Business context and reporting period
The supplied filing is China Jo-Jo Drugstores, Inc.’s annual report on Form 20-F for the fiscal year ended March 31, 2022, not a Ridgetech Inc. filing or a quarterly report. The company is a Cayman Islands holding company operating retail pharmacies, an online pharmacy, pharmaceutical wholesale distribution and herb farming in China, primarily through contractual VIE arrangements. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
At year-end, the company operated 111 pharmacies in Hangzhou. Retail drugstores generated 51.2% of revenue, online sales 18.4%, and wholesale 30.4%; herb farming generated no revenue.
Financial performance and condition
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $164.4 million | $133.1 million |
| Gross profit / margin | $36.5 million / 22.2% | $29.2 million / 22.0% |
| Operating loss / margin | $2.7 million / (1.6%) | $8.8 million / (6.6%) |
| Net loss | $3.2 million | $8.4 million |
| Net loss per share | $0.92 | $2.39 |
| Cash used in operating activities | $5.4 million | $0.1 million |
| Cash used in investing activities | $0.3 million | $2.0 million |
| Cash provided by financing activities | $4.8 million | $3.1 million |
Retail revenue rose 10.7% to $84.2 million; online revenue increased 34.4% to $30.2 million; wholesale revenue increased 44.6% to $49.9 million. Segment gross margins were 32.0% for retail, 11.9% online and 12.0% wholesale. Wholesale revenue growth was attributed in part to lower resale prices and larger purchasing volumes.
Year-end cash and cash equivalents were $18.5 million, with a further $16.9 million restricted, for total cash, cash equivalents and restricted cash of $35.3 million. Current assets were $75.5 million and current liabilities $74.4 million, leaving $1.0 million of working capital. Current liabilities included $34.2 million of notes payable, generally short-term bank acceptance notes, and $2.0 million of current long-term loan repayments. Total liabilities were $83.6 million. The company reported $12.5 million in operating lease liabilities, in addition to its borrowing obligations.
Operating cash outflow increased substantially from FY2021. Management attributed the change partly to reduced cash contribution from accounts payable and the absence of FY2021 stock-based compensation add-backs. The cash-flow statement reports $5.386 million used in operations; a management discussion passage gives a slightly different figure, so the filing is not fully consistent on this value.
Material changes versus the prior year
- Revenue grew 23.5%, led by online and wholesale sales; retail sales also increased. Retail’s share of total revenue declined as online and wholesale expanded.
- Gross margin improved 0.2 percentage points. Selling expenses increased 14.6%, including higher rent and online platform fees, but fell to 18.8% of revenue from 20.2%.
- General and administrative expense declined 24.9%, mainly because FY2021 included $3.9 million of stock-based compensation. FY2022 included an increase in bad-debt expense.
- Operating and net losses narrowed, but the company remained loss-making and operating cash flow was negative.
- Notes payable increased to $34.2 million from $25.7 million. Cash and restricted cash combined increased modestly to $35.3 million from $34.7 million.
Outlook, commentary, risks and unusual items
Management said the direct effects of COVID-19 on operations had been limited and described its negative impacts as temporary, while acknowledging uncertainty around future developments. It expects retail margins to remain stable and believes newly opened stores may benefit as more obtain government medical-insurance reimbursement certificates. The filing provides no quantified revenue, earnings or cash-flow guidance; management says wholesale growth is not expected to increase significantly in the immediate future absent new customers or exclusive distribution rights.
- Liquidity and funding: Management said existing cash, expected operating cash flow, bank facilities and potential shareholder loans should support near-term needs. The company cited approximately $2.35 million of available bank credit at March 31, 2022 and a fully drawn factoring credit line. Its narrow working-capital surplus and operating cash outflow warrant attention.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing insufficient U.S. GAAP expertise and inadequate reconciliation and supervisory review. Remediation efforts included system changes and staff training, but management said effectiveness would depend on those measures operating successfully in future periods.
- VIE and China regulatory exposure: The company has no equity ownership in key pharmacy and clinic operating entities and relies on contractual arrangements to control them. It warns that PRC authorities could challenge the structure or require restructuring, potentially disrupting operations or the ability to consolidate results or access cash.
- Data and market-access regulation: The filing discusses uncertainty around China’s data-security, cybersecurity and overseas-listing rules. The company said it did not hold personal information of more than one million users and believed it was not then required to undergo cybersecurity review; regulatory interpretations could change.
- Other operating risks: Risks include intense competition, supplier and landlord deposits, dependence on key personnel, licensing and reimbursement requirements, product liability without product-liability insurance, and foreign-exchange and cash-repatriation restrictions. One supplier accounted for 21.4% of FY2022 purchases; two vendors together accounted for 40.2%.
- Audit and listing: The FY2022 financial statements received an unqualified audit opinion from YCM CPA, Inc. The filing nevertheless discusses HFCAA-related inspection and delisting risks; it states the auditor is headquartered in California while audit documentation and procedures relate to China.
- Unusual and subsequent events: A 1-for-12 reverse split took effect April 7, 2022, and Nasdaq later confirmed bid-price compliance. In April 2022, the company granted 850,000 restricted stock awards, including awards to senior executives and a director. The company reported no material pending legal proceedings and no cash dividends paid or anticipated in the foreseeable future.
Most important facts for investors to verify
- Confirm the issuer identity and reporting period: this source is China Jo-Jo Drugstores, Inc.’s FY2022 Form 20-F, not a Ridgetech filing or a 2021 Q4 report.
- Reconcile the cash-flow disclosure discrepancy and assess the quality and sustainability of cash generation, including the distinction between unrestricted cash and restricted cash.
- Review the maturity, collateral and refinancing terms of $34.2 million in notes payable, the remaining loan balance, and the company’s credit-line availability.
- Assess whether internal-control remediation has been implemented and independently validated, given management’s ineffective-control conclusion.
- Evaluate the enforceability and regulatory status of the VIE arrangements, cash-transfer restrictions, and potential China cybersecurity or overseas-listing requirements.
- Reconcile share counts and dilution across the March 31 year-end, April 2022 reverse split and subsequent restricted-stock grants.