 15, 2023 |
87
China Jo-Jo Drugstores, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of China Jo-Jo Drugstores, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of China Jo-Jo Drugstores, Inc. and subsidiaries (collectively, the “Company”) as of March 31, 2024 and 2023, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2
Valuation of Accounts Receivable
Description of the Matter
As described in Note 2 and Note 4 to the consolidated financial statements, the Company’s accounts receivable totaled approximately $15.8 million as of March 31, 2024. Accounts receivable are reported at an amount that management expects to collect, net of estimated allowances. The valuation of accounts receivable is a critical audit matter due to the significant judgments made by management regarding the allowance for credit losses, which required a high degree of auditor judgment to design and perform audit procedures and evaluate the audit evidence obtained in relation to the valuation.
How We Addressed the Matter in Our Audit
To address the matter involved, we designed and performed audit procedures and evaluated audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures included the following:
| 1. | We reviewed the process and methodologies used by management to develop their valuation approach. |
| 2. | We tested the data used by management to ensure its accuracy and completeness. |
| 3. | We verified the underlying assumptions used in estimating the accounts receivable, ensuring they are reasonable and based on reliable data. |
| 4. | We compared the historical estimates made by management to the actual amounts collected. |
| 5. | We reviewed the forward-looking information and assumptions used by management and evaluated the reasonableness of these assumptions in the context of current economic conditions and industry trends. |
Revenue Recognition – Determination of Estimated Reserve for Government Medical Insurance Agency
Description of the Matter
As described in Note 2 to the consolidated financial statements, the Company separates its revenues into three segments: drugstore retail sales, online pharmacy sales and wholesale. Purchases related to drugstore retail sales are mainly paid by cash or government medical insurance card. The government medical insurance card is funded by local government medical insurance agencies and can only be used for medical purposes. When a customer makes a purchase with the government medical insurance card, the agency receives a notification at the checkout to reserve the balance on that card. Each month, the Company files claims with the agencies for reimbursement for the prior month. However, the agency could deny reimbursement for various reasons, such as sales exceeding limited quantities. While the vast majority of the balance claimed will be reimbursed within a few months, a small portion may take longer, including up to more than a year. The determination of the reserve for potential losses from the agency is a critical audit matter due to the significant judgment by management in estimating the loss on claims, which required a high degree of auditor judgement to design and perform audit procedures and evaluate the audit evidence obtained in relation to the estimated loss.
How We Addressed the Matter in Our Audit
To address the matter involved, we designed and performed audit procedures and evaluated audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures included the following:
| 1. | We evaluated and tested the process used by management to estimate the loss of the claims. This involved understanding the methodologies and assumptions applied by management in determining the reserve. |
| 2. | We compared estimated losses to historically uncollected amounts and assessed the accuracy and reliability of management’s past estimates. |
| 3. | We researched and reviewed the government medical insurance policies and any updates throughout the year to evaluate any significant changes in these policies that could impact the reimbursement of claims. |
| 4. | We examined reimbursements received in the subsequent period through the filing date to identify any indications of additional loss. |
/s/
We have served as the Company’s auditor since 2022.
PCAOB
ID
July 30, 2024
F-3
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | March 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivables | ||||||||
| Inventories | ||||||||
| Other receivables, net | ||||||||
| Advances to suppliers | ||||||||
| Due from related parties | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| OTHER ASSETS | ||||||||
| Property and equipment, net | ||||||||
| Long-term investment | ||||||||
| Farmland assets | ||||||||
| Long-term deposits | ||||||||
| Other noncurrent assets | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loan payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Notes payable | ||||||||
| Other payables | ||||||||
| Due to related parties | ||||||||
| Customer deposits | ||||||||
| Taxes payable | ||||||||
| Accrued liabilities | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Ordinary shares; $ | ||||||||
| Preferred shares; $ | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total shareholders’ equity attributed to China Jo-Jo | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the years ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| REVENUES, NET | $ | $ | $ | |||||||||
| COST OF GOODS SOLD | ||||||||||||
| GROSS PROFIT | ||||||||||||
| SELLING EXPENSES | ||||||||||||
| GENERAL AND ADMINISTRATIVE EXPENSES | ||||||||||||
| STOCK BASED COMPENSATION | ||||||||||||
| IMPAIRMENT OF LONG-LIVED ASSETS | ||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||
| OTHER INCOME (EXPENSES): | ||||||||||||
| INTEREST INCOME | ||||||||||||
| INTEREST EXPENSE | ( | ) | ( | ) | ( | ) | ||||||
| INVESTMENT LOSS | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ||||||
| PROVISION FOR INCOME TAXES | ||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ||||||
| LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ||||||
| NET LOSS ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC. | ( | ) | ( | ) | ( | ) | ||||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||
| FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | ( | ) | ( | ) | ||||||||
| COMPREHENSIVE LOSS | ( | ) | ( | ) | ( | ) | ||||||
| WEIGHTED AVERAGE NUMBER OF SHARES: | ||||||||||||
| Basic | ||||||||||||
| Diluted | ||||||||||||
| LOSS PER SHARE: | ||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||
| Ordinary Shares | Additional | other | Non- | Total | ||||||||||||||||||||||||||||
| Number of | paid-in | Statutory | Accumulated | comprehensive | controlling | Shareholders’ | ||||||||||||||||||||||||||
| shares | Amount | capital | reserves | deficit | income/(loss) | interest | Equity | |||||||||||||||||||||||||
| BALANCE, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation loss | - | |||||||||||||||||||||||||||||||
| BALANCE, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Fractional shares issued for reverse stock split | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of shares and warrants in private placements | ||||||||||||||||||||||||||||||||
| Share-based compensation | ||||||||||||||||||||||||||||||||
| Cashless exercise of warrants | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Fractional shares issued for reverse stock split | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of shares and warrants in private placements | ||||||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation loss | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| BALANCE, March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Bad debt direct write-off and provision and reversal | ( | ) | ||||||||||
| Amortization of right-of-use assets | ||||||||||||
| Loss from disposal of property and equipment | ||||||||||||
| Impairment of long lived assets | ||||||||||||
| Share-based compensation | ||||||||||||
| Investment loss | ||||||||||||
| Change in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ( | ) | ||||||
| Notes receivable | ( | ) | ||||||||||
| Inventories and biological assets | ( | ) | ( | ) | ||||||||
| Other receivables | ( | ) | ( | ) | ( | ) | ||||||
| Advances to suppliers | ( | ) | ( | ) | ||||||||
| Long term deposit | ( | ) | ( | ) | ||||||||
| Other current assets | ||||||||||||
| Other noncurrent assets | ( | ) | ||||||||||
| Amount due from related parties | ( | ) | ||||||||||
| Accounts payable | ( | ) | ||||||||||
| Other payables and accrued liabilities | ( | ) | ||||||||||
| Customer deposits | ( | ) | ( | ) | ||||||||
| Taxes payable | ( | ) | ||||||||||
| Operating lease liabilities | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Acquisition of equipment and building | ( | ) | ( | ) | ( | ) | ||||||
| Investment in a joint venture | ( | ) | ( | ) | ||||||||
| Purchases of intangible assets | ( | ) | ( | ) | ( | ) | ||||||
| Additions to leasehold improvements | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from short-term bank loan | ||||||||||||
| Repayment of short-term bank loan | ( | ) | ( | ) | ||||||||
| Repayment of third parties loan | ( | ) | ( | ) | ||||||||
| Proceeds from notes payable | ||||||||||||
| Repayment of notes payable | ( | ) | ( | ) | ( | ) | ||||||
| Proceeds from issuance of shares and warrants in private placements | ||||||||||||
| Proceeds from other payable-related parties | ||||||||||||
| Repayment of other payable-related parties | ( | ) | ||||||||||
| Net cash provided by financing activities | ||||||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ( | ) | ( | ) | ||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, beginning of year | ||||||||||||
| CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, end of year | $ | $ | $ | |||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid for income taxes | $ | $ | $ | |||||||||
| Cash paid for interest | ||||||||||||
| NON-CASH ACTIVITIES： | ||||||||||||
| Cashless exercise of warrants | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Note 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
China Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19, 2006, originally under the name “Kerrisdale Mining Corporation”. On September 24, 2009, the Company changed its name to “China Jo-Jo Drugstores, Inc.” in connection with a share exchange transaction as described below.
On September 17, 2009, the Company completed a
share exchange transaction with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”), whereby
The Company is an online and offline retailer and wholesale distributor of pharmaceutical and other healthcare products in the People’s Republic of China (“China” or the “PRC”). The Company’s offline retail business is comprised primarily of pharmacies, which are operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company that the Company controls through contractual arrangements.
The Company’s offline retail business also
includes four medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”)
and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”), both of which are also controlled by
the Company through contractual arrangements. In May 2014, Shouantang Technology established Hangzhou Shouantang Bio-technology Co., Ltd.
(“Shouantang Bio”). In May 2016, Shouantang Bio set up and held
The Company currently conducts its online retail pharmacy business through Jiuzhou Pharmacy, which holds the Company’s online pharmacy license. On September 10, 2015, Renovation set up Jiuyi Technology to provide additional technical support such as webpage development to our online pharmacy business. In November 2015, the technical support function was transferred back to Jiuzhou Pharmacy, which hosts our online pharmacy.
The Company’s wholesale business is primarily
conducted through Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”), which is licensed to distribute prescription and
non-prescription pharmaceutical products throughout China. Jiuzhou Pharmacy acquired Jiuxin Medicine on August 25, 2011. On April 20,
2018,
The Company’s herb farming business is conducted by Hangzhou Qianhong Agriculture Development Co., Ltd. (“Qianhong Agriculture”), a wholly-owned subsidiary of Jiuxin Management.
F-8
On July 30, 2021, China Jo-Jo Drugstores, Inc., a Nevada corporation (“CJJD”), completed a corporate reorganization (the “Reorganization” or “Redomicile Merger”), resulting in China Jo-Jo Drugstores Holdings, Inc., a company incorporated under the laws of the Cayman Islands (“CJJD Cayman”), becoming the publicly held parent company of CJJD, with CJJD merged with and into CJJD Cayman, pursuant to the Agreement and Plan of Merger, dated as of May 14, 2021, by and between CJJD and CJJD Cayman (the “Merger Agreement”). Prior to the Reorganization, shares of CJJD’s ordinary shares were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on the NASDAQ Capital Market under the symbol “CJJD.” As a result of the Reorganization, each issued and outstanding share of CJJD’s ordinary shares was converted into the right to receive one CJJD Cayman ordinary share, which shares were issued by CJJD Cayman as part of the Reorganization.
On April 7, 2022, the Company effected a 1-for-12 reverse
stock split on its ordinary shares. Upon the effectiveness of the reverse stock split, every
On March 1, 2024, the Company effected a 1-for-20 reverse
stock split on its ordinary shares. Upon the effectiveness of the reverse stock split, every
| Entity Name | Background | Ownership | ||
| Renovation | ||||
| Jiuxin Management | ● Established in the PRC on October 14, 2008
● Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law
● Registered capital of $30.0 million | |||
| Shouantang Technology | ● Established in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
● Registered capital requirement reduced by the SAIC to $11 million in July 2012 and is fully paid
● Deemed a WFOE under PRC law
● Invests and finances the working capital of Quannuo Technology | |||
| Qianhong Agriculture | ● Established in the PRC on August 10, 2010 by Jiuxin Management
● Registered capital of RMB 10 million fully paid
● Carries out herb farming business | |||
| Jiuzhou Pharmacy (1) | ● Established in the PRC on September 9, 2003
● Registered capital of RMB 5 million fully paid
● Operates the “Jiuzhou Grand Pharmacy” stores in Hangzhou | |||
| Jiuzhou Clinic (1) | ||||
| Jiuzhou Service (1) | ● Established in the PRC on November 2, 2005
● Registered capital of RMB 500,000 fully paid
● Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores |
F-9
| Entity Name | Background | Ownership | ||
| Jiuxin Medicine | ● Established in PRC on December 31, 2003
● Acquired by Jiuzhou Pharmacy in August 2011
● Registered capital of RMB 10 million fully paid
● Carries out pharmaceutical distribution services | |||
| Jiutong Medical | ● Established in the PRC on December 20, 2011 by Renovation
● Registered capital of $2.6 million fully paid
● Currently has no operation | |||
| Shouantang Bio | ● Established in the PRC in October, 2014 by Shouantang Technology
● 100% held by Shouantang Technology
● Registered capital of RMB 1,000,000 fully paid
● Sells nutritional supplements under its own brand name | |||
| Jiuyi Technology | ● Established in the PRC on September 10, 2015
● 100% held by Renovation
● Technical support to online pharmacy | |||
| Kahamadi Bio | ● Established in the PRC in May 2016
● 49% held by Shouantang Bio
● Registered capital of RMB 10 million
● Develop brand name for nutritional supplements | |||
| Linjia Medical | ● Established in the PRC in September 27, 2017
● 51% held by Jiuzhou Pharmacy
● Registered capital of RMB 20 million
● Operates local clinics |
F-10
| Shouantang Clinic | ● Established in the PRC in September 2, 2022
● 100% held by Jiuzhou Pharmacy
● Registered capital of RMB 0.1 million
● Operates local clinics | |||
| Jiuzhen Health | ● Established in the PRC in November 11, 2022
● 100% held by Jiuzhou Pharmacy
|
| Hongtong Service | ● Health care delivery
● Established in the PRC in May 12, 2022
● 100% held by Jiuzhou Pharmacy
● Registered capital of RMB 0.1 million
● Daily service |
| (1) | |
| (2) |
F-11
Liquidity and capital resources
As of March 31, 2024, we had cash of approximately
$
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.
On September 26, 2023, the Company closed a private
placement of
The Company has a credit line agreement from a
local bank as described in detail in Note 15 and Note 16. As of March 31, 2024, approximately $
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.
F-12
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
F-13
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.
Long-term investments
Long-term investments include equity investments. Equity investments include investments in common stock or in-substance common stock of entities. For those equity investments over which the Group can exercise significant influence but does not own a majority equity interest or control, the equity method is applied, and the Group adjusts the carrying amount of an investment and recognizes investment income or loss for the Group’s share of the earnings or loss of the investee after the date of investment. For those equity investments accounted for other than under the equity method, the fair value method is applied. However, for equity investments that do not have readily determinable fair values, the Group chooses to account for them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. If this measurement alternative is elected, changes in the carrying value of the equity investments will be required to be made whenever there are observable price changes in transactions for identical or similar investments of the same issuer.
F-14
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.
F-15
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.
F-16
Disaggregation of Revenue
| 2024 | 2023 | 2022 | ||||||||||
| For the year ended March 31, | ||||||||||||
| Retail drugstores | ||||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total retail revenue | $ | $ | $ | |||||||||
| Online pharmacy | ||||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total online revenue | $ | $ | $ | |||||||||
| Drug wholesale | ||||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total wholesale revenue | $ | $ | $ | |||||||||
| Total revenue | $ | $ | $ | |||||||||
F-17
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.
| March 31, 2024 | March 31, 2023 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||
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.
| For the year end March 31, 2024 | ||||||||||||
| Account receivable | Other receivables | Total | ||||||||||
| Allowance for credit losses as of March 31, 2023 | $ | $ | ||||||||||
| Credit loss reversal | ( | ) | ( | ) | ( | ) | ||||||
| Ending allowance for credit losses | $ | $ | ||||||||||
F-18
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.
| Estimated Useful Life | ||
| Leasehold improvements | ||
| Motor vehicles | ||
| Office equipment & furniture | ||
| Buildings |
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.
F-19
| Estimated Useful Life | ||
| Land use rights | ||
| Software | ||
| license |
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. The forest rights certificate from the
local village extends the life of the lease to January 31, 2060. 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 $
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, 2024 and 2023.
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
F-20
Share-based compensation
The Company accounts for share-based payment awards granted to employees and directors by recording compensation expense based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. Share-based awards are attributed to expenses using the straight-line method over the vesting period. The Company determines the value of each option award that contains a market condition using a Monte Carlo Simulation valuation model, while all other option awards are valued using the Black-Scholes valuation model as permitted under FASB ASC 718 “Compensation - Stock Compensation.” The assumptions used in calculating the fair value of share-based payment awards represent the Company’s best estimates. The Company’s estimates of the fair values of stock options granted and the resulting amounts of share-based compensation recognized may be impacted by certain variables including stock price volatility, employee stock option exercise behaviors, additional stock option modifications, estimates of forfeitures, and the related income tax impact.
Advertising and promotion costs
Advertising and promotion costs are expensed as
incurred and amounted to $
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, 2024 and 2023 were translated at 1 USD to 7.2203 RMB and at 1 USD to 6.8676 RMB, respectively. The average translation rates applied to income and cash flow statement amounts for years ended March 31, 2024 and 2023 were at 1 USD to 7.1671 RMB and at 1 USD to 6.8516 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.
F-21
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including its organization and structure disclosed in Note 1, this may not be indicative of future results.
The Company has significant cash deposits with suppliers in order to obtain and maintain inventory. The Company’s ability to obtain products and maintain inventory at existing and new locations is dependent upon its ability to post and maintain significant cash deposits with its suppliers. In the PRC, many vendors are unwilling to extend credit terms for product sales that require cash deposits to be made. The Company does not generally receive interest on any of its supplier deposits, and such deposits are subject to loss as a result of the creditworthiness or bankruptcy of the party who holds such funds, as well as the risk from illegal acts such as conversion, fraud, theft or dishonesty associated with the third party. If these circumstances were to arise, the Company would find it difficult or impossible, due to the unpredictability of legal proceedings in China, to recover all or a portion of the amount on deposit with its suppliers.
Members of the current management team own controlling interests in the Company and are also the Owners of the VIEs in the PRC. The Company only controls the VIEs through contractual arrangements which obligate it to absorb the risk of loss and to receive the residual expected returns. As such, the controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the agreement terms, as a result of which the Company would not retain control of the VIEs.
Concentrations and Credit Risk
Certain financial instruments, which subject the
Company to concentration of credit risk, consist of cash and restricted cash. The Company has cash balances at financial institutions
located in Hong Kong and PRC. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit Protection
Board’s insured limits. Since March 31, 2015, balances at financial institutions and state-owned banks within the PRC are covered
by insurance up to RMB
For the fiscal year ended March 31, 2024, one vendor collectively accounted for more than 10% of the Company’s total purchases and two suppliers accounted for more than 10% of total advances to suppliers. For the fiscal year ended March 31, 2023, four vendors collectively accounted for more than 10% of the Company’s total purchases and four suppliers accounted for more than 10% of total advances to suppliers.
For the fiscal year ended March 31, 2024, one customer accounted for more than 10% of the Company’s total sales but no customer accounted for more than 10% of total accounts receivable. For the fiscal year ended March 31, 2023, one customer accounted for more than 10% of the Company’s total sales but no customer accounted for more than 10% of total accounts receivable.
F-22
NOTE 4 – TRADE RECEIVABLES
| March 31, 2024 | March 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | ||||||||
| Note receivable | ||||||||
| Trade receivables | $ | $ | ||||||
For the years ended March 31, 2024 and 2023, $
Note 5 – OTHER CURRENT ASSETS
| March 31, 2024 | March 31, 2023 | |||||||
| Prepaid rental expenses (1) | $ | $ | ||||||
| Prepaid and other current assets | ||||||||
| Total | $ | $ | ||||||
| (1) |
Note 6 – PROPERTY AND EQUIPMENT
| March 31, 2024 | March 31, 2023 | |||||||
| Building | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Farmland development cost | ||||||||
| Office equipment and furniture | ||||||||
| Motor vehicles | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Impairment* | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| * |
Total depreciation expense for property and equipment
was $
F-23
Note 7 – LONG-TERM INVESTMENT
| March 31, 2024 | March 31, 2023 | |||||||
| Kahamadi Bio (1) | $ | $ | ||||||
| Zhuoli Life (2) | ||||||||
| Songlu Pharmaceutical (3) | ||||||||
| Jiuzhou Digital (4) | ||||||||
| Guoshu Lianren (Zhejiang) Medical and Health Management Co., Ltd (5) | ||||||||
| Long-term investment | $ | $ | ||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
Note 8 – ADVANCES TO SUPPLIERS
Advances to suppliers consist of deposits, with
or advances to, outside vendors for future inventory purchases. Most of the Company’s suppliers require a certain amount of money
to be deposited with them as a guarantee that the Company will receive its purchase on a timely basis. This amount is refundable and bears
no interest.
| March 31, 2024 | March 31, 2023 | |||||||
| Advance to suppliers | $ | $ | ||||||
| Less: reserve for vendor non-performance on advances | ( | ) | ( | ) | ||||
| Advance to suppliers, net | $ | $ | ||||||
F-24
Note 9 – INVENTORY
Inventory consisted of finished goods, valued
at $
Note 10 – FARMLAND ASSETS
| March 31, | March 31, | |||||||
| 2024 | 2023 | |||||||
| Farmland assets | $ | $ | ||||||
| Less: Impairment* | ( | ) | ( | ) | ||||
| Farmland assets, net | $ | $ | ||||||
| * |
Note 11 – LONG TERM DEPOSITS
As of March 31, 2024 and March 31, 2023, long
term deposits amounted to $
Note 12 – OTHER NONCURRENT ASSETS
| March 31, 2024 | March 31, 2023 | |||||||
| Forest land use rights* | $ | $ | ||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| * |
The amortization of the prepayment for the lease
of land use right was approximately $
| Years ending March 31, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
F-25
Note 13 – Leases
The Company leases most of its retail stores and
corporate offices under operating leases, typically with initial terms of
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows paid for operating leases | $ | |||
| Right-of-use assets obtained in exchange for lease obligations: | ||||
| Operating leases | ||||
| Operating leases: | ||||
| Operating lease right-of-use assets | $ | |||
| Current portion of operating lease liabilities | $ | |||
| Long-term operating lease liabilities | ||||
| Total operating lease liabilities | $ | |||
| Weighted average remaining lease term | ||||
| Operating leases | ||||
| Weighted average discount rate | % | |||
| Operating | ||||
| For the year ending March 31, | Leases | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
F-26
Note 14 – INTANGIBLE ASSETS
| March 31, 2024 | March 31, 2023 | |||||||
| License (1) | $ | $ | ||||||
| Software (2) | ||||||||
| Land use rights (3) | ||||||||
| Total intangible assets | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Less: impairment (4) | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
Amortization expense of intangibles amounted to
$
| (1) | |
| (2) |
| (3) | |
| (4) |
F-27
Note 15 – NOTES PAYABLE
The Company has credit facilities with Hangzhou
United Bank (“HUB”), Bank of Hangzhou (“BOH”), and China Merchant Bank (“CMB”) that provided working
capital in the form of the following bank acceptance notes. Usually, the Company applies to issue a note, which is guaranteed by the bank,
to its supplier to pay off its debt in a future date. Before the payment date, the bank will ask the Company to inject cash into the bank.
On the payment date, the bank will pay the amount to whoever legally holds the note.
| Origination | Maturity | March 31, | March 31, | |||||||||||
| Beneficiary(1) | Endorser | date | date | 2024 | 2023 | |||||||||
| Jiuzhou Pharmacy | $ | $ | ||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuzhou Pharmacy | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Jiuxin Medicine | ||||||||||||||
| Total | $ | $ | ||||||||||||
| (1) |
As of March 31, 2024, the Company had a credit
line of approximately $
F-28
Note 16 – LOAN PAYABLE
On August 4, 2023, Jiuzhou Service signed
a Maximum Amount Pledge Contract with Industrial and Commercial Bank of China, pledging Mr. Lei Liu’s land use rights and property
ownership as security, for a loan facility with a maximum principal amount of US$
Note 17 – TAXES
Income tax
Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries, adjusted for items which are considered discrete to the period.
The effective tax rates on income before income
taxes for the year ended March 31, 2024 was (
The effective tax rates on income before income
taxes for the year ended March 31, 2023 was (
The effective tax rates on income before income
taxes for the year ended March 31, 2022 was (
| For the year ended March 31 | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| U.S. Statutory rates | % | % | % | |||||||||
| Foreign income not recognized in the U.S. | ( | ) | ( | ) | ( | ) | ||||||
| China income taxes | ||||||||||||
| Change in valuation allowance | ( | ) | ( | ) | ( | ) | ||||||
| Non-deductible expenses-permanent difference | ( | ) | ( | ) | ( | ) | ||||||
| Effective tax rate | ( | )% | ( | )% | ( | )% | ||||||
The Company has recorded $
Note 18 – POSTRETIREMENT BENEFITS
Regulations in the PRC require the Company to
contribute to a defined contribution retirement plan for all permanent employees. The contribution for each employee is based on a percentage
of the employee’s current compensation as required by the local government. The Company contributed $
F-29
Note 19 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
| Due from related parties: | March 31, 2024 | March 31, 2023 | ||||||
| Hangzhou Kahamadi Biotechnology Co., Ltd(1) | ||||||||
| Others (the directors of subsidiaries)(1) | ||||||||
| Total | $ | $ | ||||||
| (1) |
| Due to related parties: | March 31, 2024 | March 31, 2023 | ||||||
| Due to a director and CEO(2): | ||||||||
| Other(3): | ||||||||
| Total | $ | $ | ||||||
| (1) | Advances to directors of our subsidiaries. |
| (2) |
| (3) |
Note 20 – SHAREHOLDER’S EQUITY
Ordinary shares
On September 26, 2023, the Company closed a private
placement of
On March 1, 2024,
Warrants
Concurrent with the registered direct offering
of common stock that closed on April 15, 2019, the Company issued to several investors in a private placement warrants to purchase up
to
Concurrent with the registered direct offering
of common stock that closed on June 3, 2020, the Company issued to several investors in a private placement warrants to purchase up to
Concurrent with the registered direct offering
of ordinary shares that closed on September 26, 2023, the Company issued to several investors warrants to purchase up to
F-30
Statutory reserves
Statutory reserves represent restricted retained
earnings. Based on their legal formation, the Company is required to set aside
Appropriations to the Reserve Fund are accounted for as a transfer from unrestricted earnings to statutory reserves. During the years ended March 31, 2024 and 2023, the Company did not make appropriations to statutory reserves.
There are no legal requirements in the PRC to fund the Reserve Fund by transfer of cash to any restricted accounts, and the Company does not do so.
Note 21 – NET LOSS PER SHARE
The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available to ordinary shareholders 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 ordinary shares were exercised and converted into ordinary shares.
| For the Years Ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Net loss attributable to controlling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average shares used in basic computation | ||||||||||||
| Diluted effect of stock options and warrants | ||||||||||||
| Weighted average shares used in diluted computation | ||||||||||||
| Loss per share – Basic: | ||||||||||||
| Net loss before noncontrolling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Add: Net loss attributable to noncontrolling interest | $ | $ | $ | |||||||||
| Net loss attributable to controlling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Loss per share – Diluted: | ||||||||||||
| Net income before noncontrolling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Add: Net loss attributable to noncontrolling interest | $ | $ | $ | |||||||||
| Net loss attributable to controlling interest | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
For the year ended March 31, 2024,
F-31
Note 22 – SEGMENTS
The Company operates within
The Company’s reportable business segments are strategic business units that offer different products and services. Each segment is managed separately because they require different operations and markets to distinct classes of customers.
| Retail drugstores | Online Pharmacy | Drug wholesale | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Total capital expenditures | $ | $ | $ | $ | ||||||||||||
| Retail drugstores | Online Pharmacy | Drug wholesale | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Stock based compensation | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Total capital expenditures | $ | $ | $ | $ | ||||||||||||
| Retail drugstores | Online Pharmacy | Drug wholesale | Total | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods | ||||||||||||||||
| Gross profit | $ | $ | $ | $ | ||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment of long-lived assets | ||||||||||||||||
| Loss from operations | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Total capital expenditures | $ | $ | $ | $ | ||||||||||||
F-32
The Company does not have long-lived assets located
outside the PRC.
| For the years ended | ||||||||||||
| March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total | $ | $ | $ | |||||||||
| For the years ended | ||||||||||||
| March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total | $ | $ | $ | |||||||||
| For the years ended | ||||||||||||
| March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Prescription drugs | $ | $ | $ | |||||||||
| OTC drugs | ||||||||||||
| Nutritional supplements | ||||||||||||
| TCM | ||||||||||||
| Sundry products | ||||||||||||
| Medical devices | ||||||||||||
| Total | $ | $ | $ | |||||||||
Note 23 – SUBSEQUENT EVENTS
On April 1, 2024, the compensation committee of
our board of directors granted
On April 29, 2024, the Company entered into certain
Share Purchase Agreements (the “Purchase Agreement”) with several investors (the “Investors”) pursuant to which
the Company agreed to sell to the Investors, and the Investors agreed to purchase from the Company, in a registered direct offering, an
aggregate of
“Shares”), par value $
On May 10, 2024, the Company entered into certain
Share Purchase Agreements (the “Purchase Agreement”) with several investors (the “Investors”) pursuant to which
the Company agreed to sell to the Investors, and the Investors agreed to purchase from the Company, in a registered direct offering, an
aggregate of
On June 11, 2024, the Company entered into certain
Share Purchase Agreements (the “Purchase Agreement”) with several investors (the “Investors”) pursuant to which
the Company agreed to sell to the Investors, and the Investors agreed to purchase from the Company, in a registered direct offering, an
aggregate of
F-33
Exhibit 12.1
CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lei Liu, certify that:
| 1. | I have reviewed this annual report on Form 20-F of China Jo-Jo Drugstores, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: July 30, 2024 | /s/ Lei Liu |
| Lei Liu | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 12.2
CERTIFICATION BY THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ming Zhao, certify that:
| 1. | I have reviewed this annual report on Form 20-F of China Jo-Jo Drugstores, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: July 30, 2024 | /s/ Ming Zhao |
| Ming Zhao | |
| Chief Financial Officer | |
| (Principal Accounting Officer & Principal Financial Officer) |
Exhibit 13.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual report on Form 20-F for the year ended March 31, 2024 (the “Report”) of China Jo-Jo Drugstores, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof, we, Lei Liu, Chief Executive Officer, and Ming Zhao, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| /s/ Lei Liu | |
| Lei Liu | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| /s/ Ming Zhao | |
| Ming Zhao | |
| Chief Financial Officer | |
(Principal Financial Officer and Principal Accounting Officer) |
|
| July 30, 2024 |
Exhibit 15.1
Consent of Independent Registered Public Accounting Firm
China Jo-Jo Drugstores, Inc.
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (No. 333-259692 and No. 269182) and S-8 (No. 268809 and No. 277849) of China Jo-Jo Drugstores, Inc. of our report dated July 30, 2024, relating to the consolidated financial statements and schedules for the years ended March 31, 2024, 2023 and 2022, which appears in this annual report on Form 20-F.
/s/ YCM CPA, Inc.
Irvine, California
July 30, 2024
Exhibit 97.1
China Jo-Jo Drugstores, Inc.
COMPENSATION RECOVERY POLICY
Effective December 1, 2023
In accordance with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Exchange Act Rule 10D-1, and rule 5608 of the Nasdaq rules (“Nasdaq Rules”), the rules where the securities of China Jo-Jo Drugstores, Inc. (the “Company”) are listed. The Company’s Board of Directors (the “Board”) has adopted this Compensation Recovery Policy (the “Policy”). The purpose of this Policy is to recover the erroneously awarded Inventive-Based Compensation (defined below), if any, in the event that the Company is required to prepare an Accounting Restatement.
Capitalized terms used in the Policy are defined in Section A below. The application of the Policy to Executive Officers is not discretionary, except to the limited extent provided in Section G below, and applies without regard to whether an Executive Officer was at fault.
| A. | Definitions |
“Accounting Restatement” means an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period.
“Accounting Restatement Determination Date” means the date that a Company is required to prepare an Accounting Restatement, which is the earlier of: (a) the date the Board, a committee of the Board, or one or more of the officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement; and (b) the date a court, regulator, or other legally authorized body directs the Company to prepare an Accounting Restatement.
“Excess Compensation” means the amount of Incentive-Based Compensation Received that exceeds the amount of Incentive-Based Compensation that otherwise would have been Received had such Incentive-Based Compensation been determined based on the restated amounts (this is referred to in the listings standards as “erroneously awarded incentive-based compensation”) and must be computed without regard to any taxes paid.
“Executive Officer” means each individual who is or was ever designated as an “officer” by the Board in accordance with Exchange Act Rule 16a-1(f).
“Financial Reporting Measures” means measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures. Stock price and total shareholder return are also Financial Reporting Measures. A Financial Reporting Measure need not be presented within the financial statements or included in a filing with the Securities and Exchange Commission.
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“Incentive-Based Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure (for the avoidance of doubt, no compensation that is potentially subject to recovery under the Policy will be earned until the Company’s duty to recover under the Policy has lapsed) and excludes the following: salaries, bonuses paid solely at the discretion of the Committee or Board that are not paid from a bonus pool that is determined by satisfying a Financial Reporting Measure, bonuses paid solely upon satisfying one or more subjective standards and/or completion of a specified employment period, non-equity incentive plan awards earned solely upon satisfying one or more strategic measures or operational measures, and equity awards for which the grant is not contingent upon achieving any Financial Reporting Measure performance goal and vesting upfront, upon the signing of certain agreements, or is contingent solely upon completion of time requirement (e.g., time-based vesting equity awards) and/or attaining one or more non-Financial Reporting Measures.
“Received” means, with respect to any Incentive-based Compensation, actual or deemed receipt, and Incentive-Based Compensation is “Received” under the Policy in the Company’s fiscal period during which the Financial Reporting Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period. For the avoidance of doubt, the Policy does not apply to Incentive-Based Compensation for which the Financial Reporting Measure is attained prior to October 2, 2023.
| B. | Persons Covered by the Policy |
The Policy is binding and enforceable against all Executive Officers who received Incentive-Based Compensation covered by this Policy from the Company (See Section E below).
| C. | Administration of the Policy |
The Compensation Committee of the Board (the “Committee”) has full-delegated authority to administer the Policy. The Committee is authorized to interpret and construe the Policy and to make all determinations necessary, appropriate, or advisable for the administration of the Policy. In addition, if determined in the discretion of the Board, the Policy may be administered by the independent members of the Board or another committee of the Board made up of independent members of the Board, in which case all references to the Committee will be deemed to refer to such independent members of the Board or such other Board committee. All determinations of the Committee will be final and binding and will be given the maximum deference permitted by law.
| D. | Accounting Restatements Requiring Application of the Policy |
If the Company is required to prepare an Accounting Restatement, then the Committee must determine the Excess Compensation, if any, that must be recovered. The Company’s obligation to recover Excess Compensation is not dependent on if or when the restated financial statements are filed.
| E. | Compensation Covered by the Policy |
The Policy applies to all Incentive-Based Compensation Received by an Executive Officer:
| (a) | after beginning service as an Executive Officer; |
| (b) | who served as an Executive Officer at any time during the performance period for that Incentive-Based Compensation; |
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| (c) | while the Company has a class of securities listed on the Exchange; |
| (d) | during the three completed fiscal years immediately preceding the Accounting Restatement Determination Date. In addition to these last three completed fiscal years, the Policy must apply to any transition period (that results from a change in the Company’s fiscal year) within or immediately following those three completed fiscal years. However, a transition period between the last day of the Company’s previous fiscal year end and the first day of the Company’s new fiscal year that comprises a period of nine to 12 months would be deemed a completed fiscal year; and |
| (e) | on or after October 2, 2023. |
| F. | Excess Compensation Subject to Recovery of the Policy |
To determine the amount of Excess Compensation for Incentive-Based Compensation based on stock price or total shareholder return, where it is not subject to mathematical recalculation directly from the information in an Accounting Restatement, the amount must be based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the Incentive-Based Compensation was Received and the Company must maintain documentation of the determination of that reasonable estimate and provide the documentation to the Exchange.
| G. | Repayment of Excess Compensation |
The Company must recover Excess Compensation reasonably promptly and Executive Officers are required to repay Excess Compensation to the Company. Subject to applicable law, the Company may recover Excess Compensation by requiring the Executive Officer to repay such amount to the Company by direct payment to the Company or such other means or combination of means as the Committee determines to be appropriate (these determinations do not need to be identical as to each Executive Officer). These means may include:
| (a) | requiring reimbursement of cash Incentive-Based Compensation previously paid; |
| (b) | seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; |
| (c) | offsetting the amount to be recovered from any unpaid or future compensation to be paid by the Company or any affiliate of the Company to the Executive Officer; |
| (d) | cancelling outstanding vested or unvested equity awards; and/or |
| (e) | taking any other remedial and recovery action permitted by law, as determined by the Committee. |
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The repayment of Excess Compensation must be made by an Executive Officer notwithstanding any Executive Officer’s belief (whether or not legitimate) that the Excess Compensation had been previously earned under applicable law and therefore is not subject to recovery.
The Company is prohibited from indemnifying any Executive Officer or former Executive Officer against the loss of Excess Compensation.
In addition to its rights to recovery under the Policy, the Company or any affiliate of the Company may take any legal actions it determines appropriate to enforce an Executive Officer’s obligations to the Company or its affiliate or to discipline an Executive Officer, including (without limitation) termination of employment, institution of civil proceedings, reporting of misconduct to appropriate governmental authorities, reduction of future compensation opportunities, or change in role. The decision to take any actions described in the preceding sentence will not be subject to the approval of the Committee and can be made by the Board, any committee of the Board, or any duly authorized officer of the Company or of any applicable affiliate of the Company.
| H. | Limited Exceptions to the Policy |
The Company must recover Excess Compensation in accordance with the Policy except to the limited extent that any of the conditions set forth below are met, and the Committee determines that recovery of the Excess Compensation would be impracticable:
| (a) | The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before reaching this conclusion, the Company must make a reasonable attempt to recover the Excess Compensation, document the reasonable attempt(s) taken to so recover, and provide that documentation to the Exchange; |
| (b) | Recovery would violate home country law where that law was adopted prior to November 28, 2022. Before reaching this conclusion, the Company must obtain an opinion of home country counsel, acceptable to the Exchange, that recovery would result in such a violation, and must provide such opinion to the Exchange; or |
| (c) | Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) (Assignment and alienation) or 26 U.S.C. 411(a) (Minimum vesting standards) and regulations thereunder. |
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| I. | Other Important Information in the Policy |
Notwithstanding the terms of any of the Company’s organizational documents (including, but not limited to, the Company’s Memorandum and Articles of Association), any corporate policy or any contract (including, but not limited to, any indemnification agreement), neither the Company nor any affiliate of the Company will indemnify or provide advancement for any Executive Officer against any loss of Excess Compensation, or any claims relating to the Company’s enforcement of its rights under the Policy. Neither the Company nor any affiliate of the Company will pay for or reimburse insurance premiums for an insurance policy that covers potential recovery obligations. In the event that pursuant to the Policy the Company is required to recover Excess Compensation from an Executive Officer who is no longer an employee, the Company will be entitled to seek recovery in order to comply with applicable law, regardless of the terms of any release of claims or separation agreement such individual may have signed. Neither the Company nor any affiliate of the Company will enter into any agreement that exempts any Incentive-Based Compensation that is granted, paid, or awarded to an Executive Officer from the application of the Policy or that waives the Company’s right to recovery of any Excess Compensation, and the Policy shall supersede any such agreement (whether entered into before, on, or after the adoption of the Policy).
The Committee or Board may review and modify the Policy from time to time.
If any provision of the Policy or the application of any such provision to any Executive Officer is adjudicated to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability will not affect any other provisions of the Policy or the application of such provision to another Executive Officer, and the invalid, illegal or unenforceable provisions will be deemed amended to the minimum extent necessary to render any such provision or application enforceable.
The Policy will terminate and no longer be enforceable when the Company ceases to be a listed issuer within the meaning of Section 10D of the Exchange Act or when the Exchange Act Rule 10D-1, and the rule 5608 of the Nasdaq Rules are no longer effective.
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