China Jo-Jo Drugstores, Inc. Reports Fiscal Year 2014 First Quarter Earnings Results and Schedules Conference Call for August 19, 2013

Three months ended June 30,

2013

2012

Amount

Percentage

of total

revenue

Amount

Percentage

of total

revenue

Revenue

$

15,336,519

100.0%

$

32,847,330

100.0%

Gross profit

$

3,601,169

23.5%

$

5,144,777

15.7%

Selling expenses

$

1,680,842

11.0%

$

1,858,225

5.7%

General and administrative expenses

$

2,640,818

17.2%

$

2,846,578

8.7%

(Loss) income from operations

$

(720,491)

(4.7)%

$

439,974

1.3%

Other (expense) income, net

$

(40,413)

(0.3)%

$

98,698

0.3%

Change in fair value of purchase option derivative liability

$

12,665

0.1%

$

(158)

(0.0)%

Income tax expense

$

39,520

0.3%

$

3,882

0.0%

Net income attributable to controlling interest

$

(787,516)

(5.1)%

$

534,887

1.6%

Net loss attributable to noncontrolling interest

$

(243)

(0.0)%

$

(255)

(0.0)%

(1)

Retail sales, which accounted for approximately 71.2% of total revenue for the three months ended June 30, 2013, increased by $1,957,934 or 21.9% to $10,912,390. Performance of many of our older stores have improved from concerted efforts to improve customer experience, such as hiring more physicians to increase availability of in-store consultation, and stocking each store location to better cater to its neighborhood. At the same time, many of the stores opened in the past two years are now maturing and able to accept state-sponsored medical insurance.  Same-store sales increased by approximately $2,151,250 or 25.6%, while online sales contributed approximately $1,264,172 in revenue, an increase of 125.2%.   The increase in same-store sales reflects implementation of our key drugstore operation strategy such as promoting sale through our doctors and clinics, as well as modest economic growth in China.  Retail margin, however, fell from 26.0% to 25.7% due to price adjustments caused by government drug price control.  Our store count decreased to 51 as of June 30, 2013, from 65 a year ago.  However, because the stores that we closed were underperforming with low sale volume, their closure had little effect on our overall retail sales.

(2)

Wholesale revenue, which represented 28.8% of total revenue for the three months ended June 30, 2013, decreased by $16,944,654 or 65.0%.  Such significant contraction resulted from ongoing implementation of our new wholesale strategy to focus on profitability rather than sales volume.  Thus, our wholesale profit margin increased from 2.5% to 18.6%. However, until we can achieve first-tier distributor status with more vendors, we will continue to have limited access to more lucrative sales channels such as hospitals, and do not expect our wholesale business to expand significantly in the immediate future.

(3)

Sales from our herb farming business amounted to $0 for the three months ended June 30, 2013 as compared to $2,524,091 a year ago. Because market prices were lower than anticipated, we decided to hold off harvesting certain herbs (such as ginkgo trees which, although can be harvested, will increase in value with age), and to keep what we have harvested in inventory, until prices reached an acceptable level. We generally plant herbs based on our best estimate as to future market demands, and harvest and sell them when market conditions are favorable. We anticipate that we will continue doing so in upcoming fiscal year, but do not expect a significant increase from fiscal 2013 in terms of revenue or gross profit.

Three months ended June 30,

2013

2012

Amount

% of total
revenue

Amount

% of total
revenue

Variance by
amount

% of
change

Revenue from retail business

     Revenue from drugstores

$

9,648,218

62.9%

$

8,393,098

25.6%

$

1,255,120

15.0%

     Revenue from online sales

1,264,172

8.2%

561,358

1.7%

702,814

125.2%

          Sub-total of retail revenue

10,912,390

71.1%

8,954,456

27.3%

1,957,934

21.9%

Revenue from wholesale business

4,424,129

28.8%

21,368,783

65.0%

(16,944,654)

(79.3)%

Revenue from farming business

-

-%

2,524,091

7.7%

(2,524,091)

(100.0)%

Total revenue

$

15,336,519

100%

$

32,847,330

100%

$

(17,510,811)

(53.3)%

(1)

Drugstore revenue increased by approximately $1.2 million or 15% period over period, primarily due to three factors. First, we reconfigured operating strategy to refocus on our strengths.  For example, by hiring additional doctors for our clinics, we were able to attract and serve more patients who in turn purchased their medication from our stores.  Second, all of the stores that we opened in Hangzhou during the past two years are now able to accept state-sponsored medical insurance, six of which were unable to do so a year ago.  Since insurance reimbursement accounted for approximately 50% our drugstore revenue from Hangzhou in the past year, the ability to accept medical insurance is a significant factor in a store's operating performance.  Third, the modest growth in Chinese economy has encouraged consumers to spend, so a modest increase in drug sales is expected.

(2)

Wholesale revenue decreased by $16,944,654 or 79.3% period over period. The drop in wholesale revenue is a reflection of our strategy to focus on profitability. Although we achieved our sales volume in the prior period quickly through competitive pricing, we incurred loss as result of low profit margin and rising overhead. Since our third fiscal quarter of fiscal 2013, we have ceased certain low margin sales and are focusing on profitability rather than sales volume.  Although this strategy may impact our ability to achieve first-tier distributor status, we believe that focusing on profitability rather than volume is critical for our overall operations going forward.

(3)

Online sales increased by $702,814 or 125.2% period over period.  We have been working with business-to-consumer online vendors, including Taobao, by posting our products on their online platforms, which direct customers back to our website.  Such arrangement has exposed our online presence to a wider consumer base.  In addition, since the end of 2012, we have expended considerable efforts in identifying popular products that can drive sales.  As a result, we have seen steady growth in online sales.

Three months ended

June 30,

2013

2012

Average gross margin for retail business 

25.7%

26.0%

Average gross margin for wholesale business 

18.6%

2.5%

Average gross margin for farming business 

N/A

90.9%

CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

June 30,
2013

March 31,
2013

A S S E T S

CURRENT ASSETS

Cash

$

2,711,399

$

4,524,094

Notes receivable

291,600

-

Trade accounts receivable, net

11,912,337

12,978,808

Inventories

9,127,235

8,586,999

Other receivables, net

320,355

157,849

Advances to suppliers, net

17,175,750

15,523,034

Restricted cash

3,540,685

2,162,837

Other current assets

2,027,463

1,221,499

Total current assets

47,106,824

45,155,120

PROPERTY AND EQUIPMENT, net

13,071,698

13,288,652

OTHER ASSETS

Long term deposits

2,805,695

2,760,665

Other noncurrent assets

5,470,095

5,431,326

Intangible assets, net

1,182,433

1,202,258

Total other assets

9,458,223

9,394,249

Total assets

$

69,636,745

$

67,838,021

L I A B I L I T I E S    A N D    S T O C K H O L D E R S'   E Q U I T Y

CURRENT LIABILITIES

Short-term loan payable

$

162,000

$

-

Accounts payable, trade

15,374,922

13,780,211

Notes payable

7,136,683

7,186,453

Other payables

1,426,631

1,327,454

Other payables - related parties

1,419,650

1,224,417

Customer deposits

5,274,087

4,828,293

Taxes payable

375,473

371,633

Accrued liabilities

317,407

956,342

Total current liabilities

31,486,853

29,674,803

Purchase option derivative liability

2,944

15,609

Total liabilities

31,489,797

29,690,412

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY

Preferred stock; $0.001 par value;  10,000,000 shares authorized; nil issued and

   outstanding as of June 30, 2013 and March 31, 2013

-

-

    Common stock; $0.001 par value; 250,000,000 shares authorized;  13,609,003
       shares issued and outstanding as of June 30, 2013 and March 31, 2013

13,609

13,609

Additional paid-in capital

16,637,085

16,609,747

Statutory reserves

1,309,109

1,309,109

Retained earnings

16,307,853

17,095,369

Accumulated other comprehensive income

3,881,445

3,121,654

Total stockholders' equity

38,149,101

38,149,488

Noncontrolling interests

(2,153)

(1,879)

Total equity

38,146,948

38,147,609

Total liabilities and stockholders' equity

$

69,636,745

$

67,838,021

The accompanying notes are an integral part of these condensed consolidated financial statements.

CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

For the three months ended

June 30,

2013

2012

REVENUES, NET

$

15,336,519

$

32,847,330

COST OF GOODS SOLD

11,735,350

27,702,553

GROSS PROFIT

3,601,169

5,144,777

SELLING EXPENSES

1,680,842

1,858,225

GENERAL AND ADMINISTRATIVE EXPENSES

2,640,818

2,846,578

TOTAL OPERATING EXPENSES

4,321,660

4,704,803

(LOSS) INCOME FROM OPERATIONS

(720,491)

439,974

OTHER (LOSS) INCOME, NET

(40,413)

98,698

CHANGE IN FAIR VALUE OF PURCHASE OPTION DERIVATIVE LIABILITY

12,665

(158)

(LOSS) INCOME BEFORE INCOME TAXES

(748,239)

538,514

PROVISION FOR INCOME TAXES

39,520

3,882

NET (LOSS) INCOME

(787,759)

534,632

ADD: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST

243

255

NET (LOSS) INCOME ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.

(787,516)

534,887

OTHER COMPREHENSIVE INCOME

Foreign currency translation adjustments

759,791

55,270

COMPREHENSIVE (LOSS) INCOME

$

(27,725)

$

590,157

WEIGHTED AVERAGE NUMBER OF SHARES:

Basic

13,609,003

13,557,496

Diluted

13,609,003

13,598,686

EARNINGS PER SHARES:

Basic

$

(0.06)

$

0.04

Diluted

$

(0.06)

$

0.04

The accompanying notes are an integral part of these condensed consolidated financial statements.