HANGZHOU, China
China Jo-Jo Drugstores, Inc. (NASDAQ:CJJD), (the “Company”), a retail and wholesale distributor of pharmaceutical and other healthcare products in Zhejiang and Shanghai, today reported earnings results for the second quarter of fiscal 2013 ended September 30, 2012. The Company will hold its second quarter fiscal 2013 earnings call on Friday, November 16, 2011 at 8:00 a.m. Eastern Time. Please see below for dial in information.
Second Quarter Highlights:
- Revenue increased 20.0% from a year ago to $26.7 million
- Second quarter retail drugstore sales revenue improved 12.9% from first quarter fiscal year 2013
- Wholesale business accounted for 60.6% of total revenue
- Gross profit was $3.4 million and gross margin was 12.8%
Dr. Lei Liu, Chairman and CEO, stated, “Given China’s slower economic and increased regulatory environment towards retail pharmacies, we are pleased that we continue to make progress to better vertically integrate our operations. Our wholesale business has continued to grow and will give us the foothold we need to establish our long-term position.”
Since August 2011, stricter government policies towards the marketing practices of retail drugstores, industry competition and further government drug price control have impacted sales at our retail drugstores. However, as more of our drugstores are approved to accept government medical insurance, the Company’s retail drugstores sales revenue improved to $9,637,418 during the three months ended September 30, 2012 over revenue of $8,393,098 during the three months ended June 30, 2012.
Dr. Liu further commented, “Looking forward, we anticipate that our revenues will be primarily from our wholesale operations with additional contributions from our retail drugstores. We also hope to see continued production from our Chinese herb farming and growth in our online drugstore business.”
Second Quarter Fiscal 2013 Results
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Three months ended September 30, | |||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||
| Amount | Percentage
of total revenue |
Amount | Percentage
of total revenue |
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| Revenue | $ | 26,665,114 | 100.0 | % | $ | 22,224,947 | 100.0 | % | ||||||||||||
| Gross profit | $ | 3,422,197 | 12.8 | % | $ | 6,257,896 | 28.2 | % | ||||||||||||
| Selling expenses | $ | 2,102,621 | 7.9 | % | $ | 2,711,494 | 12.2 | % | ||||||||||||
| General and administrative expenses | $ | 1,310,313 | 4.9 | % | $ | 1,320,521 | 5.9 | % | ||||||||||||
| Income from operations | $ | 9,263 | 0.0 | % | $ | 2,225,881 | 10.0 | % | ||||||||||||
| Other income (expense), net | $ | (90,332 | ) | (0.3 | )% | $ | 187,166 | 0.8 | % | |||||||||||
| Impairment of goodwill | $ | 1,473,606 | 5.5 | % | $ | – | 0.0 | % | ||||||||||||
| Change in fair value of purchase option derivative liability | $ | 25,905 | 0.1 | % | $ | 34,356 | 0.2 | % | ||||||||||||
| Income tax expense | $ | 10 | 0.0 | % | $ | 817,990 | 3.7 | % | ||||||||||||
| Net (loss) income attributable to controlling interest | $ | (1,528,449 | ) | (5.7 | )% | $ | 1,633,713 | 7.4 | % | |||||||||||
| Net loss attributable to noncontrolling interest | $ | 331 | 0.0 | % | $ | 4,300 | 0.0 | % | ||||||||||||
Revenue. We had two revenue streams for the three months ended September 30, 2012 and 2011: (i) store and online retail sales of pharmaceutical and other healthcare products, and (ii) wholesale distribution of pharmaceutical and other healthcare products, primarily to third-party pharmaceutical trading companies. Included in our wholesale revenue are wholesales of pharmaceutical and healthcare products that we purchased from third-party manufacturers or suppliers. Our revenue increased by $4,440,167 or 20.0% period over period, primarily due to the expansion of our wholesale business, offset by a decrease in our retail business:
| (1) | We started our wholesale business after acquiring Jiuxin Medicine in August 2011, through which we have been distributing third-party pharmaceutical and healthcare products to pharmaceutical trading companies and other group customers. Our wholesale business increased rapidly during fiscal 2013 because we introduced very competitive pricing to customers to stimulate sales. Sales from the wholesale business accounted for $16,167,166 or approximately 60.6% of our total revenue for the three months ended September 30, 2012. In contrast, for the three months ended September 2011, sales from the wholesale business accounted for only $3,941,973 or approximately 17.7% of our total sales. | ||
| (2) | Our retail sales decreased by $7,785,026 or 42.6% to $10,497,948 for the three months ended September 30, 2012 from $18,282,974 for the three months ended September 30, 2011. Although our retail store count increased to 65 as of September 30, 2012, from 58 stores a year ago, our retail store sales decreased primarily as a result of stricter government policies and a competitive retail market. Retail sales accounted for approximately 39.4% of our total revenue for the three months ended September 30, 2012. Same-store sales decreased by approximately $9,060,348 or 50.0%, while our new stores and online pharmacy contributed a total of approximately $1,118,454. We expect same-store sales will continue to decline as the frequency of government-mandated price controls and the number of drugs subject to price controls continue to rise. | ||
Quarterly Revenue by Segment. The following table breaks down the revenue for our three business segments for the three months ended September 30, 2012 and 2011:
| Three months ended September 30, | ||||||||||||||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||||||||||||
| Amount |
% of total |
Amount |
% of total |
Variance by |
% of |
|||||||||||||||||||||||||
| Revenue from retail business | ||||||||||||||||||||||||||||||
| Revenue from drugstores | $ | 9,637,418 | 36.2 | % | $ | 18,193,045 | 81.9 | % | $ | (8,555,627 | ) | (47.0 | )% | |||||||||||||||||
| Revenue from online sales | 860,530 | 3.2 | % | 89,929 | 0.4 | % | 770,601 | 856.9 | % | |||||||||||||||||||||
| Sub-total of retail revenue | 10,497,948 | 39.4 | % | 18,282,974 | 82.3 | % | (7,785,026 | ) | (42.6 | )% | ||||||||||||||||||||
| Revenue from wholesale business | 16,167,166 | 60.6 | % | $ | 3,941,973 | 17.7 | % | 12,225,193 | 310.1 | % | ||||||||||||||||||||
| Revenue from farming business | – | 0.0 | % | – | 0.0 | % | – | 0.0 | % | |||||||||||||||||||||
| Total revenue | $ | 26,665,114 | 100 | % | $ | 22,224,947 | 100 | % | $ | 4,440,167 | 20.0 | % | ||||||||||||||||||
The revenue fluctuation period over period reflected the following combined factors:
| (1) | Revenue from “Jiuzhou Grand Pharmacy” stores decreased by approximately $8.6 million or 47.0% quarter over quarter, mainly due to two reasons. During the three month ended September 30, 2011, we implemented a variety of promotional activities such as giving out gifts and discounts to our customers. Since the second quarter of fiscal 2012, the Hangzhou government has been gradually restricting retail drugstores within the city from organizing large-scale marketing promotions on the streets in which further rebates or discounts are given to customers making purchases with government-sponsored medical insurance cards. Our promotional activities were curtailed accordingly, which, in turn, impacted our retail sales revenue, especially from sales of certain prescription drugs covered by the medical insurance cards. In addition, the government subjected more drugs to price controls, which caused us to reduce prices for some of the affected drugs and stop carrying others at our pharmacies. | ||
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(2) |
Our wholesale business increased by $12,225,193 or 301.1% quarter over quarter. It reflects our continuous efforts to expand Jiuxin Medicine’s business, which was acquired in August, 2011. In order to promote its sales, Jiuxin Medicine introduced competitive prices, which resulted in a low profit margin. On the other side, as Jiuxin Medicine was in its start-up period, the sales in August and September of 2011 did not typically represent its regular sale volume. As a result, we do not expect such a significant growth rate in the future. |
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(3) |
Our online pharmacy sales increased by $770,601 or 856.9% quarter over quarter. As we started business cooperation with certain local business-to-consumer online vendors such as Taobao during the second half of 2011, our online pharmacy has become more and more widely exposed to potential customers over time. As a result, we have seen a steady growth in our online sales. |
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Gross Profit. Our gross profit decreased by $2,835,699 or 45.3% quarter over quarter primarily as a result of decreased retail sales. Our gross margin decreased period over period from 28.2% to 12.8% as a result of decline of our retail sale profit margin as well as a low profit margin of our wholesale business, partially caused by our sales promotion activities. The average gross margin of our retail and wholesale businesses for the three months ended September 30, 2012 are as follows:
| Three months ended
March 31, |
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| 2012 | 2011 | |||||||||
| Average gross margin for retail business | 26.6 | % | 33.4 | % | ||||||
| Average gross margin for wholesale business | 3.9 | % | 4.1 | % | ||||||
| Average gross margin for farming business | N/A | N/A | ||||||||
Our retail gross margin decreased to 26.6% in the three months ended September 30, 2012 from 33.4% in the three months ended September 30, 2011. The Chinese government has included more and more prescription and OTC drugs in the price control list. Some of our products’ prices were higher than the prices set by the Chinese government. Hence, we had to adjust these products’ prices. As a result, the profit margin for these products declined. In addition, due to the economic slowdown and stricter government policies such as stricter insurance reimbursement policy and the expansion of Essential Drug List (EDL), the retail drugstore market became much more competitive. For example, drugs listed in the EDL were being sold at a price close to its cost at local community hospitals which, in turn, receive government subsidies. Correspondently, we had to either abandon sale of these drugs or sell them at minimal profit margins. As a result, our overall retail gross profit margin decreased.
Our wholesale gross margin for the three months ended September 30, 2012 was 3.9% as compared to 4.1% for the three months ended September 30, 2011. Because we introduced very competitive prices to stimulate sales, our traditional wholesale business, where we purchase from third-party manufacturers or suppliers and resell, has a low profit margin.
Selling and Marketing Expenses. Our sales and marketing expenses decreased by $608,873 or 22.5% period over period mainly due to less promotional activities because of restrictions by the local government, offset by increased rent and depreciation and amortization expense. Such expenses as a percentage of our revenue decreased to 7.9%, from 12.2% for the same period a year ago as our wholesale business contributed significant sales revenue.
General and Administrative Expenses. Our general and administrative expenses decreased by $10,208 or 0.8% period over period. Such expenses as a percentage of our revenue decreased to 4.9% from 5.9% for the same period a year ago. The decrease in absolute dollars as well as a percentage of revenue related to our stringent expense budget and control.
Income from Operations. Mainly as a result of lower profit margins, partly offset by decreases in general and administration expenses and decreases in selling and marketing expenses, our income from operations decreased by $2,216,618 or 99.6% period over period. Our operating margin for the three months ended September 30, 2012 and 2011 was 0.0% and 10.0%, respectively.
Impairment of Goodwill. During the three months ended September 30, 2012, we recorded a goodwill impairment charge of $1,473,606 that was previously recognized in the acquisitions of Juixin Medicine and Shanghai Zhongxin. The impairment to goodwill was made after the Company estimated the fair values of businesses acquired and determined that the implied fair value of goodwill was lower than the carrying value of goodwill for the two businesses. Accordingly, the Company recorded its best impairment estimates of $1,403,933 for Jiuxin Medicine and $69,673 for Shanghai Zhongxin.
Income Taxes. For the current period, our income tax expense decreased by $817,980, as a result of a net loss.
Net Income. As a result of the foregoing, our net income decreased by $3,162,162 period over period.
Comparison of six months ended September 30, 2012 and 2011
The following table summarizes our results of operations for the six months ended September 30, 2012 and 2011:
| Six months ended September 30, | ||||||||||||||||||||
| 2012 | 2011 | |||||||||||||||||||
| Amount | Percentage
of total revenue |
Amount | Percentage
of total revenue |
|||||||||||||||||
| Revenue | $ | 59,512,445 | 100.0 | % | ||||||||||||||||
