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China Jo-Jo Drugstores Reports Third Quarter Earnings Results

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 third quarter of fiscal 2013 ended December 31, 2012. The Company will hold its earnings call on Tuesday, February 19, 2013, at 8:00 a.m. Eastern Time. Please see below for dial in information.

Third Quarter Highlights:

  • Revenue decreased 39.1% from a year ago to $15.6 million
  • Third quarter retail drugstore sales revenue improved 7.3% from the second quarter fiscal year 2013
  • Wholesale business accounted for 28.0% of total revenue
  • Gross profit was $3.0 million and gross margin of retail business and wholesale business was 23.3% and 8.6%, respectively

Mr. Lei Liu, the Company’s Chairman and CEO, stated, “Despite tighter budget for government-sponsored insurance and increased regulations of retail pharmacies, we were able to improve retail sales from a quarter ago. On the other hand, we are reconsidering our volume-driven strategy for our wholesale business.”

Dr. Liu continued, “Looking forward, we anticipate a transition in our wholesale business strategy and a moderate growth in our retail drugstores sales. We also anticipate to harvest Chinese Herbs in the next twelve months and growth in our online drugstore business.”

Comparison of three months ended December 31, 2012 and 2011

The following table summarizes our results of operations for the three months ended December 31, 2012 and 2011:

      Three months ended December 31,
2012     2011
Amount    

Percentage of total revenue

Amount    

Percentage of total Revenue

Revenue $ 15,596,013 100.0 % $ 25,643,949 100.0 %
Gross profit $ 2,990,302 19.2 % $ 6,826,869 26.6 %
Selling expenses $ 3,179,168 20.4 % $ 2,498,892 9.7 %
General and administrative expenses $ 3,300,064 21.2 % $ 2,175,615 8.5 %
Income (loss) from operations $ (3,488,930 ) (22.4 )% $ 2,152,362 8.4 %
Other (expense) income, net $ (25,380 ) (0.2 )% $ 16,343 0.1 %
Impairment of goodwill $ - 0.0 % $ - 0.0 %
Change in fair value of purchase option derivative liability $ (12,095 ) (0.1 )% $ 19,404 0.1 %
Income tax (benefits) expense $ (39,613 ) (0.3 )% $ 610,910 2.4 %
Net (loss) income attributable to controlling interest $ (3,486,521 ) (22.4 )% $ 1,573,982 6.1 %
Net (loss) attributable to noncontrolling interest $ (271 ) (0.0 )% $ (3,217 ) (0.0 )%
 

Revenue. We had two revenue streams for the three months ended December 31, 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. We did not have any revenue from our farming business as there was no harvest during the winter months.

Our revenue decreased by $10,047,936 or 39.2% period over period, primarily due to decrease in both wholesale and retail businesses as compared to the same period a year ago:

(1)    

Wholesale, which represented approximately 28.0% of total revenue for the three months ended December 31, 2012, decreased by $3,041,477 or 61.5% to $4,368,398, from $7,409,875 primarily due to a shift in our wholesale strategy. Since starting the wholesale business in August 2011, we have been using competitive pricing to stimulate sales and ramp up sales volume. The attendant low margins from such practice hurt our profitability. Accordingly, we ceased certain low margin sales in the quarter ended December 31, 2012 and are reconsidering our volume-driven wholesale strategy.

 

(2)

Retail sales, which accounted for approximately 72.0% of our total revenue for the three months ended December 31, 2012, decreased by $7,006,459 or 38.4% to $11,227,615 from $18,234,074, primarily as a result of stricter government policies and an increasingly competitive retail market. Our retail store count decreased to 52 as of December 31, 2012, from 60 stores a year ago. Such closings, however, had little or no impact on our operations given the small size of these stores and their operations when compared to the whole of our pharmacy business. Same-store sales decreased by approximately $7,156,174 or 41.6%, while new stores and online pharmacy collectively contributed approximately $832,878 in revenue. Our pharmacies usually perform better in the second half of our fiscal year when more national holidays such as the Chinese Spring Festival take place. Partially due to such seasonality, our retail sales changed quarter by quarter within the fiscal 2013. We do not expect same-store sales will recover quickly in the near future 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 December 31, 2012 and 2011:

      Three months ended December 31,        
2012     2011
    % of total     % of total Variance by
Amount revenue Amount revenue amount % of change
Revenue from retail business
Revenue from drugstores $ 10,337,237 66.5 % $ 17,639,448 68.8 % $ (7,262,211 ) (41.2 )%
Revenue from online sales   850,378 5.5 %   594,626 2.3 %   255,752   43.0 %
Sub-total of retail revenue 11,227,615 72.0 % 18,234,074 71.1 % (7,006,459 ) (38.4 )%
 
Revenue from wholesale business 4,368,398 28.0 % 7,409,875 28.9 % (3,041,477 ) (41.0 )%
Revenue from farming business - 0.0 % - 0.0 % - 0.0 %
Total revenue $ 15,596,013 100 % $ 25,643,949 100 % $ (10,047,936 ) (39.2 )%
 

The revenue fluctuation period over period reflected the following combined factors:

(1)    

Drugstore revenue decreased by approximately $7.3 million or 41.2% quarter over quarter, primarily due to three reasons. First, local government has been trying to control the costs of its insurance program in the face of budgetary constraints, and is whittling down the types and number of subsidized drugs. Second, as the local government subjects more drugs to price control, we must in turn either reduce our prices for the affected drugs or stop carrying them at our pharmacies. Third, the retail drug market in Hangzhou, where our stores are still predominantly located, has become very competitive with many neighborhood drugstores. As a result, we do not expect our retail sales to recover quickly in the near future.

 

(2)

Our online pharmacy sales increased by $255,752 or 43.0% quarter over quarter. Since cooperating with business-to-consumer online vendors such as Taobao beginning in the second half of calendar 2011, our online pharmacy has gained wider recognition and we have seen a steady growth in sales.

 

Gross Profit. Our gross profit decreased by $3,836,567 or 56.2% quarter over quarter due to the significant drop in sales at our retail locations. Our gross margin also decreased, from 26.6% to 19.2%, as a result of lower retail and wholesale profit margins. The average gross margin of each of our three business segments for the three months ended December 31, 2012 are as follows:

         

Three months ended

March 31,

2012   2011
Average gross margin for retail business 23.3 % 36.7 %
Average gross margin for wholesale business 8.6 % 1.9 %
Average gross margin for farming business N/A N/A
 

Our retail gross margin decreased to 23.3% in the three months ended December 31, 2012 from 36.7% in the three months ended December 31, 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. Furthermore, in order to keep competitive in the competitive drug retail market, we had to cut prices of certain drugs. As a result, our overall retail gross profit margin decreased.

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