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China Jo-Jo Drugstores Inc. Reports Financial Results For Second Quarter Fiscal 2013 And Announces Second Quarter Fiscal 2013 Conference Call

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

Amount       Percentage

of total

Revenue $ 59,512,445   100.0 % $ 43,652,806   100.0 %
Gross profit $ 8,566,974 14.4 % $ 13,127,219 30.1 %
Selling expenses $ 3,960,845 6.7 % $ 4,089,794 9.4 %
General and administrative expenses $ 4,156,892 7.0 % $ 2,395,304 5.5 %
Income from operations $ 449,237 0.8 % $ 6,642,121 15.2 %
Other income, net $ 8,367 0.0 % $ 206,586 0.5 %
Impairment of goodwill $ 1,473,606 2.5 % $ - 0.0 %
Change in fair value of purchase option derivative liability $ 25,747 0.0 % $ 96,988 0.2 %
Income tax expense $ 3,892 0.0 % $ 2,073,553 4.8 %
Net (loss) income attributable to controlling interest $ (993,562 ) (1.7 )% $ 4,876,442 11.2 %
Net loss attributable to noncontrolling interest $ 585 0.0 % $ 4,300 0.0 %

Revenue. We had three revenue streams for the six months ended September 30, 2012: (i) store and online retail sales of pharmaceutical and other healthcare products, and (ii) wholesale distribution of pharmaceutical and other healthcare products, and (iii) our self-cultivated TCM herbs, primarily to third-party pharmaceutical trading companies. In contrast, store retail sales and wholesale provided almost all of our revenue for the six months ended September 30, 2011.

Our revenue increased by $15,859,639 or 36.3% period over period, primarily due to the expansion of our wholesale business and the addition of our farming 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 2012 because we introduced very competitive pricing to customers to stimulate sales. Sales from the wholesale business accounted for $37,535,949 or approximately 63.1% of our total revenue for the six months ended September 30, 2012. In contrast, sales from the wholesale business accounted for $3,941,973 or approximately 9.0% of our total revenue for the six months ended September 30, 2011.


In the fourth quarter of fiscal 2012, we also began distributing the TCM herbs such as Peucedanum that we have been cultivating, to third-party pharmaceutical trading companies. Although we have hired several specialists to oversee our farming business, we are mainly relying on the local village government to manage the cultivation process. For example, the local government would organize local farmers to plant, fertilize and harvest. In turn, we paid for the expenses incurred by the local farmers based on our agreements with the local government. Sales from our farming business accounted for $2,524,092 or approximately 4.2% of our total revenue for the six months ended September 30, 2012.


Our retail sales decreased by $20,959,786 or 53.8% to $18,034,414 for the six months ended September 30, 2012 from $38,994,200 for the six 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 32.7% of our total revenue for the six months ended September 30, 2012. Same-store sales decreased by approximately $22,608,343 or 56.7%, while our new stores and online pharmacy contributed a total of approximately $1,672,725. 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.

Six-Month Revenue by Segment.  The following table breaks down the revenue for our three business segments for the six months ended September 30, 2012 and 2011:
    Six months ended September 30,        
2012     2011

% of total revenue

% of total revenue

Variance by amount

% of change
Revenue from retail business
Revenue from drugstores $ 18,034,415   30.3 % $ 39,534,200   90.6 % $ (21,499,785 )   (54.4 )%
Revenue from online sales   1,417,990   2.4 %   176,633   0.4 %   1,241,357   702.8 %
Sub-total of retail revenue 19,452,405 32.7 % 39,710,833 91.0 % (20,258,428 ) (51.0 )%
Revenue from wholesale business 37,535,949 63.1 % 3,941,973 9.0 % 33,593,976 852.2 %
Revenue from farming business   2,524,091   4.2 %   -   0.0 %   2,524,091   N/A
Total revenue $ 59,512,445   100.0 % $ 43,652,806   100.0 % $ 15,859,639   36.3 %

The revenue fluctuation period over period reflected the following combined factors:
(1)     Revenue from “Jiuzhou Grand Pharmacy” stores decreased by approximately $21.0 million or 54.4% period over period for the same reasons that it declined during the quarter. During the six 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.


Our wholesale business increased by $33,593,976 or 852.2% period over period. 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.


Our online pharmacy sales increased by $1,241,357 or 702.8% period over period. 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.

Gross Profit. Our gross profit decreased by $4,560,245 or 34.7% period over period primarily as a result of decreased retail sales. Our gross margin decreased period over period from 30.1% to 14.4% as a result of decline in our retail sale profit margin as well as low profit margin for our wholesale business, partially caused by our sales promotion activities. The average gross margin of our retail and wholesale businesses for the six months ended September 30, 2012 are as follows:
    Six months ended

March 31,
2012     2011
Average gross margin for retail business   26.3 %   32.1 %
Average gross margin for wholesale business 3.0 % 4.1 %
Average gross margin for farming business 90.9 % N/A

Our retail gross margin decreased to 26.3% in the six months ended September 30, 2012 from 32.1% in the six 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.

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