UNITED STATES
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Washington, D.C. 20549
FORM
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BIMI INTERNATIONAL MEDICAL INC.
FORM 10-K
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K, other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies and prospects, and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Annual Report on Form 10-K and other reports and registration statements filed by us with the U.S. Securities and Exchange Commission (“SEC”). Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. Forward-looking information and statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate us. Any investor in our Common Stock should consider all risks and uncertainties disclosed in our filings with the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and publish our financial statements in United States Dollars. All share and per share information included in this Annual Report have been adjusted to reflect a 1-for-5 reverse-split effective as of February 3, 2022 and a 1-for-10 reverse-split effective as of December 9, 2022.
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PART I
ITEM 1. BUSINESS
The Company
BIMI International Medical Inc. is a holding company incorporated in Delaware with operations conducted through operating subsidiaries in the People’s Republic of China (the “PRC” or “China”) and holding company subsidiaries in the PRC, the British Virgin Islands and the Hong Kong Special Administrative Region of the PRC (“Hong Kong”). Our corporate structure contains no variable interest entities. We are not a Chinese operating company and our structure involves unique risks to investors. As used herein the terms “we,” “us,” “our,” “BIMI” and the “Company” means BIMI International Medical Inc., a Delaware corporation, and its subsidiaries.
We were incorporated under the laws of the State of Delaware as Galli Process, Inc. on October 31, 2000. On December 31, 2001, Galli Process, Inc. changed its name to Global Broadcast Group, Inc. On November 12, 2004, Global Broadcast Group, Inc. changed its name to Diagnostic Corporation of America. On March 15, 2007, we changed our name to NF Energy Saving Corporation of America, and on August 24, 2009, we changed our name to NF Energy Saving Corporation. On December 16, 2019, we changed our name to BOQI International Medical Inc. to reflect our new focus on the health care industry and on June 21, 2021, we changed our name to BIMI International Medical Inc.
BIMI International Medical Inc. is the public company in which investors hold our common stock and as a holding company does not conduct any of our operations. All of our subsidiaries are wholly-owned. A listing identifying the place of incorporation, type of legal entity, principal activity and the ownership interest in our Company and each of its subsidiaries follows:
| Entity Name | Place of Incorporation | Type of legal entity | Ownership Percentage | Shareholder(s) | Principal activities | Whether an operating entity | ||||||||
| BIMI International Medical Inc. | Delaware | Public company | 100 | % | Public company | Holding Company | Operating entity | |||||||
| Bimai Pharmaceutical (Chongqing) Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | BIMI International Medical Inc. | Holding company | Operating entity | |||||||
| Boyi (Liaoning) Technology Co., Ltd | Liaoyang, China | Limited liability company | 100 | % | BIMI International Medical Inc. | IT Technology service research and development | Operating entity | |||||||
| Lasting Wisdom Holdings Limited | BVI | Limited liability company | 100 | % | BIMI International Medical Inc. | Holding company | Operating entity | |||||||
| PUKUNG Limited | Hong Kong, China | Limited liability company | 100 | % | Lasting Wisdom Holdings Limited | Investment company | Operating entity | |||||||
| Beijing Xinrongxin Industrial Development Co., Ltd | Beijing, China | Inactive limited liability company | 100 | % | PUKUNG Limited | holding company | Operating entity | |||||||
| Chongqing Guanzan Technology Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Bimai Pharmaceutical (Chongqing) Co., Ltd. | Wholesale distribution of medical devices in the PRC | Operating entity | |||||||
| Dalian Boyi Technology Co., Ltd. | Dalian, China | Limited liability company | 100 | % | Bimai Pharmaceutical (Chongqing) Co., Ltd. | IT Technology service research and development | Operating entity | |||||||
| Bimai Hospital Management (Chongqing) Group Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Bimai Pharmaceutical (Chongqing) Co., Ltd. | Hospital management in the PRC | Operating entity | |||||||
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| Chongqing Shude Pharmaceutical Co., Ltd. | Chongqing, China | Limited liability company | 95 | % | Chongqing Guanzan Technology Co., Ltd. | Wholesale distribution of generic drugs in the PRC | Operating entity | |||||||
| Chongqing Lijiantang Pharmacy Chain Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Chongqing Guanzan Technology Co., Ltd. | Wholesale distribution of generic drugs in the PRC | Operating entity | |||||||
| Pusheng Pharmaceutical (Chongqing) Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Chongqing Guanzan Technology Co., Ltd. | Wholesale distribution of generic drugs in the PRC | Operating entity | |||||||
| Suzhou Eurasia Hospital Co., Ltd. | Anhui, China | Limited liability company | 100 | % | Bimai Hospital Management (Chongqing) Group Co., Ltd. | Hospital in the PRC | Operating entity | |||||||
| Yunnan Yuxi Minkang Hospital Co., Ltd. | Yunnan, China | Limited liability company | 100 | % | Bimai Hospital Management (Chongqing) Group Co., Ltd. | Hospital in the PRC | Operating entity | |||||||
| Wuzhou Qiangsheng Hospital Co., Ltd. | Guangxi, China | Limited liability company | 100 | % | Bimai Hospital Management (Chongqing) Group Co., Ltd. | Hospital in the PRC | Operating entity | |||||||
| Chaohu Zhongshan Minimally Invasive Hospital Co.,Ltd. | Anhui, China | Limited liability company | 100 | % | Bimai Hospital Management (Chongqing) Group Co., Ltd. | Hospital in the PRC | Operating entity | |||||||
| Chongqing Guoyitang Hospital Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Bimai Hospital Management (Chongqing) Group Co., Ltd. | Hospital in the PRC | Operating entity | |||||||
| Chongqing Huzhongtang Health Technology Co., Ltd. | Chongqing, China | Limited liability company | 100 | % | Chongqing Guoyitang Hospital Co., Ltd. | Wholesale distribution of generic drugs in the PRC | Operating entity |
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The following diagram illustrates our holding company structure:
Significant Factors Relating to PRC Government Oversight of Our Operating Businesses.
Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in the PRC or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past four decades, growth has been uneven across different regions and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are currently applicable to us. In addition, in the past the Chinese government implemented certain measures, including interest rate increases, to manage the pace of economic growth and prevent the economy from overheating. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations.
Status under Holding Foreign Companies Accountable Act
In December 2021, the SEC adopted rules (the “Final Rules”) to implement the Holding Foreign Companies Accountable Act (the “HFCAA”). The HFCAA includes requirements for the SEC to identify issuers who file annual reports with audit reports issued by independent registered public accounting firms located in foreign jurisdictions that the Public Company Accounting Oversight Board (“PCAOB”) is unable to inspect or investigate completely because of a position taken by a non-U.S. authority in the accounting firm’s jurisdiction (“Commission-Identified Issuers”). The HFCAA also requires that, to the extent that the PCAOB has been unable to inspect an issuer’s independent registered public accounting firm for three consecutive years since 2021, the SEC shall prohibit the issuer’s securities registered in the United States from being traded on any national securities exchange or over-the-counter markets in the United States. In December 2022, the Accelerating Holding Foreign Companies Accountable Act amended the HFCAA to shorten the three-year period to two years.
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Under the Final Rules, the SEC adopted submission and disclosure requirements by amending Form 10-K and other annual reporting forms and established procedures to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA. Specifically, the Final Rules require each Commission-Identified Issuer to submit documentation to the SEC annually on or before its annual report due date that establishes that it is not owned or controlled by a government entity in its public accounting firm’s foreign jurisdiction and require additional specified disclosures by “foreign issuers” as defined in Rule 3b-4 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SEC identifies an issuer as a Commission-Identified Issuer after the issuer files its annual report and on a rolling basis, and will impose an initial trading prohibition on an issuer as soon as practicable after it has been conclusively identified as a Commission-Identified Issuer for two consecutive years. To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements that include an audit report signed by such a registered public accounting firm.
In August 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance of the People’s Republic of China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. PCAOB staff members conducted on-site inspections and investigations from September to November 2022, and in December 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition under the HFCAA.
Given that Audit Alliance LLP, a Singapore based independent accounting firm, serves as the principal accountant to audit our consolidated financial statements to be filed with the SEC, we believe we are compliant with the HFCAA, which should preclude a finding by the SEC that we are a Commission-Identified Issuer and therefore the delisting of our Common Stock from the Nasdaq Capital Market. For a detailed description of risks related to our doing business in China and status under the HFCAA, see “Item 1A. Risk Factors - Risks Related to Our Doing Business in the PRC”.
Recent Regulatory Developments in China
The PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted outside of China and over foreign investment in China-based companies. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China, including enforcement actions against illegal activities in the securities market, enhancing supervision over China-based companies listed outside of China using the variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. For example, in July 2021, the relevant PRC government authorities made public the Opinions on Intensifying Crack-Down on Illegal Securities Activities (the “Securities Opinions”) which emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. In November 2021, the Cyberspace Administration of China (the “CAC”) released the draft Administrative Regulations on Cyber Data Security for public comments, which requires, among others, that a prior cybersecurity review should be required for listing abroad of data processors which process over one million users’ personal information, and the listing of data processors in Hong Kong which affects or may affect national security. On February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five relevant guidelines, which became effective on March 31, 2023, requiring the Chinese domestic companies’ overseas offerings and listings of equity securities be filed with the CSRC.
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The Chinese government may further promulgate relevant laws, rules and regulations that may impose additional and significant obligations and liabilities on overseas listed PRC companies regarding data security, cross-border data flow, anti-monopoly and unfair competition, and compliance with China’s securities laws. It is uncertain whether or how these new laws, rules and regulations and the interpretation and implementation thereof may affect us, but among other things, our ability to obtain external financing through the issuance of equity securities in the United States, Hong Kong or other markets could be negatively affected, and as a result, the trading prices of our Common Stock could significantly decline or become worthless. For a detailed description of risks related to our doing business in China, please see the section of this Annual Report titled “Item 1A. Risk Factors—Risks Related to Our Doing Business in the PRC.”
Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. For more details, see “Item 1A. Risk Factors—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us or result in a material adverse change to our subsidiaries’ business operations, and damage our and our subsidiaries’ reputation, which would materially and adversely affect our financial condition and results of operations and cause our Common Stock to significantly decline in value or become worthless.”
In light of such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. Any future PRC, U.S. or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect our business and results of operations. Any such action, once taken by the Chinese government, could significantly limit or completely hinder our ability to offer or continue to offer our securities to investors, and could cause the value of our Common Stock to significantly decline or become worthless. If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States or other governments deteriorate, our business in China and United States may also be adversely affected. For more details, see “Item 1A. Risk Factors—Risks Related to Doing Business in China— Uncertainties with respect to the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us or result in a material adverse change to our subsidiaries’ business operations, and damage our and our subsidiaries’ reputation, which would materially and adversely affect our financial condition and results of operations and cause our Common Stock to significantly decline in value or become worthless.”
Development of Our Business
Strategy
Our strategy is to build a comprehensive healthcare ecosystem, centering on online and offline healthcare products and services, including retail and wholesale sales of medical devices and pharmaceuticals, and hospital services. We intend to expand through both organic growth and acquisitions.
The Boqi Zhengji Acquisition and Subsequent Disposition
On October 14, 2019, as the initial step in our shift of focus from the energy sector to the healthcare business, we acquired Boqi Zhengji Pharmacy Chain Co., Ltd. (“Boqi Zhengji”), the operator of a pharmacy chain in the PRC, by purchasing 100% of the equity interests of Lasting Wisdom Holdings Limited (“Lasting”), Boqi Zhengji’ s parent company. Lasting, through its wholly owned subsidiaries Pukung Limited (“Pukung”) and Beijing Xinrongxin Industrial Development Co., Ltd. (“Xinrongxin”), owned all the ownership interests in Boqi Zhengji. The purchase price for Boqi Zhengji consisted of RMB 40 million (approximately $5,655,709) and 300,000 shares of Common Stock. The 300,000 shares of Common Stock were issued to the sellers in October 2019. The cash consideration, which was subject to post-closing adjustments based on the performance of Boqi Zhengji, measured by its pharmacy club member headcount and gross profit in 2020, was not payable until 2021.
Shortly after the acquisition, the business of Boqi Zhengji was severely impacted by the spread of the coronavirus, or COVID-19, and its revenues plummeted. On December 11, 2020, we entered into a Termination and Release Agreement (the “Release Agreement”) with the four individuals who sold Boqi Zhengji to us. We and the sellers confirmed that Boqi Zhengji’s performance targets as stipulated in the stock purchase agreement dated April 11, 2019 (as amended on February 6, 2020) would not be met, and therefore the sellers would not be eligible to receive the contingent RMB 40 million cash consideration or any other additional payment.
On December 11, 2020, we entered into an agreement to sell all the issued and outstanding equity interests in Boqi Zhengji to a third-party in consideration of $1,700,000 to be paid in cash at the closing. While the cash consideration was received on December 18, 2020, the official recognition of the closing was not received until February 2, 2021.
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The NF Group disposition
In late 2019, we committed to a plan to dispose of our legacy energy business, NF Energy Savings Corporation and its subsidiaries (the “NF Group”) in order to focus on our healthcare business. On March 31, 2020, we entered into an agreement to sell the NF Group for $10 million to be paid in cash at the closing. The transaction closed on June 23, 2020, at which time we received $10 million.
The Guanzan Acquisition
On February 1, 2020, we entered into a stock purchase agreement to acquire Chongqing Guanzan Technology Co. Ltd. (“Guanzan”), a company engaged in the distribution of medical devices and pharmaceuticals, based in Chongqing, the largest city in Southwest region of the PRC. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Guanzan and its 80% owned subsidiary, Chongqing Shude Pharmaceutical Co. Ltd, (“Shude”) (together the “Guanzan Group”) for RMB 100,000,000 (approximately $14,285,714) to be paid by the issuance of 19,000 shares of Common Stock and the cash payment of RMB 80,000,000 (approximately $11,428,571). On March 18, 2020, we closed the Guanzan Group acquisition by delivering 19,000 shares of Common Stock. The cash consideration was subject to post-closing adjustments based on the performance of the Guanzan Group in 2020 and 2021.
On November 20, 2020, the parties to the acquisition agreement entered into a Prepayment and Amendment Agreement in light of Guanzan’s performance since its acquisition, providing for the prepayment of RMB 20,000,000 of the contingent cash consideration in the form of shares of Common Stock. On November 30, 2020, we issued 20,000 shares of Common Stock then valued at $3 million as the prepayment. On August 27, 2021, we issued 92,000 shares of Common Stock in full payment of the balance of the post-closing consideration for the acquisition of the Guanzan Group. On April 9, 2021, we increased our equity interest in Shude from 80% to 95.2% by making a direct capital investment in Shude.
The Guoyitang Acquisition
On December 9, 2020, we entered into an agreement to acquire Chongqing Guoyitang Hospital (“Guoyitang”), the owner and operator of a private general hospital in Chongqing City, a city in Southwest China, with 50 hospital beds and 98 employees, including 14 doctors, 28 nurses, 43 other medical staff and 13 non-medical staff. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Guoyitang for RMB 100,000,000 (approximately $15,325,905) to be paid by the issuance of 40,000 shares of Common Stock and the payment of RMB 60,000,000 (approximately $9,195,543) in cash. The acquisition closed on February 2, 2021, at which time 40,000 shares of Common Stock were delivered to the sellers. The cash consideration of RMB 60,000,000 (approximately $9,195,543) was paid in December 2020. The balance of the purchase price of RMB 40,000,000 (approximately $6,097,560) was subject to post-closing adjustments based on the performance of Guoyitang in 2021 and 2022. For the year ended December 31, 2021, there was a performance failure in the performance of Guoyitang, accordingly the sellers were not eligible to receive any contingent payments.
The Zhongshan Acquisition and Disposition
On December 15, 2020, we entered into a stock purchase agreement to acquire Chaohu Zhongshan Minimally Invasive Hospital (“Zhongshan”), a private hospital in the Southeast region of China with 160 hospital beds and 95 employees, including 20 doctors, 48 nurses, 10 other medical staff and 17 non-medical staff. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Zhongshan for RMB 120,000,000 (approximately $18,348,623), to be paid by the issuance of 40,000 shares of Common Stock and the payment of RMB 80,000,000 in cash. The transaction closed on February 5, 2021, when 100% of the ownership interest in Zhongshan was transferred to our company. The cash consideration of RMB 40,000,000 (approximately $6,116,207) was paid to the seller in December 2020. On February 12, 2021, we issued 40,000 shares of Common Stock then valued at RMB 40,000,000 (approximately $6,116,207) to the seller as part of the consideration. The balance of the purchase price in the amount of RMB 40,000,000 (approximately $6,116,207) was subject to post-closing adjustments based on the performance of Zhongshan in 2021 and 2022.
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On February 1, 2022, we entered into an amendment to the agreement providing for the reduction of the purchase price, including a retroactive 50% decrease in the closing cash payment, a 50% retroactive decrease in the deferred closing stock payment and a 50% reduction of the 2021 and 2022 performance targets. As a result of such amendment, the Seller agreed to return RMB 40,000,000 in cash to us in 2022 and 20,000 shares of Common Stock, which were previously delivered to the seller as part of the closing consideration for Zhongshan.
In response to the poor performance of Zhongshan since its acquisition, on December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the seller. As consideration for the transfer, the seller agreed to return to us the 40,037 shares of Common Stock, that were previously issued as part of the closing consideration. The seller agreed to release us from any and all claims relating to the two earnout payments that were payable under the original purchase agreement. Pursuant to the agreement, we will continue to own 13% of the equity interests in Zhongshan, with a put option to sell part or all of such shares to the seller before December 31, 2032, based on a valuation determined by a reputable third-party appraisal firm jointly chosen by us and the seller. The transaction is expected to close in the second quarter of 2023.
The Qiangsheng, Eurasia And Minkang Hospitals Acquisition and Disposition
On April 9, 2021, we entered into a stock purchase agreement to acquire Wuzhou Qiangsheng Hospital (“Qiangsheng”), Suzhou Eurasia Hospital (“Eurasia”) and Yunnan Yuxi MinKang hospital (“Minkang”). Qiangsheng, Eurasia and Minkang are private hospitals in the Southern, Northern and Southwest region of China, respectively. The three hospitals were under common control. Qiangsheng has 20 hospital beds and 63 employees, including 18 doctors, 17 nurses, 8 other medical staff and 20 non-medical staff. Eurasia has 12 hospital beds and 52 employees, including 12 doctors, 15 nurses, 7 other medical staff and 18 non-medical staff. Minkang has 126 hospital beds and 116 employees, including 24 doctors, 58 nurses, 12 other medical staff and 22 non-medical staff. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Qiangsheng, Eurasia and Minkang Hospitals for RMB 162,000,000 (approximately $24,827,927), to be paid by the issuance of 80,000 shares of Common Stock and the payment of RMB 84,000,000 in cash. The first payment of the cash consideration was RMB 20,000,000 (approximately $3,097,317). The second and third payments of the Cash Consideration of RMB 64,000,000 (approximately $9,911,416) were subject to post-closing adjustments based on the performance of Qiangsheng, Eurasia and Minkang in 2021 and 2022. The sellers had the right to receive the second and third payments in the form of shares of Common Stock valued at $150.00 per share or in cash. The transaction closed on May 6, 2021, at which time the 80,000 shares of Common Stock were issued. Cash consideration of RMB 20,000,000 was paid on December 1, 2021.
In response to the poor performance of these three hospitals since their acquisition, on December 28, 2022, we entered into an agreement to transfer 90% of the equity interests in Qiangsheng, Eurasia and Minkang back to the sellers. As consideration for the transfer, the sellers agreed to return to us the 80,000 shares of Common Stock which were previously issued upon the acquisition of the three hospitals. Pursuant to the agreement, we will continue to own 10% of the equity interests in each of the three hospitals, with a put option to sell part or all of such shares to the sellers before December 31, 2032, based on a valuation determined by a reputable third party appraisal firm jointly chosen by us and the sellers. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
The Zhuoda Acquisition and Disposition
On September 10, 2021, we entered into a stock purchase agreement to acquire Chongqing Zhuoda Pharmaceutical Co., Ltd. (“Zhuoda”), a company engaged in the distribution of medical devices and pharmaceuticals, based in Chongqing, the largest city in Southwest region of the PRC. Pursuant to the agreement, we agreed to purchase all of the issued and outstanding equity interests in Zhuoda in consideration of $11,617,500 (RMB 75,000,000). Pursuant to the acquisition agreement the entire purchase consideration was payable in shares of Common Stock. At the closing, 44,000 shares of Common Stock valued by the parties at RMB 43,560,000, or $150.00 per share (approximately $6,600,000) were issued as partial consideration for the purchase and the remainder of the purchase price of approximately $5,017,500 (RMB 31,440,000), was subject to post-closing adjustments based on the performance of Zhuoda in 2022 and 2023.
In response to the poor performance of Zhouda since its acquisition, we entered into a sale and purchase agreement to sell Zhuoda back to the former owners of Zhuoda on October 19, 2022. Pursuant to the agreement, we sold 100% of the equity interests in Zhuoda in consideration for the return of the 44,000 shares of Common Stock previously issued to the former owners of Zhouda. The transaction closed effective November 23, 2022, when 100% of the equity interests in Zhuoda were transferred to the former owners and the 44,000 shares of Common Stock were returned to us.
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The Mali Hospital Transaction
On December 20, 2021, we entered into a stock purchase agreement to acquire Bengbu Mali OB-GYN Hospital Co., Ltd. (“Mali Hospital”), a private OB-GYN specialty hospital with 199 beds located in Bengbu city in the southeast region of the People’s Republic of China. We agreed to purchase all the issued and outstanding equity interests in Mali Hospital in consideration of $16,750,000. On January 4, 2022, we paid RMB7,227,000 to the seller as partial consideration. On December 15, 2022, we entered into an agreement to terminate the stock purchase agreement. Pursuant to the Termination Agreement, the Original Agreement will terminate effective as of the date of the return of the 60,000 shares of the Company’s common stock previously issued to the sellers of Mali Hospital and certain third-party beneficiaries. Such return is expected to take place promptly. The Company did not incur any penalties as a result of the termination of the Original Agreement. As of the date of this annual report, we have not received the refund of RMB7,227,000 that we paid on January 4, 2022.
Acquisition of Phenix Bio Inc.
On July 5, 2022, we entered into a stock purchase agreement (as amended on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire 100% of the equity interests in Phenix Bio Inc. (“Phenix”), a distributor of healthcare products. The transaction closed effective March 15, 2023. The aggregate purchase price for the equity interests in Phenix was $180,000 in cash, which has been paid, plus 5,270,000 shares of the Company’s common stock, of which 270,000 shares will be issued upon the approval of the issuance by the Company’s shareholders and the balance of 5,000,000 shares will be issued if the aggregate net profit generated by Phenix is at least $2,500,000 in calendar year 2023 or in any fiscal quarter of 2023, subject to the approval of the Company’s shareholders.
Segments
In 2021 and 2022 we were engaged in four business segments, wholesale pharmaceuticals, wholesale medical devices, medical services and retail pharmacies. In 2020, we were engaged in three business segments, wholesale pharmaceuticals, wholesale medical devices and retail pharmacies.
Our Businesses
BIMI International Medical Inc. is the public company in which investors hold our common stock and as a holding company it does not conduct any of our operations.
Wholesale Sales of Medical Devices
We acquired Guanzan on March 18, 2020 in an effort to further expand our healthcare operations by acquiring a medical devices and pharmaceuticals distribution business. The acquisition was in line with our expansion strategy, which focuses on deeper penetration of the healthcare market in the Southwest region of the PRC and gaining a wider footprint in the region. On September 22, 2021, we completed the acquisition of Zhuoda. The acquisition was in line with our expansion strategy, which focuses on deeper penetration of the healthcare market in the Southwest region of China and gaining a wider footprint in the PRC.
Our wholesale medical devices and pharmaceuticals business are operated by Guanzan and to a lesser degree Zhuoda in Chongqing, the largest city in Southwestern PRC., to drug stores, private clinics, pharmaceutical dealers and hospitals in the Southwest region of China. In response to the poor performance of Zhouda, we sold Zhuoda to its former owners in November 2022.
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Guanzan distributes both domestic and imported advanced medical devices, such as Stryker spinal products, Olympus endoscopes, imported imaging products and diagnostic imaging equipment. Guanzan and Zhuoda distribute medical devices to drug stores, private clinics, pharmaceutical dealers and hospitals in the Southwest region of the PRC. The majority of our medical device customers are private enterprises in China. Revenues from medical devices for the years ended December 31, 2022 and 2021 was $4,142,455 and $3,445,107 respectively. For the year ended December 31, 2022, our top ten wholesale medical device customers accounted for 77.00% of our wholesale medical devices revenues and one customer accounted for 18% of our wholesale medical devices revenues.
We use third party logistics services providers to transport our medical device products to our customers.
Wholesale Sales of Pharmaceuticals
Shude and Zhouda primarily distribute pharmaceuticals. Shude currently distributes approximately 300 varieties of products, including raw ingredients for pharmaceutical products, antibiotics, cardiovascular drugs and anti-obesity medicines. The majority of Shude’s customers are private pharmaceutical manufacturers and pharmaceutical wholesale companies in the PRC. Our wholesale business primarily sources its products from large state-owned pharmaceutical manufacturers and wholesalers and mid-sized or small private pharmaceutical manufacturers and wholesalers. We use third party logistics services to transport our wholesale pharmaceutical products.
For the year ended December 31, 2022, our top ten wholesale pharmaceutical customers accounted for 65% of our wholesale pharmaceutical revenues and three customers accounted for 10.30%, 10.26% and 10.06% of our wholesale pharmaceutical revenues.
Medical Services
Beginning in 2021, we began to acquire hospitals in an effort to establish a nationwide chain of hospitals specializing in obstetrics and gynecology. In February 2021, we acquired Guoyitang, the owner and operator of a private general hospital in Chongqing City, a city in Southwest China, with 50 hospital beds and 98 employees, including 14 doctors, 28 nurses, 43 other medical staff and 13 non-medical staff. In February 2021, we also acquired Zhongshan; a private hospital in the Southeast region of China with 160 hospital beds and 95 employees, including 20 doctors, 48 nurses, 10 other medical staff and 17 non-medical staff. In May 2021, we acquired the Qiangsheng, Eurasia and Minkang hospitals in the Southern, Northern and Southwest regions of China, respectively. Qiangsheng has 20 hospital beds and 63 employees, including 18 doctors, 17 nurses, 8 other medical staff and 20 non-medical staff. Eurasia has 12 hospital beds and 52 employees, including 12 doctors, 15 nurses, 7 other medical staff and 18 non-medical staff. Minkang has 126 hospital beds and 116 employees, including 24 doctors, 58 nurses, 12 other medical staff and 22 non-medical staff. Revenues from our hospitals s for the years ended December 31, 2022 and 2021 were $5,446,619 and $6,398,379 respectively.
Our efforts to establish a nationwide chain of specialized hospitals in 2022 met with adversity due to the impact of the COVID-19 pandemic and the actions taken by PRC government to combat the spread of COVID-19. As a result, we determined to cease operating Zhongsham and the Qiangsheng, Eurasia and Minkang hospitals. The Zhongshan transaction is expected to close in the second quarter of 2023. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
Retail Pharmacies
Our retail pharmacy business sells pharmaceuticals and other healthcare products to customers through directly-owned retail stores. The retail stores offer a wide range of products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, traditional Chinese medicines, personal and family care products and medical devices, as well as miscellaneous items. We started to operate in the pharmacy market upon completion of the acquisition of Boqi Zhengji in October 2019. In 2020, we sold the Boqi Pharmacy Group and established a chain of retail pharmacies under the brand name “Lijiantang Pharmacy” in the city of Chongqing, PRC. In September 2021, we closed a pharmacy because of poor performance due to nearby road renovations. By year-end 2022, we had four pharmacies in Chongqing. Each of our pharmacies employs at least one pharmacist, a store manager and several salespersons. Revenues from our retail pharmacies for the years ended December 31, 2022 and 2021 were $856,596 and $316,647, respectively.
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We favor retail locations in well-established residential communities with relatively concentrated consumer purchasing power or are located in close proximity to local hospitals, and evaluate potential store sites to assess consumer traffic, visibility and convenience. The average area of our pharmacy stores is 200 square meters. We only accept prescriptions from licensed health care providers, and verify the validity, accuracy, and completeness of all prescriptions. Most pharmacies also maintain a TCM counter staffed by licensed herbalists. After opening, a location may take up to one year to achieve our projected revenue goals for that particular location Various factors influence individual store revenue including, but not limited to, location, nearby competition, local population demographics, square footage, and government insurance coverage.
Our retail pharmacy business procures its products from national wholesalers, small regional wholesalers and various pharmaceuticals trading platforms
Phenix Bio Inc.
On July 5, 2022, we entered into a stock purchase agreement (as amended on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire 100% of the equity interests in Phenix Bio Inc. (“Phenix”), a distributor and manufacturer of healthcare products. Pursuant to the Phenix SPA, we agreed to purchase all the issued and outstanding equity interests in Phenix. The transaction closed effective March 15, 2023. Phenix is focused on sales of nutritional supplements having a scientific and natural foundation. Such products are principally sold on-line. Phenix’s supplements. Phenix began its operations in 2022 and achieved revenues of approximately $414,000, with a gross margin of approximately 70.0%
Regulatory Compliance
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
Permissions Required from the PRC Authorities for Our Operations
We conduct our business in China through our subsidiaries. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, we have not received any requirement from Chinese governmental authorities to obtain additional permissions for our operation or the issuance of securities to foreign investors. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future.
According to the Notice by the General Office of the State Council of Comprehensively Implementing the List-based Management of Administrative Licensing Items (No. 2 [2022] of the General Office of the State Council) and its attachment, the List of Administrative Licensing Items Set by Laws, Administrative Regulations, and Decisions of the State Council (2022 Edition), as of the date of this Annual Report, our PRC subsidiaries have received from PRC authorities all requisite licenses, permissions or approvals needed to engage in the businesses currently conducted in China, and no permission or approval has been denied. Such licenses and permissions include, but not be limited to, business registration,
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The following table provides details of the licenses and permissions held by our subsidiaries in China:
| Company | Licenses and Permissions | License Issuers | Term of Validity | |||
| Bimai Pharmaceutical (Chongqing) Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Yuzhong District, Chongqing Municipal | Perpetual since December 22，2020 | |||
| Chongqing Guanzan Technology Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | Perpetual since March 11, 2013 | |||
| Chongqing Guanzan Technology Co., Ltd. | Medical device business license | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | May 17, 2021 to February 11, 2023 | |||
| Chongqing Shude Pharmaceutical Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | Perpetual since January 17, 1996 | |||
| Chongqing Lijiantang Pharmacy Chain Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | Perpetual since April 30, 2020 | |||
| Chongqing Lijiantang Pharmacy Chain Co., Ltd. | Medical business license | Chongqing Municipal Drug Administration | October 23, 2021 to December 01, 2025 | |||
| Chongqing Lijiantang Pharmacy Chain Co., Ltd. | Internet drug information service qualification certificate | Chongqing Municipal Drug Administration | December 11, 2020 to December 10, 2025 | |||
| Chongqing Lijiantang Pharmacy Chain Co., Ltd. | Type II medical device business record certificate | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | Perpetual since November 22, 2021 | |||
| Chongqing Lijiantang Pharmacy Chain Co.,Ltd. | Food business license | Administration for Market Regulation of Jiulongpo District, Chongqing Municipal | From November 02, 2020 to November 01, 2025 | |||
| Pusheng Pharmaceutical (Chongqing) Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Yuzhong District, Chongqing Municipal | Perpetual since April 28, 2021 | |||
| Pusheng Pharmaceutical (Chongqing) Co., Ltd. | Medical business license | Chongqing Municipal Drug Administration | From June 16, 2021 to June 15, 2026 | |||
| Pusheng Pharmaceutical (Chongqing) Co., Ltd. | Type II medical device business record certificate | Administration for Market Regulation of Yuzhong District, Chongqing Municipal | Perpetual since July 14, 2021 |
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| Chaohu Zhongshan Minimally Invasive Hospital Co., Ltd. | Industrial and commercial business license | Chaohu Administration for Market Regulation | Perpetual since October 28, 2021 | |||
| Chaohu Zhongshan Minimally Invasive Hospital Co., Ltd. | Practicing license of medical institution | Chaohu Municipal Health Commission | From March 26, 2021 to March 25, 2026 | |||
| Chongqing Guoyitang Hospital Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Nan’an District, Chongqing Municipal | Perpetual since November 10, 2015 | |||
| Chongqing Guoyitang Hospital Co., Ltd. | Practicing license of medical institution | Nan’an District Health and Health Commission of Chongqing | June 25, 2021 to October 11, 2025 | |||
| Chongqing Huzhongtang Health Technology Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Nan’an District, Chongqing Municipal | Perpetual since November 25, 2015 | |||
| Chongqing Huzhongtang Health Technology Co., Ltd. | Medical device business license | Administration for Market Regulation of Nan’an District, Chongqing Municipal | From April 01, 2021 to March 31, 2026 | |||
| Boyi (Liaoning) Technology Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Liaoyang District | Perpetual since June 24, 202 | |||
| Dalian Boyi Technology Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Zhongshan District, Dalian Municipal | Perpetual since January 07, 2020 | |||
| Bimai Hospital Management (Chongqing) Group Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Yuzhong District, Chongqing Municipal | Perpetual since April 28, 2021 | |||
| PUKUNG LIMITED | Certificate of Incorporation | Registrar of Companies, Hong Kong Special Administrative Region | From March 29, 2022 to March 28, 2023 | |||
| Yunnan Yuxi Minkang Hospital Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Hongta District, Yuxi Municipal | Perpetual since June 14, 2002 | |||
| Yunnan Yuxi Minkang Hospital Co., Ltd. | Practicing license of medical institution | Hongta District Health Bureau of Yuxi | From August 2, 2022 to August 1, 2027 | |||
| Wuzhou Qiangsheng Hospital Co., Ltd. | Industrial and commercial business license | Wuzhou Municipal Bureau of Administrative Examination and Approval | From 5 July 2019 to 4 July 2049 | |||
| Wuzhou Qiangsheng Hospital Co., Ltd. | Practicing license of medical institution | Changzhou District Health and Family Planning Bureau of Wuzhou | From January 14, 2019 to January 14, 2023 | |||
| Suzhou Eurasian Hospital Co., Ltd. | Industrial and commercial business license | Administration for Market Regulation of Yongqiao District, Suzhou Municipal | Perpetual since 22 July ,2015 | |||
| Suzhou Eurasian Hospital Co., Ltd. | License to practice in a medical institution | Yongqiao District Health Committee of Suzhou | July 14, 2020 to July 13, 2025 | |||
| Lasting Wisdom Holdings Limited | Certificate of Incorporation | British Virgin Islands | From June 01, 2022 to May 31, 2023 | |||
| Beijing Xinrongxin Industrial Development Co., Ltd. | Industrial and commercial business license | Administration for Industry and Commerce of Chaoyang Branch, Beijing Municipal | Perpetual since May 30, 2018 |
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If we or our PRC subsidiaries are found to be in violation of any existing or future PRC laws or regulations or fail to obtain or maintain any of the required permits, approvals or filings, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. In addition, if we had inadvertently concluded that such approvals, permits, registrations or filings were not required, or if applicable laws, regulations or interpretations change in a way that requires us to obtain such approval, permits, registrations or filings in the future, we and our PRC subsidiaries may be unable to obtain such necessary approvals, permits, registrations or filings in a timely manner, or at all, and such approvals, permits, registrations or filings may be rescinded even if obtained. Any such circumstance may subject us to fines and other regulatory, civil or criminal liabilities, and we may be ordered by the competent government authorities to suspend relevant operations, which will materially and adversely affect our business operations.
Furthermore, we may be subject to regular inspections, examinations, inquiries or audits by regulatory authorities, and an adverse outcome of such inspections, examinations, inquiries or audits may result in the loss or nonrenewal of the relevant licenses and approvals. Moreover, the criteria used in reviewing applications for, or renewals of licenses and approvals may change from time to time, and there can be no assurance that we will be able to meet new criteria that may be imposed to obtain or renew the necessary licenses and approvals. Many of such licenses and approvals are material to the operation of our business, and if we fail to maintain or renew material licenses and approvals, our ability to conduct our business could be materially impaired and we may be forced to curtail some or all of our operations. If the interpretation or implementation of existing laws and regulations change, or new regulations come into effect, requiring us or our PRC subsidiaries to obtain any additional permits, licenses or certificates that were previously not required to operate our business, there can be no assurance that we or our PRC subsidiaries will successfully obtain such permits, licenses or certificates.
Cash Transfers and Dividend Distributions
We are offshore holding company conducting business through our PRC subsidiaries. In order to fund their operations, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Such loans to our PRC subsidiaries and capital contributions are subject to PRC regulations and approvals or filings. For example, loans by us to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE or its local branch. Information about capital contributions to our PRC subsidiaries must be filed with the PRC Ministry of Commerce or its local counterpart. In addition, the PRC government also restricts the convertibility of foreign currencies into Renminbi and use of the proceeds. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted under its business scope. On October 23, 2019, SAFE promulgated Circular 28, which stipulates that non-investment foreign-funded enterprises are allowed to make domestic equity investment with their capital funds on the premise that the Negative List is not violated and the projects invested thereby in China are true and compliant. Violations of the applicable circulars and rules may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. The Circular Regarding Further Optimizing the Cross-border RMB Policy to Support the Stabilization of Foreign Trade and Foreign Investment jointly promulgated by the PBOC, NDRC, the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission of the State Council, the China Banking and Insurance Regulatory Commission and SAFE on December 31, 2020 and effective on February 4, 2021 allows the non-investment foreign-invested enterprises to make domestic reinvestment with RMB capital in accordance with the law on the premise that they comply with prevailing regulations and the invested projects in China are authentic and compliant. In addition, if a foreign-invested enterprise uses RMB income under capital accounts to conduct domestic reinvestment, the invested enterprise is not required to open a special deposit account for RMB capital. See “Item 1A. Risk Factors - Risks Related to Doing Business in China - PRC regulations on loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC subsidiaries.”
The applicable foreign exchange circulars and rules may significantly limit our ability to convert, transfer and use the net proceeds from the private placement of convertible notes or any offering of additional equity securities in China, which may adversely affect our business, financial condition and results of operations. As the foreign exchange related regulatory regime and practice are complex and still evolving and involve many uncertainties, we cannot assure you that we have complied or will be able to comply with all applicable foreign exchange circulars and rules, or that we will be able to complete the necessary government registrations or filings on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or filings, our ability to contribute additional capital to fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
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During the normal course of our business, cash is transferred between our subsidiaries via wire transfer to and from bank accounts to pay certain business expenses. Cash is maintained by the parent company BIMI International Medical Inc. in its bank account and transferred to our subsidiaries when necessary. In addition, cash may be used by BIMI as the holding company to meet corporate expenses such as audit fees, attorneys’ fees, stock exchange listing fees, IR/PR expenses and corporate administrative support expenses. In 2022, we transferred $5,600,000 in capital contributions and loans to our operating subsidiaries in the PRC. As a public company, there are restrictions and limitations on our ability to distribute earnings to the parent holding company and U.S. investors, depending on various factors such as the company’s financial condition, legal obligations, and applicable regulations. For more information, see Item 15. Exhibits and Financial Statement Schedules for our condensed consolidating schedule and consolidated financial statements,” that are filed as part of the report, beginning on page F-1.
Our Chinese subsidiaries may pay dividends to the parent holding company only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. PRC regulation of loans to, and direct investments in PRC entities by offshore holding companies may delay or prevent us from using proceeds from future financing activities to make loans or additional capital contributions to subsidiaries in the PRC or Hong Kong. See “Item 1A. Risk Factors - Risks Related to Doing Business in China - PRC regulations on loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC subsidiaries.”
We have never declared or paid any dividends on our shares or any other securities. In order for us to distribute dividends to our shareholders, we will need to rely to some extent on dividends distributed by our PRC subsidiaries. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us, and such distributions will be subject to PRC withholding tax. In addition, PRC regulations currently permit payment of dividends by a PRC company only out of accumulated distributable after-tax profits, as determined in accordance the accounting standards and regulations in the PRC. See “Item 1A. Risk Factors - Risks Related to Our Shares - Because we have not paid dividends and have no present intention of paying dividends, investors will not realize any income from an investment in our Common Stock unless and until investors sell their shares at profit.”
If any of our PRC subsidiaries incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries may pay dividends only out of their respective accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Such reserve funds cannot be distributed to us as dividends. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to an enterprise expansion fund, or a staff welfare and bonus fund. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Nevertheless, to the extent cash or assets are located in the PRC or Hong Kong, or in a PRC or Hong Kong entity, the funds or assets may not be available to fund operations or for other use outside the PRC or Hong Kong due to the intervention, or the imposition of restrictions and limitations on our ability or that of our subsidiaries in the PRC or Hong Kong, by the PRC government to transfer cash or assets. See “Item 1A. Risk Factors - Risks Related to Doing Business in China - PRC regulations on loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC subsidiaries.
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Our PRC subsidiaries generate primarily all of their revenue in RMB, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their RMB revenues to pay dividends to us. However, conversion of RMB to other currencies are permitted for the purpose of dividends according to the PRC’s regulations on Foreign Exchange Control. See “Item 1A. Risk Factors - Risks Related to Doing Business in China - Governmental control of currency conversion may affect the value of your investment.
Further, in response to the persistent capital outflow in the PRC and RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China (“PBOC) and China’s State Administration of Foreign Exchange (SAFE) promulgated a series of capital control measures, including stricter vetting procedures for domestic companies to remit foreign currency for overseas investments, dividends payments and shareholder loan repayments. Such measures were relaxed in mid-2017 with the slowdown of the capital outflow and stabilizing of the RMB. However, the PRC government may revert to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by the SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
The PRC Enterprise Income Tax Law (the “EIT Law”) and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its equity holders that are non-PRC resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced withholding rate arrangement and such non-PRC resident enterprises constitute the beneficiary of such income.
Pursuant to an arrangement between Mainland China and Hong Kong (the “Hong Kong Tax Treaty”) and relevant tax regulations of the PRC, subject to certain conditions, a reduced withholding tax rate of 5% will be available for dividends from PRC entities provided that the recipient can demonstrate it is a Hong Kong tax resident and it is the beneficial owner of the dividends. The government adopted regulations in 2018 which stipulate that in determining whether a non-resident enterprise has the status as a beneficial owner, comprehensive analysis shall be conducted based on the factors listed therein and the actual circumstances of the specific case shall be taken into consideration. Specifically, it expressly excludes an agent or a designated payee from being considered as a “beneficial owner.”
Cash Management Policies and Procedures
Under our informal cash management policy, the frequency and amount of intercompany transfers of funds is determined based on the working capital needs of our subsidiaries and intercompany transactions and is subject to internal approval processes and funding arrangements. Our management reviews and monitors our cash flow forecast and working capital needs of our subsidiaries on a regular basis. In addition, capital contributions and intercompany loan arrangements are subject to local jurisdiction and banking regulations. In this regard, we have not faced difficulties or limitations in our ability to transfer cash between subsidiaries in any of our operating jurisdictions. BIMI Medical International Inc, our Delaware holding company, has been able to transfer funds to its subsidiaries, but the subsidiaries are unable to distribute funds to BIMI Medical International Inc.
On June 9, 2022, we entered into a stock purchase agreement with the Chairman of the Board of the Company, Mr. Fnu Oudom, whereby Mr. Oudom agreed to purchase 1,250,000 (post a 1-for-10 reverse split in December 2022) shares of Common Stock for $5 million, or $0.40 per share, which was subject to the approval of the shareholders of the Company. Upon approval, the $5 million was transferred to our PRC subsidiaries for working capital purposes. The transfer of funds among our operating PRC subsidiaries is subject to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (2020 Revision, the “Provisions on Private Lending Cases”), which was implemented on August 20, 2020 to regulate the financing activities between natural persons, legal persons and unincorporated organizations. The Provisions on Private Lending Cases does not prohibit using cash generated from one subsidiary to fund another subsidiary’s operations. To date, none of our subsidiaries have made any distributions or paid any dividend to Bimi Medical International Inc. We have not been notified of any other restriction which could limit our PRC subsidiaries’ ability to transfer cash between subsidiaries. See Item 15 – “Exhibits and Financial Statement Schedules for our condensed consolidated financial statements,” that are filed as part of this report, beginning on page F-1.
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Regulation of Foreign Investments
The Foreign Investment Law of the PRC (“Foreign Investment Law”) was formally adopted by the National People’s Congress on March 15, 2019 and became effective on January 1, 2020. The Foreign Investment Law is formulated to further expand opening-up, vigorously promote foreign investment and protect the legitimate rights and interests of foreign investors. According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment access is not lower than that of domestic investors and their investments. The negative list management system means that the state implements special administrative procedures for access of foreign investment in specific fields. Foreign investors shall not invest in any forbidden fields stipulated in the negative list and shall meet the conditions stipulated in the negative list before investing in any restricted fields.
Foreign investors’ investment, earnings and other legitimate rights and interests within the territory of China are protected in accordance with the law, and all national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. The state guarantees that foreign-invested enterprises participate in the formulation of standards in an equal manner. The state guarantees that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. The State shall not expropriate any foreign investment except under special circumstances. In special circumstances, the state may levy or expropriate the investment of foreign investors in accordance with the law for the needs of the public interest. The expropriation and requisition shall be conducted in accordance with legal procedures and timely and reasonable compensation shall be given. In carrying out business activities, foreign-invested enterprises shall comply with relevant provisions on labor protection, social insurance, tax, accounting, foreign exchange and other matters stipulated in laws and regulations.
On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures on the Security Review of Foreign Investment, effective on January 18, 2021, which sets forth provisions concerning the security review mechanism on foreign investment, including the types of investments subject to review, review scopes and procedures, among others. The Office of the Working Mechanism of the Security Review of Foreign Investment (the “Office of the Working Mechanism”) will be established under the NDRC to carry out routine work of security review on foreign investment. Foreign investor or relevant parties in China must declare the security review to the Office of the Working Mechanism prior to (i) the investments in the military industry, military industrial supporting industry and other fields relating to the security of national defense, and investments in areas surrounding military facilities and military industry facilities; and (ii) investments in important agricultural products, important energy and resources, important equipment manufacturing, important infrastructure, important transport services, important cultural products and services, important information technology and internet products and services, important financial services, key technologies and other important fields relating to national security, and obtain control in the target enterprise. Control exists when the foreign investor (i) holds over 50% equity interests in the target, (ii) has voting rights that can materially impact on the resolutions of the board of directors or shareholders meeting of the target even when it holds less than 50% equity interests in the target, or (iii) has material impact on the target’s business decisions, human resources, accounting and technology, etc.
On December 26, 2019, the State Council promulgated the Implementation Regulations on the Foreign Investment Law, which came into effect on January 1, 2020, and it further requires that foreign-invested enterprises and domestic enterprises shall be treated equally with respect to policy making and implementation. Pursuant to the Implementation Regulations on the Foreign Investment Law, if the existing foreign-invested enterprises fail to change their original forms as of January 1, 2025, the relevant market regulation departments will not process other registration matters for the enterprises and may disclose their relevant information to the public.
On December 30, 2019, the MOFCOM and the State Administration for Market Regulation jointly issued the Measures for Reporting of Foreign Investment Information, or the Foreign Investment Information Measures, which came into effect on January 1, 2020 and replaced the Interim Administrative Measures for the Record-filing of the Establishment and Modification of Foreign-invested Enterprises. Since January 1, 2020, for foreign investors carrying out investment activities directly or indirectly in the PRC, foreign investors or foreign-invested enterprises shall submit investment information through the Enterprise Registration System and the National Enterprise Credit Information Publicity System operated by the State Administration for Market Regulation. Foreign investors or foreign-invested enterprises shall disclose their investment information by submitting reports for their establishments, modifications and cancelations and their annual reports in accordance with the Foreign Investment Information Measures. If a foreign-invested enterprise investing in the PRC has finished submitting its reports for its establishment, modifications and cancelation and its annual reports, the relevant information will be shared by the competent market regulation department to the competent commercial department, and does not require such foreign-invested enterprise to submit the reports separately.
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Regulation of Overseas Securities Offerings
On February 17, 2023, the CSRC issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively, the “New Administrative Rules Regarding Overseas Listings”), which came into force on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets must fulfill the filing procedure with the CSRC pursuant to the requirements of the Trial Administrative Measures. Initial public offerings or listings in overseas markets must file with the CSRC within three (3) working days after the relevant application is submitted overseas. If an issuer offers securities in the same overseas market where it has previously offered and listed securities subsequently, filings have to be made with the CSRC within three (3) working days after the offering is completed. Upon occurrence of any material event, such as change of control, investigations or sanctions imposed by an overseas securities’ regulatory agency or other relevant competent authority, change of listing status or transfer of listing segment, or voluntary or mandatory delisting, after an issuer has offered and listed securities in an overseas market, the issuer must submit a report thereof to CSRC within three (3) working days after the occurrence and public disclosure of such event. On February 24, 2023, the CSRC promulgated the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which also became effective on March 31, 2023. The Confidentiality and Archives Administration Provisions set out rules, requirements and procedures relating to provision of documents, materials and accounting archives for securities companies, securities service providers, overseas regulators and other entities and individuals in connection with overseas offering and listing, including without limitation to, domestic companies that carry out overseas offering and listing (either in direct or indirect means) and the securities companies and securities service providers (either incorporated domestically or overseas) that undertake relevant businesses shall not leak any state secret and working secret of government agencies, or harm national security and public interest, and a domestic company shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level, if it plans to, either directly or through its overseas listed entity, publicly disclose or provide any documents and materials that contain state secrets or working secrets of government agencies. Working papers produced in the Chinese mainland by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in the Chinese mainland. Where such documents need to be transferred or transmitted to outside the Chinese mainland, relevant approval procedures stipulated by regulations shall be followed. While we believe we do not involve leaking any state secret and working secret of government agencies, or harming national security and public interest in connection with provision of documents, materials and accounting archives, there is uncertainty how the new provisions will be interpreted and implemented in the future, and we may be required to perform additional procedures in connection with the provision of accounting archives after the Confidentiality and Archives Administration Provisions come into effect. Any failure by us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our Common Stock or our other securities, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Common Stock or such other securities to significantly decline in value or become worthless.
Regulation of Mergers and Acquisitions
PRC regulations and rules concerning mergers and acquisitions, including the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors (the “M&A Rules”), and other regulations and rules with respect to mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that the Ministry of Commerce of the PRC (the “MOFCOM”) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, according to the Anti-Monopoly Law of the PRC, which was amended in June 2022 and became effective as of August 1, 2022, and the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council, the concentration of business undertakings by way of mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the State Administration for Market Regulation (the “SAMR”) when the threshold is crossed and such concentration shall not be implemented without the clearance of prior notification. In addition, the Measures for Security Review of Foreign Investment jointly issued by the National Development and Reform Commission and MOFCOM and the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprise by Foreign Investors (the “Security Review Rules”) issued by the MOFCOM specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire the de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review by structuring the transaction through, among other things, trusts, entrustment or contractual control arrangements.
Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes may delay or inhibit our ability to complete such transactions. It is unclear whether our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, MOFCOM and other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.
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Annual Inspections
In accordance with relevant PRC laws, all types of enterprises incorporated under PRC laws are subject to annual inspections with the State Administration for Industry and Commerce of the PRC or its local branches. In addition, foreign invested enterprises are subject to annual inspections conducted by other applicable PRC governmental authorities. In order to reduce enterprises’ burden of submitting inspection documentation to different governmental authorities, the Measures on Implementing Joint Annual Inspection on Foreign-invested Enterprises issued in 1998 by State Administration of Foreign Exchange (“SAFE”), together with six other ministries, stipulated that foreign-invested enterprises must participate in an annual inspection jointly conducted by all relevant PRC governmental authorities.
Foreign Currency Exchange Regulations.
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 2008 and various regulations issued by the State Administration of Industry and Commerce (“SAIC”) and the SAFE and other relevant PRC governmental authorities, Renminbi are freely convertible only to the extent of current account items, such as trade related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require prior approval from SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as US dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into Renminbi. On August 29, 2008, SAFE promulgated a circular regulating the conversion by a foreign-invested company of its registered capital in foreign currency into Renminbi by restricting how the converted Renminbi may be used. This circular stipulates that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within China. Violations of this circular can result in severe penalties, including monetary fines.
In addition, any foreign loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between its approved total investment amount and its approved “registered capital amount.”
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, SAFE issued Circular 75, which regulates foreign exchange matters in relation to the use of a “special purpose vehicles” by PRC residents to seek offshore equity financing and conduct “return investment” in China. Under Circular 75, a “special purpose vehicles” refers to an offshore entity established or controlled, directly or indirectly, by PRC citizens or PRC entities (collectively, as PRC residents) for the purpose of seeking offshore equity financing using assets or interests owned by such PRC residents or PRC entities in onshore companies, while “round trip investment” refers to the direct investment in China by PRC residents through the use of “special purpose vehicles,” including without limitation, establishing foreign invested enterprises and using such foreign invested enterprises to purchase or control (by way of contractual arrangements) onshore assets. Circular 75 requires that, before establishing or controlling a “special purpose vehicles,” PRC residents are required to complete foreign exchange registration with the competent local counterparts of SAFE for their overseas investments. In addition, such PRC resident is required to amend his or her SAFE registration or to file with SAFE or its competent local branch, with respect to that offshore special purpose vehicles in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China by the offshore special purpose vehicles. To further clarify the implementation of such amendment or filing procedure, SAFE requires domestic enterprises under Circular 75 to coordinate and supervise such amendment or filings with SAFE or its local counterparts by such PRC residents. If PRC residents fail to comply, the domestic enterprises are required to report to the local SAFE authorities.
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Failure to comply with the registration procedures set forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including being prohibited from distributing its profits and proceeds from any reduction in capital, share transfer or liquidation to its offshore parent or affiliate, and restrictions on the ability to contribute additional capital from the offshore entity to the PRC entities, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations.
Regulation of Overseas Listing
Recent statements by the PRC government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. The PRC government recently initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively, the “New Administrative Rules Regarding Overseas Listings”), which came into force on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets shall fulfill the filing procedure with the CSRC as per requirement of the Trial Administrative Measures. According to the Trial Administrative Measures, Article 2, where a domestic company seeks to directly offer and list securities in overseas markets, the issuer shall file with the CSRC and where a domestic company seeks to indirectly offer and list securities in overseas markets, the issuer shall designate a major domestic operating entity, which shall, as the domestic responsible entity, file with the CSRC. Initial public offerings or listings in overseas markets shall be filed with the CSRC within three (3) working days after the relevant application is submitted overseas. If an issuer offers securities in the same overseas market where it has previously offered and listed securities subsequently, filings shall be made with the CSRC within three (3) working days after the offering is completed. According to the Trial Administrative Measures Article 22, upon occurrence of any material event, such as change of control, investigations or sanctions imposed by overseas securities regulatory agencies or other relevant competent authorities, change of listing status or transfer of listing segment, or voluntary or mandatory delisting, after an issuer has offered and listed securities in an overseas market, the issuer shall submit a report thereof to CSRC within three (3) working days after the occurrence and public disclosure of such event. Further, according to the Trial Administrative Measures Article 21, an overseas securities company that serves as a sponsor or lead underwriter for overseas securities offering and listing by domestic companies shall file with the CSRC within 10 working days after signing its first engagement agreement for such business, and submit to the CSRC, no later than January 31 each year, an annual report on its business activities in the previous year associated with overseas securities offering and listing by domestic companies. If an overseas securities company has entered into engagement agreements before the effectuation of the Trial Administrative Measures and is serving in practice as a sponsor or lead underwriter for overseas securities offering and listing by domestic companies, it shall file with the CSRC within 30 working days after the Trial Administrative Measures take effect. On February 24, 2023, the CSRC promulgated the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which also became effective on March 31, 2023. The Confidentiality and Archives Administration Provisions set out rules, requirements and procedures relating to provision of documents, materials and accounting archives for securities companies, securities service providers, overseas regulators and other entities and individuals in connection with overseas offering and listing, including without limitation to, domestic companies that carry out overseas offering and listing (either in direct or indirect means) and the securities companies and securities service providers (either incorporated domestically or overseas) that undertake relevant businesses shall not leak any state secret and working secret of government agencies, or harm national security and public interest, and a domestic company shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level, if it plans to, either directly or through its overseas listed entity, publicly disclose or provide any documents and materials that contain state secrets or working secrets of government agencies. Working papers produced in the Chinese mainland by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in the Chinese mainland. Where such documents need to be transferred or transmitted to outside the Chinese mainland, relevant approval procedures stipulated by regulations shall be followed. While we believe we do not involve leaking any state secret and working secret of government agencies, or harming national security and public interest in connection with provision of documents, materials and accounting archives, there is uncertainty how the new provisions will be interpreted and implemented in the future, and we may be required to perform additional procedures in connection with the provision of accounting archives after the Confidentiality and Archives Administration Provisions come into effect. Any failure by us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our Common Stock or our other securities, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Common Stock to significantly decline in value or become worthless.
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Anti-Monopoly Regulations
The Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress which became effective on August 1, 2008 and the Interim Provisions on the Review of Concentrations of Undertakings promulgated by the SAMR which became effective on December 1, 2020 require that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the SAMR before they can be completed. Where the participation in concentration of undertakings by way of foreign-funded merger and acquisition of domestic enterprises or any other method which involves national security, the examination of concentration of undertakings shall be carried out pursuant to the provisions of this law and examination of national security shall be carried out pursuant to the relevant provisions of the state. Failure to comply with above regulations may result in an order to stop concentration, dispose the shares/assets or transfer the operation within a stipulated period, or adopt other necessary measures to reinstate the preconcentration status, or fines.
On October 23, 2021, the SCNPC issued a draft of the amended Anti-Monopoly Law for public comments. On June 24, 2022, the Decision of the Standing Committee of the National People’s Congress on Revising the Anti-monopoly Law of the People’s Republic of China, or the Revised Anti-monopoly Law was released, which will be effective on August 1, 2022. According to the Revised Anti-monopoly Law, the fines for illegal concentration of business operators have been increased to no more than ten percent of its last year’s sales revenue if the concentration of business operator has or may have an effect of excluding or limiting competitions; or a fine of up to RMB5 million if the concentration of business operator does not have an effect of excluding or limiting competition. The Revised Anti-monopoly Law also stipulates that the relevant authority shall investigate a transaction where there is any evidence that the concentration has or may have the effect of eliminating or restricting competitions, even if such concentration does not reach the filing threshold. And in order to adapt the Revised Anti-monopoly Law, on June 27, 2022, the SAMR issued a Discussion Draft of the Provisions on Prohibition of the Abuse of Market Dominance. As of the date of this annual report, the Discussion Draft of the Provisions on Prohibition of the Abuse of Market Dominance was released for public comments only and the final version and effective date of such regulations are subject to substantial uncertainty.
Cybersecurity Regulations
On December 28, 2021, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on February 15, 2022. According to the Cybersecurity Review Measures, the procurement of any network product or service by an operator of critical information infrastructure or the conducting of data processing activities by a network platform operator, that affects or may affect national security, will be subject to a cybersecurity review. A network platform operator that possesses personal information of more than one million users must apply to the Cybersecurity Review Office set up under the CAC for a cybersecurity review when it seeks to list overseas.
As of the date of this report, based on the advice of our PRC counsel, Chongqing Jinmujinyang (Jiulongpo) Law Firm (a/k/a in English: Chongqing Kingmoon & Kingyang (Jiulongpo) Law Firm), we do not believe that we or any of our subsidiaries are covered by the permission requirements from the CAC nor do we expect that the current PRC laws on cybersecurity or data security will have a material adverse impact on our business operations. However, as there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, we may not be able to pass such review. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. As of the date of this report, we have not been involved in any investigations on cybersecurity review initiated by the Cyber Administration of China or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect. We believe that we are in compliance with the aforementioned regulations and policies that have been issued by the Cyber Administration of China.
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Regulations Relating to Taxation
The PRC Enterprise Income Tax Law applies a 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except to the extent tax incentives are granted to special industries and projects. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008 and payable to its foreign investor may be subject to a withholding tax rate of 10% if the PRC tax authorities determine that the foreign investor is a non-resident enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax.
Under the PRC Enterprise Income Tax Law, an enterprise established outside China with “de facto management bodies” within China is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. A circular issued by the State Administration of Taxation in April 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese enterprise groups and established outside of China as “resident enterprises” clarified that dividends and other income paid by such PRC “resident enterprises” will be considered PRC-source income and subject to PRC withholding tax, currently at a rate of 10%, when paid to non-PRC enterprise shareholders. This circular also subjects such PRC “resident enterprises” to various reporting requirements with the PRC tax authorities.
Under the implementation regulations to the PRC Enterprise Income Tax Law, a “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, the tax circular mentioned above specifies that certain PRC invested overseas enterprises controlled by a Chinese enterprise or a Chinese enterprise group in the PRC will be classified as PRC resident enterprises if the following are located or resident in the PRC: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, the company seal, and minutes of board meetings and shareholders’ meetings; and 50% or more of the senior management or directors having voting rights.
Pharmaceutical and Ancillary Regulations
According to the “Administrative Measures for Pharmaceutical Business Licenses” and other relevant regulations in China, we need to obtain qualification certificates the operations of our Company, including all of our subsidiaries and pharmacy stores in China. The qualification certificates mainly include the “Quality Management Certificate for Pharmaceutical Administration” (GSP Certificate) and the “Pharmaceutical Business License”. “Food Business License”, “Medical Device Business License”, “Medical Agency Practice License”, etc.
All of our pharmacies have obtained Pharmaceutical Business Licenses and Pharmaceutical Management Quality Management Certificates In addition, all of our pharmacies have obtained Internet Drug Information Service Qualification Certificates and Medical Device Network Sales Records These business qualifications, which are necessary for operating pharmacies in China, are subject to annual renewal.
A distributor of pharmaceutical products must obtain a distribution permit from the relevant provincial or designated municipal or county level Food and Drug Administration. The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems, personnel, and equipment. The distribution permit is valid for five (5) years, and the holder must apply for renewal of the permit within six (6) months prior to its expiration. In addition, a pharmaceutical product distributor needs to obtain a business license from the relevant administration for industry and commerce prior to commencing its business. All of our retail pharmacies have obtained necessary pharmaceutical distribution permits, and we do not expect to face any difficulties in renewing these permits and/or certifications.
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In addition, under the Supervision and Administration Rules on Pharmaceutical Product Distribution, promulgated by the SFDA, a pharmaceutical product distributor is responsible for its procurement and sales activities and is liable for the actions of its employees or agents in connection with their conduct of distribution on behalf of the distributor. A retail distributor of pharmaceutical products is not allowed to sell prescription pharmaceutical products or Tier A OTC pharmaceutical products listed in the national or provincial medical insurance catalogs without a valid prescription or the presence of a certified in-store pharmacist. See “Reimbursement under the National Medical Insurance Program.”
A distributor of nutritional supplements and other food products must obtain a food circulation permit from its local Administration of Industry and Commerce. The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems, personnel, and equipment. The food circulation permit is valid for three (3) years, and the holder must apply for renewal of the certificate within thirty (30) days prior to its expiration. The Guanzan Group has received this permit for its operation.
GSP standards regulate wholesale and retail pharmaceutical product distributors to ensure the quality of distribution of pharmaceutical products in China. All wholesale and retail pharmaceutical product distributors are required to apply for GSP certification within thirty (30) days after obtaining drug distribution permits. The current applicable GSP standards require pharmaceutical product distributors to implement strict controls on the distribution of pharmaceutical products, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management, and quality control. Specifically, the warehouse must be able to store the pharmaceutical products at various required temperatures and humidity, and handle transport, warehouse entries, delivery, and billing by computerized logistics management systems. The GSP certificate is usually valid for five (5) years. Currently, Guanzan Group is a GSP certified company.
Under the Rules on Administration of Prescriptions promulgated by the SFDA, doctors are required to include the chemical ingredients of the medicine they prescribe in their prescription and are not allowed to include brand names in their prescription. This regulation is designed to provide consumers with choices among different pharmaceutical products that contain the same chemical ingredients.
Eligible participants in the national medical insurance program, consisting primarily of urban residents, are entitled to purchase medicine when presenting their medical insurance cards in an authorized pharmacy, provided that the medicine they purchase has been included in the national or provincial medical insurance catalogs. Depending on relevant local regulations, authorized pharmacies can either (i) sell medicine on credit and obtain reimbursement from relevant government social security bureaus on a monthly basis, or (ii) receive payments from the participants at the time of their purchases, and the participants in turn obtain reimbursement from relevant government social security bureaus.
Medications included in the national and provincial medical insurance catalogs are divided into two (2) tiers. Purchases of Tier A pharmaceutical products are generally fully reimbursable. Purchasers of Tier B pharmaceutical products, which are generally more expensive than those in Tier A, are required to make a certain percentage of co-payments, with the remaining amount being reimbursable. The percentage of reimbursement for Tier B OTC products varies in different regions in the PRC. Factors that affect the inclusion of medicine in the medical insurance catalogs include whether the medicine is consumed in large volumes and commonly prescribed for clinical use in China and whether it is considered to be important in meeting the basic healthcare needs of the general public.
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China’s Ministry of Labor and Social Security, together with other government authorities, have the power to determine which medicines are included in the national medical insurance catalog every two (2) years, under which of the two (2) tiers the included medicine falls, and whether an included medicine should be removed from the catalog.
Advertising Regulation
Under the Advertising Law of the PRC, the contents of an advertisement must be true, lawful, without falsehood, and must neither deceive nor mislead consumers. Accordingly, advertisements must be examined by the competent authority prior to its publication or broadcast through any form of media. In addition, advertisements of pharmaceutical products may only be based on a drug’s approved indication of use statement and may not contain any assurance of a product’s efficiency, treatment efficiency, curative rate, or any other information prohibited by law. Advertisement for certain drugs should include an admonishment to seek a doctor’s advice before purchasing and application. Advertising is prohibited for certain drugs such as anesthetics and psychotropic drugs.
To further prevent misleading advertising of pharmaceutical products, the SAIC and the SFDA jointly promulgated the Standards for Examination and Publication of Advertisements of Pharmaceutical Products and Measures for Examination of Advertisement of Pharmaceutical Products in March 2007. Under these regulations, an approval must be obtained from the provincial level of food and drug administration before a pharmaceutical product may be advertised. In addition, once approved, an advertisement’s content may not be altered without further approval. Such approval, once obtained, is valid for one (1) year.
Regulation of Medical Institutions
We started to operate in and have been subject to regulations relating to the management of medical institutions upon completion of the acquisition of Guoyitang in January 2021. The Administrative Measures on Medical Institutions, as amended, provides that the establishment of a medical institution by any entity or individual must be reviewed and approved by health administrative departments at or above the county level and obtain a Medical Institution Practicing Certificate.
The Administrative Measures for Verification of Medical Institutions (For Trial Implementation) provides that the Medical Institution Practicing Certificate is subject to periodic examinations and verifications by registration authorities. The verification period is 3 years for general hospitals, hospitals of traditional Chinese medicine, hospitals of western medicine, hospitals of ethnic minority medicine and specialized hospitals, as well as sanitariums, rehabilitation hospitals, maternity and children’s health care centers, emergency centers, clinical laboratories and specialized disease prevention institutions equipped with more than 100 beds, while the verification period is 1 year for other medical institutions. In the event that a medical institution fails to apply for verification as required and post re-verification procedures or unsuccessful in its re-verification application, the registration authorities may cancel its Medical Institution Practicing Certificate.
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According to the Interim Provisions of Management of Physical Examination, the registration authority is required to examine and assess the medical institutions.
According to the Regulations on the Control of Narcotic Drugs and Psychotropic Drugs, as amended, any medical institution that uses narcotic drugs and certain psychotropic drugs is subject to the approval of the relevant authority and must obtain authority to purchase such drugs.
According to the Administrative Regulations on Sanitation of Public Places and its implementing rules hospitals equipped with waiting rooms must apply to the sanitary administrative authorities for a sanitary license in a timely manner.
According to the Drug Administration Law of PRC, as amended, the Regulations for the Implementation of the Drug Administration Law and the Measures for Supervision and Administration of Drugs of Medical Institutions (For Trial Implementation), medical institutions must purchase drugs from enterprises qualified to produce and deal in drugs. Drugs used by medical institutions must be purchased uniformly by special departments in accordance with the provisions, and other departments and medical staff members of medical institutions are forbidden to purchase drugs on their own.
Regulations on Employment and Social Welfare
According to the Labor Contract Law of the People’s Republic of China, or the Labor Contract Law, promulgated by the SCNPC on June 29, 2007 and amended on December 28, 2012, and the Implementation Rules of the Labor Contract Law of the People’s Republic of China, or the Implementation Rules of the Labor Contract Law, promulgated by the State Council on September 18, 2008, a written employment contract shall be concluded in the establishment of an employment relationship. If an employer fails to enter into a written employment contract with an employee within one month from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. The Labor Contract Law and its implementation rules also require compensation to be paid upon certain terminations. In addition, if an employer intends to enforce a noncompete provision in an employment contract or noncompetition agreement with an employee, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination or expiry of the labor contract. Employers in most cases are also required to provide severance payment to their employees after their employment relationships are terminated.
Pursuant to the Social Insurance Law of the People’s Republic of China, which was promulgated by the SCNPC on October 28, 2010, effective on July 1, 2011 and last amended on December 29, 2018, the Interim Regulations on the Collection of Social Insurance Fees, issued by the State Council on January 22, 1999 and last amended on March 24, 2019, and the Regulations on the Administration of Housing Provident Funds, issued by the State Council on April 3, 1999 and last amended on March 24, 2019, enterprises in China are required to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located.
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Marketing and Promotion
Our current marketing and promotion efforts are focused on our wholesale medical devices, wholesale pharmaceuticals and retail pharmacy operations, and our strategy is to build brand recognition, build strong customer loyalty, and develop incremental revenue opportunities.
For our wholesale business, we promote our products and brand through participation in trade shows and academic seminars and engaging third party professionals in advertisement efforts. We actively pursue direct sales to hospitals, clinics and pharmacies as well government centralized procurement and bidding projects.
In our retail stores, the store managers and staff are encouraged to propose their own advertising and promotional plans, including holiday promotions, posters and billboards. In addition, we periodically offer special discounts and gift promotions for selected merchandise in conjunction with our suppliers’ marketing programs. We intend to invest in advertising in 2023.We also provide ancillary services such as providing free blood pressure readings in our stores.
Many of our promotional programs are designed to encourage manufacturers to invest resources to market their brands within our stores. We charge manufacturers promotional fees in exchange for the right to promote their products during promotional periods. Since manufacturers provide purchasing incentives and information to help customers make informed purchase decisions, we believe that manufacturer led promotions improve our customers’ shopping experience.
Raw Materials and Suppliers
The Company’s medical devices and pharmaceutical suppliers include national and regional large-scale pharmaceutical and medical device manufacturing companies and wholesale pharmaceutical companies.
We believe that competitive sources are readily available for substantially all of the products we require for our retail and wholesale businesses. As such, we believe that we can change suppliers without any material interruption to our business. To date, we have not experienced any significant difficulty in sourcing our suppliers.
In the year ended December 31, 2022, no vendor accounted for more than 10% of our wholesale medical devices purchases and one vendor accounted for 42.0 % of our wholesale pharmaceutical purchases.
Quality Control
We strongly emphasize quality control, which starts with procurement. In addition to their market acceptance and costs, we select products based on Good Manufacturing Practice and Good Supply Practices (“GSP”) compliance by our suppliers. We also assess product quality based on the manufacturer’s facilities and capabilities, including technology, packaging and logistics. We conduct random quality inspections of each batch of products we procure and replace any supplier who fails to pass such inspections.
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In addition to general quality control measures described above, we also enforce strict quality control measures at our storage and distribution center. All products for our wholesale and retail businesses are screened upon their arrival, and those with evidence of defects or damages are immediately rejected. Products that pass the screening process are recorded and stored strictly according to each manufacturer’s temperature and other requirements. Products (for both our pharmacies and wholesale customers) are verified against the appropriate delivery orders prior to leaving the facility. We use vehicles with cold-temperature storage to make deliveries as necessary.
Competition
Guanzan and Shude, our distributors of medical devices and pharmaceuticals, have established distribution channels in the city of Chongqing, China. The wholesale medical devices and pharmaceutical distribution industries in China are competitive and highly fragmented. We compete with regional distributors as well as national operators. These competitors have substantially greater logistics capacities and more financial resources, as well as more industry relevant experience, than us.
The pharmacy industry in China is also intensely competitive, rapidly evolving and highly fragmented. We compete on the basis of store location, merchandise selection, prices and brand recognition. Many of our competitors include large, national drugstore chains that may have more financial resources, stronger brand strength, and management expertise than us. Other competitors include local and independent drugstores and government operated pharmacies, as well as discount stores, convenience stores, and supermarkets with respect to sundry and other non-medicinal products that we carry.
We plan to focus on on-line initiated sales in the future based on the use of apps and expect to compete against established state-owned pharmacies and internet giants. No assurance can be given that we will succeed in this initiative.
The medical services market in China is highly competitive and fragmented with numerous market participants. Our competitors include major privately-owned multi-site operators in China. We believe the principal competitive factors in this market are price and quality of service, variety of services rendered, convenience and proximity of treatment center location to place of business or residence, brand recognition and reputation, targeted marketing and customized services. We also face intense competition in our general healthcare service business. We compete primarily with other treatment centers in our areas of operation. Key competitive factors include healthcare service quality, reputation, convenience and price. We expect new competitors in the general healthcare service industry will continue to emerge given the state of China healthcare reform and the central and local governments’ supportive policies towards public healthcare reform and private capital investment in the healthcare services industry. The Company is also actively seeking potential partnerships.
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Seasonality
Our management believes that our operations are not currently subject to seasonal influences.
Employees
We consider our employees the most valuable asset of our company. We offer competitive compensation and comprehensive benefits to attract and retain our employees. We believe that an engaged workforce is key to maintaining our ability to innovate. We invest in our employees’ career growth and development is an important focus for us. We are committed to providing a safe work environment for our employees in compliance with applicable regulations. We have taken necessary precautions in response to the recent COVID-19 outbreak, including offering employees the flexibility to work from home and mandatory social distancing requirements in the workplace.
As of December 31, 2022, we had a total of 296 full-time employees working in the PRC and two employees in the U.S., including 200 employees working in hospitals, of which 6 are engaged in information technology. As of December 31, 2022 the number of employees employed in the retail pharmacy, wholesale medical devices wholesale pharmaceuticals. medical service and other were 11, 85, 194 and 6, respectively. We believe we have a good relationship with our employees.
ITEM 1A. RISK FACTORS
Investing in our shares of Common Stock involves a high degree of risk and uncertainty. You should carefully consider the risks and uncertainties described below before investing. Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks. In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment. These risk factors include, but are not limited to:
Risks Related to Our Business
| ● | There are doubts about our company’s ability to continue as a going concern. |
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| ● | We have had a history of losses and our ability to grow sales and achieve profitability are unpredictable. | |
| ● | We have a substantial amount of existing debt, which may restrict our financing and operating flexibility and have other adverse consequences; defaults could have a material adverse effect on our business, financial condition, results of operations and cash flows. | |
| ● | We failed to realize any financial benefits from most of our recent acquisitions and may be unable to realize any benefits from any other future transactions. | |
| ● | The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity. | |
| ● | Raising additional capital will be difficult and may cause dilution to our shareholders and restrict our operations. | |
| ● | The recent COVID-19 pandemic had a material adverse effect on our business operations, results of operations, cash flows and financial position during 2022. | |
| ● | Breaches of network or information technology security could have an adverse effect on our business. | |
| ● | If we fail to implement effective internal controls required by the Sarbanes-Oxley Act of 2002, or remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our Common Stock. | |
| ● | Violations of anti-bribery, anti-corruption and/or international trade laws to which we are subject could have a material adverse effect on our business operations, financial position, and results of operations. |
Risks Relating to Our Wholesale Operations
| ● | Failure to maintain relationships with our customers or to otherwise expand our distribution network would materially and adversely affect our business. |
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| ● | Our wholesale pharmaceutical business operates without the support of manufacturing capability and is at a significant disadvantage. |
Risks Relating to Our Pharmacy Business
| ● | We may be subject to fines and penalties if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under China’s National Medical Insurance Program. | |
| ● | We may not be able to maintain proper inventory levels for our pharmacy stores. | |
| ● | Certain risks are inherent in providing pharmacy services and we do not maintain professional liability and errors and omissions liability insurance. |
Risks Related to Our Hospitals
| ● | Our hospitals historically derived a significant portion of their revenue by providing healthcare services to patients with public medical insurance coverage; any delayed payment under China’s public medical insurance programs could affect our results of operations. | |
| ● | Our hospital could become the subject of patient complaints, claims and legal proceedings in the course of its operations, which could result in costs and materially and adversely affect our brand image, reputation and results of operations. | |
| ● | If we fail to properly manage the employment of the physicians and other medical professionals of our hospital, we may be subject to penalties, which could materially and adversely affect our business and results of operations. | |
| ● | Our performance depends on our ability to recruit and retain skilled physicians. | |
| ● | As a provider of medical services, we are exposed to inherent risks relating to malpractice claims. | |
| ● | Regulatory pricing controls may affect the pricing of our hospital. |
Risks Related to Our Human Capital
| ● | We may be unable to attract, hire, and retain a highly qualified workforce, including key management. | |
| ● | We substantially depend on a few key personnel who, if not retained, could cause declines in productivity and operational results and loss of our strategic guidance, all of which would diminish our business prospects and value to investors. |
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Risk Related to Doing Business in China
| ● | Changes in the political and economic policies of the PRC government or in relations between China and the United States or other governments may materially and adversely affect our business, financial condition, and results of operations and may result in our inability to sustain our growth and expansion strategies. | |
| ● | Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.\ | |
| ● | Our shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors for two consecutive years. | |
| ● | The approval of, or filing or other procedures with, the CSRC or other Chinese regulatory authorities may be required in connection with issuing our equity securities to foreign investors under Chinese law, and, if required, we cannot predict whether we will be able, or how long it will take us, to obtain such approval or complete such filing or other procedures. | |
| ● | If we do not maintain the privacy and security of sensitive patient, customer and business information, we could damage our reputation, incur substantial additional costs and become subject to litigation; We may become subject to cybersecurity review. | |
| ● | The impact of China’s regulatory reforms is unpredictable. | |
| ● | The PRC government’s significant oversight over our China-based operating subsidiaries could result in a material adverse change in their operations and in the value of our Common Stock. | |
| ● | Uncertainties with respect to the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us or result in a material adverse change to our subsidiaries’ business operations, and damage our and our subsidiaries’ reputation, which would materially and adversely affect our financial condition and results of operations and cause our Common Stock to significantly decline in value or become worthless. | |
| ● | The PRC government may intervene or influence our subsidiaries’ business operations at any time, which could result in a material change in their business operations or the value of our investment in such subsidiaries. | |
| ● | We have limited business insurance coverage in China. | |
| ● | We may suffer currency exchange losses if the RMB depreciates relative to the US Dollar. |
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| ● | Governmental control of currency conversion may affect the value of your investment. | |
| ● | Labor laws in the PRC may adversely affect our operations. | |
| ● | It may be difficult to enforce any civil judgments against us or our board of directors or officers because all of our operating and/or fixed assets are located in the PRC.. | |
| ● | Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent. |
Risks Related to Our Company’s Common Stock
| ● | We will need to raise additional capital that will likely cause dilution to our shareholders. | |
| ● | The trading volume of shares of our Common Stock has fluctuated from time to time, which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate. | |
| ● | The Nasdaq Capital Market imposes listing standards on our Common Stock that we may not be able to fulfill, thereby leading to a possible delisting of our Common Stock. |
Risks Related to Our Business
There are doubts about our company’s ability to continue as a going concern.
Our company’s independent auditors have raised doubts about our ability to continue as a going concern. There can be no assurance that sufficient funds that will be required during the next year or thereafter will be generated from operations or that funds will be available from external sources, such as securities, debt or equity financing or other potential sources. We intend to overcome the circumstances that impact our ability to remain a going concern through a combination of new sources of revenues, with interim cash flow deficiencies being addressed through additional financing. We anticipate raising additional funds through public or private financing, securities financing and/or strategic relationships or other arrangements in the near future to support our business operations; however, we may not have commitments from third parties for a sufficient amount of additional capital. We cannot be certain that any such financing will be available to us on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Our ability to obtain additional funding will determine if we can continue as a going concern. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and share price and require us to curtail or cease operations, sell off assets, seek protection from creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of our shares, and debt financing, if available, may have onerous terms. including restrictive covenants. Any additional financing could have a negative effect on our shareholders.
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We have had a history of losses and our ability to grow sales and achieve profitability are unpredictable.
As of December 31, 2022, we had an accumulated deficit of $70.14 million and incurred net losses of $22,318,056 and $34,921,745 in the years ended December 31, 2022 and 2021, respectively. Our ability to maintain and improve future levels of sales and profitability depends on many factors, which include:
| ● | successfully implementing our business strategy; |
| ● | increasing revenues; and |
| ● | controlling costs. |
There can be no assurance that we will be able to successfully implement our business plan, meet our challenges and become profitable in the future.
We have a substantial amount of existing debt, which may restrict our financing and operating flexibility and have other adverse consequences; defaults could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In order to fund our operations and recent acquisitions we have incurred a substantial amount of indebtedness. Our significant level of debt could have important consequences, including, but not limited to, the following:
| ● | making it more difficult for us to service our debt obligations and liabilities; | |
| ● | making us vulnerable to, and reducing our flexibility to respond to, general adverse economic and industry conditions; | |
| ● | requiring that a substantial portion of our cash flows from operations be dedicated to servicing debt, thereby reducing the funds available to us to fund working capital or other general corporate purposes; | |
| ● | impeding our ability to obtain additional debt or equity financing and increasing the cost of any such borrowing, particularly due to the financial and other restrictive covenants contained in the agreements governing our debt; and | |
| ● | adversely affecting public perception of us. |
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Although we believe we will be able to continue to service and repay our debt, there is no assurance that we will be able to do so. If our plans for future operations do not generate sufficient cash flows and earnings, our ability to make required payments on our debt would be impaired. If we fail to pay our indebtedness when due, it could have a material adverse effect on us and may require us to curtail or cease operations, sell off assets, seek protection from creditors through bankruptcy proceedings, or otherwise.
We failed to realize any financial benefits from most of our recent acquisitions and may be unable to realize any benefits from any other future transactions.
Mergers and acquisitions of companies are inherently risky and subject to many factors outside of our control and no assurance can be given that acquisition of companies in the future will be successful and will not adversely affect our business, operating results, or financial condition. In 2022, we recorded impairment losses totaling approximately $5.4 million with respect to the goodwill relating to our acquisitions of the Guanzan Group, Zhongshan, Guoyitang, Minkang, Qiangsheng and Eurasia.
If we acquire other businesses, we may face difficulties, including:
| ● | Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises; | |
| ● | Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions; | |
| ● | Integrating financial forecasting and controls, procedures and reporting cycles; | |
| ● | Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; | |
| ● | The uncertainties in the operations of the target acquisitions caused by the COVID-19 that may prevent such companies from achieving their performance projections. | |
| ● | Insufficient revenue to offset increased expenses associated with acquisitions; and | |
| ● | The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after announcement of acquisition plans. |
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact affect our net income and shareholders’ equity,
When we acquire a business, a substantial portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. The current accounting standards require that goodwill and intangible assets should be deemed to have indefinite lives, which should be tested for impairment at least annually (or more frequently if impairment indicators arise). Other intangible assets are amortized over their useful lives. For the years ended December 31, 2021 and 2022, we recorded goodwill impairment losses of $5,385,811 and $26,128,171, respectively.
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Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another goodwill impairment analysis, which could result in an impairment of up to the entire balance of our goodwill based on the quantitative assessment performed.
Raising additional capital will be difficult and may cause dilution to our shareholders and restrict our operations.
We expect to finance our cash needs for our working capital and the payment of the cash portion of our recent acquisitions. Although we have been able to obtain funding from outside sources in the last year, we cannot be certain that we will be able to continue to do so or to obtain additional financing on favorable terms. One possible impediment to raising capital is the tightening credit policies of the Chinese banks and the prospects of tightening in the global credit markets. If we cannot raise additional capital on acceptable terms, we may not be able to operate our business, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. We cannot be sure that we will be able to secure all the financing we will require, or that it will be available on favorable terms. If we are unable to obtain necessary financing, we will be required to substantially curtail our approach to implementing our business objectives.
To the extent that we raise additional capital through the sale of equity or convertible debt, our shareholders’ ownership interest will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect shareholder rights. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures.
The recent COVID-19 pandemic had a material adverse effect on our business operations, results of operations, cash flows and financial position during 2022.
During late 2019, a virus now known as the novel coronavirus or “COVID-19” appeared in Wuhan, the Peoples Republic of China (“PRC” or “China”). By March 11, 2020, the World Health Organization (“WHO”) labeled COVID-19 as a pandemic and many countries around the world began closing borders and making efforts to either shelter-in-place or quarantine its population. During the first quarter of 2020, China placed a mandatory quarantine on certain areas, specifically in Wuhan located in Hubei Province, which lasted for more than two months.
Our company and all of its operations are located in China. Since the pandemic broke out, our operations have been materially impacted. At the beginning of February 2020, the PRC government issued a quarantine order, which lasted for more than two months in many parts of the country, where everyone had to stay at home. During February and March, all of our administrative functions had to be performed remotely. Not until the beginning of April did we start to have a small skeleton crew working in our office and were able to perform those functions that could not be handled remotely.
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We have incurred additional costs to ensure we meet the needs of our customers, including providing additional cleaning materials for our stores and other facilities. COVID-19 has also caused supply chain disruption which has resulted in higher supply chain costs to replenish inventory in our stores and distribution centers. Furthermore, we have experienced restricted stock availability in a number of key categories which negatively impacted us. Certain popular and high profit margin products could not be sold due to governmental restrictive orders, which also resulted in the expiration of a large quantify of our medicines that are otherwise in high demand in the winter season. The customer traffic in our retail pharmacy stores in Dalian dropped greatly due to the pandemic. Because of the lockdown order that lasted for more than two months, we suffered reduced sales and an operating loss in the first three quarters in 2020. Although some of the businesses in China have resumed their daily activities while the pandemic was under control, there have been relapses in certain regions of the country which caused temporary lockdowns. If similar lockdown orders or sales restrictions are implemented by the government, they may have greater impact on our business.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, employees, suppliers, vendors, business partners and distribution channels. The COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which will adversely affect our business operations and may materially and adversely affect our results of operations, cash flows and financial position. In addition to volatility in consumer demand and buying habits, we may restrict the operations of our stores or distribution facilities if we deem it necessary or if recommended or mandated by governmental authorities which would have a further adverse impact on us.
The extent to which the COVID-19 pandemic impacts us will depend on numerous evolving factors and future developments that we are not able to predict, including: the severity of the virus; the duration of the outbreak; governmental, business and other actions (which could include limitations on our operations or mandates to provide products or services); the promotion of social distancing and the adoption of shelter-in-place orders affecting foot traffic in stores; the impacts on our supply chain; the impact of the pandemic on economic activity; the extent and duration of the effect on consumer confidence and spending, customer demand and buying patterns including spend on discretionary categories; the health of and the effect on our workforce and our ability to meet staffing needs in our stores, hospitals, wholesale operations and other critical functions, particularly if members of our work force are quarantined as a result of exposure; any impairment in value of our tangible or intangible assets which could be recorded as a result of a weaker economic conditions; and the potential effects on our internal controls including those over financial reporting as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our team members and business partners, among others. In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted. We cannot make any assurances that COVID-19 will not reappear with new infections and to the extent that COVID-19, or another virus appears, we may encounter prolonged operational lockdown measures which would disrupt our business operations.
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The markets in which we now operate are very competitive and further increases in competition could adversely affect us.
In the Chinese pharmaceutical wholesale sector, wholesalers without affiliated manufacturers have inherent risks, which include lack of control over product availability. We are at a significant disadvantage in comparison to other wholesalers that are also manufacturers. Also, this sector is heavily regulated industry where government exercises strong controls. Any comparative advantages we may have could be lost because of changes in laws or government policies.
We face intense competition with local, regional and national companies, including other drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet pharmacies. Competition from on-line retailers has significantly increased during the past few years. The ability of our stores to achieve profitability depends on their ability to achieve a critical mass of loyal, repeat customers.
Some of our competitors have or may merge with or acquire pharmaceutical services companies, and health insurance companies, which may further increase competition. We may not be able to effectively compete against some of our competitors in the retail pharmacy sector because they have financial and other resources that are superior to ours. Further, we may be at a competitive disadvantage because we are more highly leveraged than our competitors. We cannot assure you that we will be able to effectively compete in our markets or increase our sales volume in response to further increased competition, or that any of our competitors are not in a better position to absorb the impact of COVID-19.
Our recently acquired hospitals compete with larger and more established state-owned and private hospitals. We may not be able to effectively compete against these hospitals because they have financial and other resources that are superior to ours and may be able to attract new patients more easily.
Consolidation in the healthcare industry could adversely affect our business, financial condition and results of operations.
Many organizations in the healthcare industry have consolidated to create larger healthcare enterprises with greater market power, which has contributed to continued pricing pressures. If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for our products and services and/or reduce our access to customers. If these pressures result in reductions in our prices and/or reduce our access to customers, our business will become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams. We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements, and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants we engage with, which may adversely impact our business, financial condition and results of operations. In addition, our new strategy also includes selective acquisition opportunities and we cannot assure you that we will be able to consummate any such transactions on commercially reasonable terms, if at all.
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Breaches of network or information technology security could have an adverse effect on our business.
Cyber security risks, such as a significant breach of customer, employee, or company data, could attract a substantial amount of media attention, damage our customer relationships and reputation and result in lost sales, fines or lawsuits. Throughout our operations, we receive, retain and transmit certain personal information that our customers provide to purchase products or services, fill prescriptions, enroll in promotional programs, participate in our customer loyalty programs, register on our websites, or otherwise communicate and interact with us. In addition, aspects of our operations depend upon the secure transmission of confidential information over public networks. Although we deploy a layered approach to address information security threats and vulnerabilities designed to protect confidential information against data security breaches, a compromise of our data security systems or of those of businesses with whom we interact, which results in confidential information being accessed, obtained, damaged or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers, financial institutions, payment card associations and other persons, any of which could materially and adversely affect our business operations, financial position and results of operations. In addition, a security breach could require that we expend substantial additional resources related to the security of information systems and disrupt our businesses. While no actual or attempted attacks have had a material impact on our operations or financial condition, we cannot provide any assurance that our operations will not be negatively materially affected by such attacks in the future.
We rely on computer software and hardware systems in managing our operations, the capacity of which may restrict our growth and the failure of which could adversely affect our business, financial condition and results of operations.
We are dependent upon our information management system to monitor daily operations of our retail, wholesale and hospital businesses, and to maintain accurate and up-to-date operating and financial data for the compilation of management information. If our computer software and hardware systems fail to meet the increasing needs of our expanding operations, our ability to grow may be constrained. Furthermore, any system failure which causes interruptions to the input, retrieval and transmission of data or causes lags in service time could disrupt our normal operations. Although we believe that our computer software and hardware systems are up to date and that our disaster recovery plan is adequate in handling potential failures, we cannot provide assurance that we can effectively carry out this disaster recovery plan and that we will be able to restore our operation within a sufficiently short time frame to avoid our business being disrupted. Furthermore, our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, natural disasters, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. If any of our computer software and/or hardware systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss or corruption of critical data and interruptions or delays in our ability to perform critical functions. Due to the limited coverage of business interruption insurance policies offered in China, we do not carry business interruption insurance and, as a result, any business disruption or natural disaster could severely disrupt our business and operations and, in turn, significantly decrease our revenue and profitability.
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If we fail to implement effective internal controls required by the Sarbanes-Oxley Act of 2002, or remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our Common Stock.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management of public companies to develop and implement internal controls over financial reporting and evaluate the effectiveness thereof. A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual interim financial statement will not be prevented or detected on a timely basis. Due to the Company’s limited resources, we currently do not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in our financial transactions in accordance with US GAAP.
Any failure to complete our assessment of our internal controls over financial reporting, to remediate any material weaknesses that we may identify, including the one identified above, or to implement new or improved controls, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Inadequate disclosure controls and procedures and internal controls over financial reporting could also cause investors to lose confidence in our public disclosures and reported financial information, which could have a negative effect on the trading price of our Common Stock.
Violations of anti-bribery, anti-corruption and/or international trade laws to which we are subject could have a material adverse effect on our business operations, financial position, and results of operations.
We are subject to laws concerning our business operations and marketing activities in foreign countries where we conduct business. For example, we are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), U.S. export control and trade sanction laws, and similar anti-corruption and international trade laws, any violation of which could create substantial liability for us and also harm our reputation. The FCPA generally prohibits U.S. companies and their officers, directors, employees, and intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment. The FCPA also requires that U.S. public companies maintain books and records that fairly and accurately reflect transactions and maintain an adequate system of internal accounting controls. If we are found to have violated the FCPA, or any other anti-bribery, anti-corruption or international trade laws, we may face sanctions including civil and criminal fines, disgorgement of profits, and suspension or debarment of our ability to contract with governmental agencies or receive export licenses. From time to time, we may face audits or investigations by one or more domestic or foreign governmental agencies relating to our international business activities, compliance with which could be costly and time-consuming, and could divert our management and key personnel from our business operations. An adverse outcome under any such investigation or audit could subject us to fines or other penalties, which could adversely affect our business operations, financial position, and results of operations.
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Increasing scrutiny and changing expectations from investors, lenders, customers and other market participants with respect to our Environmental, Social and Governance, or ESG, policies may impose additional costs on us or expose us to additional risks.
Companies across all industries and around the globe are facing increasing scrutiny relating to their ESG policies. Investors, lenders and other market participants are increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. The increased focus and activism related to ESG may hinder our access to capital, as investors and lenders may reconsider their capital investment allocation as a result of their assessment of our ESG practices. If we do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition and price our company’s shares could be materially and adversely affected.
Our business is subject to the risks of earthquakes, fire, power outages, floods, health epidemics and other catastrophic events and to interruption by manmade problems such as terrorism.
Our operations, as well as our customers, are located in areas exposed to risks of natural disasters such as earthquakes and tsunamis. A significant natural disaster, such as an earthquake, tsunami, fire, flood, or other catastrophic event, such as a new pandemic, could have a material adverse effect on our or their business, which could in turn materially affect our financial condition, results of operations and prospects.
Our business could be subject to environmental liabilities.
Our failure to comply with past, present and future environmental laws could result in fines, penalties, third-party claims, reduced sales of our products, substantial product inventory write-offs and reputational damage, any of which could harm our business, financial condition, results of operations and prospects. We also expect that our business will be affected by new environmental laws and regulations on an ongoing basis applicable to us, including our newly acquired hospitals. To date, our expenditures for environmental compliance have not been material. Although we cannot predict the future effect of such laws or regulations, they will likely result in additional costs or require us to change the way we operate, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Failure to timely identify or effectively respond to changing consumer preferences negatively affect our relationship with our customers and the demand for our products and services.
The success of our businesses depends in part on customer loyalty and superior customer service. Failure to timely identify or effectively respond to changing consumer preferences could negatively affect our relationship with our customers and the demand for our products and services.
Moreover, customer expectations and new technology advances from our competitors have required that our business evolve so that we are able to interface with our customers not only face-to-face but also online and via mobile and social media. If we fail to keep pace with dynamic customer expectations and new technology developments, our ability to compete and maintain customer loyalty could be adversely affected.
Our success depends on our ability to establish effective advertising, marketing and promotional programs.
Our success depends on our ability to establish effective advertising, marketing and promotional programs. Our pricing strategies and value propositions must be appropriate for our target customers. If we are not able to maintain and increase the awareness of our businesses and the services we provide, we may not be able to attract and retain customers and our reputation may also suffer. We expect to incur substantial expenses in our marketing and promotional efforts to both attract and retain customers. However, our marketing and promotional activities may be less successful than we anticipate, and may not be effective at building our brand awareness and customer base. In addition, the government may impose restrictions on how marketing and promotional activities can be conducted. Failure to successfully execute our advertising, marketing and promotional programs may result in material decreases in our revenue and profitability.
Risks Relating to Our Wholesale Operations
Failure to maintain relationships with our customers or to otherwise expand our distribution network would materially and adversely affect our business.
Our wholesale business sells products to drug stores, private clinics, pharmaceutical distributors and hospitals. For the year ended December 31, 2022 our top ten wholesale medical devices and wholesale pharmaceuticals customers accounted 34% of our wholesale revenues and no customer accounted for more than 10% of sales. In line with industry practices in the PRC, we enter into written sales agreements with our wholesale customers. However, such sales agreements are not in substance equivalent to a typical distribution agreement in the United States. Each sales agreement is more in the form of a sales order and specifies one or several purchases of one or more products without any continuing obligation to make purchases unless it is a long-term agreement. Only about 10% of our wholesale customers are subject to purchase arrangements of one-year or longer terms. Their purchases contributed more than 30% of our wholesale revenues in 2022. In the event distribution customers choose not to continue their relationship with us after completing their existing sales agreements, they can do so without breaching any contract or agreement. Our financial results could be adversely affected if we cannot replace these customers. We compete with large wholesalers, many of whom may have higher visibility, greater name recognition, financial resources, and broader product selection than we do. Consequently, maintaining relationships with existing customers may be difficult and time-consuming.
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Our dependence on a limited number of customers may expose us to the risk of substantial losses if a single large customer stops purchasing our products, purchases lower quantities of our products or goes out of business and we are unable to attract new customers to recover such lost revenues. If any of our significant customers reduces the quantity of the products they purchase from us or stops purchasing from us, our net revenue would be materially and adversely affected. Any disruption in our distribution network could negatively affect our ability to effectively sell our products and would materially and adversely affect our business, financial condition and results of operations.
Our wholesale pharmaceutical business operates without the support of manufacturing capability and is at a significant disadvantage.
In the Chinese pharmaceutical wholesale sector, wholesalers without affiliated manufacturers have inherent risks which include lack of control over product availability and pricing disadvantages. We are at a significant disadvantage in comparison to other wholesalers that are also manufacturers.
Risks Relating to Our Pharmacy Business
We may be subject to fines and penalties if we fail to comply with the applicable PRC laws and regulations governing sales of medicines under China’s National Medical Insurance Program.
Eligible participants in China’s national medical insurance program, including urban and suburban residents in China, are entitled to buy medicines using their medical insurance cards from an authorized pharmacy, provided that the medicines they purchase have been included in the national or provincial medical insurance catalogs. The pharmacy, in turn, obtains reimbursement from the relevant government social security bureaus. Moreover, the applicable PRC laws, rules and regulations prohibit pharmacies from selling goods other than pre-approved medicines when purchases are made with medical insurance cards. We have established procedures to prohibit our drugstores from selling unauthorized goods to customers who make purchases with medical insurance cards. However, we cannot provide assurance that those procedures will be strictly followed by all of our employees in all of our stores.
Our ability to grow our pharmacy business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current leases.
Our ability to grow our business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use regulations and other regulations applicable to the kinds of stores we seek to construct may impact our ability to find suitable locations and influence the cost of constructing our stores. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Furthermore, changing local demographics at existing store locations could materially and adversely affect revenue and profitability levels at those stores, and overall our business, financial condition, results of operation, and prospects.
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We may not be able to maintain proper inventory levels for our pharmacy stores.
To ensure adequate inventory supply, we must forecast inventory needs and place orders with our suppliers based on our estimates of future demand for particular products. We may not be able to accurately forecast demand for supplies because of the difficulties of estimating the demand for our products. The volatile economic environment and fast-evolving demands and preferences of our customers have made accurate projection of inventory levels increasingly challenging.
Inventory levels in excess of customer demand may result in inventory obsolescence, a decline in inventory values, inventory write-downs or write-offs, or expiration of products, which would cause our gross margin to suffer and could impair the strength of our brand. High inventory levels may also require us to commit substantial capital resources, preventing us from using them for other important business purposes. Conversely, if we underestimate customer demand or if our suppliers fail to provide supplies to us in a timely manner, we may experience inventory shortages. Such inventory shortages might result in unfilled customer needs, damage to our reputation, and have a negative impact on customer relationships and reduce our sales. We cannot assure you that we will be able to maintain proper inventory levels for our operations and such failure may have an adverse effect on our business, financial condition, results of operations and profitability.
Certain risks are inherent in providing pharmacy services and we do not maintain professional liability and errors and omissions liability insurance.
Pharmacies are exposed to risks inherent in the distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, laws that require our pharmacists to offer counseling, without additional charge, to customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. We currently do not maintain professional liability and errors and omissions liability insurance. Consequently, we may be required to expend substantial funds to satisfy these types of claims, which could have an adverse effect on our business, financial condition, results of operations and profitability.
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Risks Related to Our Hospitals
Our hospitals historically derived a significant portion of their revenue by providing healthcare services to patients with public medical insurance coverage; any delayed payment under China’s public medical insurance programs could affect our results of operations.
Our remaining hospital in China is a Medical Insurance Designated Medical Institution. Patients who are covered by the public medical insurance programs may choose to rely on public medical insurance programs to pay for some of healthcare services. Any dispute or late or delinquent settlement under the public medical insurance programs may cause the trade receivables of our hospitals to increase or result in write-offs. Depending on the relevant public medical insurance programs’ practice, a Medical Insurance Designated Medical Institution may be subject to a government-approved annual quota for the medical fees that it is allowed to recover from the relevant public medical insurance bureau.
In addition, we cannot assure you that we will be able to maintain our hospital’s status as Medical Insurance Designated Medical Institution, the loss of which will not only harm our reputation but may also result in reduced patient visits. Furthermore, the PRC government may alter its reimbursement policies in coverage plans in the future such that: (i) certain healthcare services provided by our hospitals will no longer be covered; or (ii) more stringent thresholds on existing coverage may be imposed. Any reduction in the rates paid or the scope of services covered may reduce patient accessibility to our hospitals and may lead to reduced patient flow and medical fees. Any of these events could lead to a decrease in our revenue generation and profitability which could have a material adverse effect on our business, results of operations and prospects.
Our hospital could become the subject of patient complaints, claims and legal proceedings in the course of its operations, which could result in costs and materially and adversely affect our brand image, reputation and results of operations.
We rely on the physicians and other medical professionals of our hospitals to make proper clinical decisions regarding the diagnoses and treatment of their patients. However, we do not have direct control over the clinical activities of our hospital or over the decisions and actions taken by the physicians and other medical professionals as their diagnoses and treatments of patients are subject to their professional judgment and in most cases, must be performed on a real time basis. Any incorrect decisions or actions on the part of the physicians and other medical professionals, or any failure by our hospitals to properly manage their clinical activities may result in undesirable or unexpected outcomes, including complications, injuries and even deaths in extreme cases. In addition, there are inherent risks associated with the clinical activities that may result in unavoidable and unfavorable medical outcomes.
In recent years, physicians, hospitals and other healthcare service providers in China have become subject to an increasing number of patient complaints, claims and legal proceedings alleging malpractice or other causes of action. Although rare, incidents have occurred in hospitals and medical institutions in China where dissatisfied patients carried out extreme actions or even violence during the course of the disputes. Any such incident, if occurs, would harm our reputation, impair the ability of our hospitals to recruit and retain medical professionals and staff, discouraging other patients from visiting our hospital, and cause us to incur substantial costs.
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Any negative publicity about us, our hospital or the healthcare service industry could harm the brand image and reputation and trust in the services provided by our hospitals, which could result in a material and adverse impact on our business and prospects.
If we fail to properly manage the employment of the physicians and other medical professionals of our hospital, we may be subject to penalties, which could materially and adversely affect our business and results of operations.
The activities of physicians and other medical professionals are strictly regulated under the PRC laws and regulations. Physicians, nurses and medical technicians who practice at medical institutions must hold licenses and may only practice within the scope of their licenses and at the specific medical institutions at which their licenses are registered. In practice, it takes some time for physicians, nurses and medical technicians to transfer their licenses from one medical institution to another or add another medical institution to their permitted practicing institutions. We cannot assure you that our physicians will complete the transfer of their licenses and related government procedures timely or at all. In addition, we cannot assure you that the medical professionals at our hospitals will always strictly follow the requirements and will not practice outside the permitted scope of their respective licenses. Any failure to properly manage the employment of our physicians and other medical professionals may subject us to administrative penalties against our hospital, which could materially and adversely affect our business.
We have limited or no control over the quality of pharmaceuticals, medical consumables and other medical equipment used in the operations of our hospital. If such quality does not meet the required standards, we could be exposed to liabilities and our reputation, business, results of operations, financial condition and prospects could be adversely affected.
The provision of healthcare services involves the frequent use of a variety of pharmaceuticals, medical equipment and medical consumables, substantially of which we procure from suppliers we do not have control over. We cannot assure you that all supplies are authentic, free of defects and meet the relevant quality standards. If these supplies are subsequently found to have been defective at the time of the supply, even though we did not know or could not have known about such defect, we may be subject to liability claims, negative publicity, reputational damage or administrative sanction, any of which may adversely affect our results of operations and reputation. We cannot assure you that significant claims of such nature will not be asserted against us in the future, and that adverse verdicts will not be reached or that we will be able to recover losses from our suppliers. In addition, we cannot assure you that we will be able to find suitable replacement suppliers, failing which our business, results of operations, financial condition and prospects will be adversely affected.
Our hospital’s operations are susceptible to fluctuations in the costs of pharmaceuticals and medical consumables, which could adversely affect our profitability and results of operations.
The profitability of our hospital is influenced by fluctuations in the costs of pharmaceuticals and medical consumables. The availability and prices of the pharmaceuticals and medical consumables can fluctuate from time to time and are subject to factors beyond our control, including supply, demand, general economic conditions and governmental regulations, each of which may affect the procurement costs or cause a disruption in the supply. Consistent with industry practice, we have not entered into any long-term supply agreements with our suppliers and we cannot assure you that we will be able to anticipate and react to changes in medical supply costs in the future by locating replacement suppliers or adjusting service offerings, or that our hospitals will be able to pass these cost increases onto the patients. Any of these factors may have a material and adverse effect on our profitability and results of operations.
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Our performance depends on our ability to recruit and retain skilled physicians.
The success of our hospital depends in part on the number and quality of the physicians and the medical staffs of our hospitals, the admitting and utilization practices of those physicians, maintaining good relations with those physicians and controlling costs related to the employment of physicians. We may face increased challenges in this area as the physician population reaches retirement age, especially if there is a shortage of physicians willing and able to provide comparable services. If we are unable to provide adequate support personnel or technologically advanced equipment and hospital facilities that meet the needs of those physicians and their patients, admissions may decrease and our operating performance may decline.
As a provider of medical services, we are exposed to inherent risks relating to malpractice claims.
As a provider of medical services, any misdiagnosis or improper treatment may result in negative publicity regarding us or our services, which would harm our reputation. If we are found liable for malpractice, we may be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against a malpractice claim, we could be required to spend significant management, financial and other resources in the process, which could disrupt our business, and our reputation and brand name may also suffer. Since malpractice claims are not common in China, we do not carry malpractice insurance. As a result, any imposition of malpractice liability could materially harm our business, financial condition and results of operations.
Regulatory pricing controls may affect the pricing of our hospital.
The PRC government issues policies on the pricing of healthcare services, pharmaceuticals and medical consumables. As a Medical Insurance Designated Medical Institution, our hospital is subject to the pricing guidelines set by the relevant local healthcare administrative authorities. We cannot predict if the PRC government will lower the price ceilings or change the pricing guidelines in the future or if additional healthcare services, pharmaceuticals or medical consumables may become subject to price control, or more stringent insurance reimbursement limits, which may put pressure on the pricing of our hospitals. As a result, our financial condition and results of operations could be materially and adversely affected.
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Risks Related to Our Human Capital
We may be unable to attract, hire, and retain a highly qualified workforce, including key management.
The talents and efforts of our employees, particularly our key management, are vital to our success. Our management team has significant business experience and would be difficult to replace. In addition, institutional knowledge may be lost in any potential managerial transition. We may be unable to retain them or to attract other highly qualified employees, including our medical staff and workers, particularly if we do not offer employment terms that are competitive with the rest of the labor market. Failure to attract, hire, develop, motivate, and retain highly qualified employee talent, or failure to develop and implement an adequate succession plan for the management team, could disrupt our operations and adversely affect our business and our future success.
We substantially depend on a few key personnel who, if not retained, could cause declines in productivity and operational results and loss of our strategic guidance, all of which would diminish our business prospects and value to investors.
Our success depends to a large extent upon the continued service of a few executive officers and key employees, including, Mr. Tiewei Song, our Chief Executive Officer and President. The loss of the services of one or more of our key employees would have an adverse effect on us and our PRC operating subsidiaries, as these individuals play a significant role in developing and executing our overall business plan and maintaining customer relationships and proprietary technology systems. While none of our key personnel is irreplaceable, the loss of the services of any of these individuals would be disruptive to our business. We believe that our overall future success depends in large part upon our ability to attract and retain highly skilled managerial and marketing personnel. There is no assurance that we will be successful in attracting and retaining such personnel on terms acceptable to us or the employee. Inadequate personnel will limit our growth, and will be seen as a detriment to our prospects, leading potentially to a loss in value for investors.
Our labor costs may be adversely affected by competition for staffing, the shortage of experienced nurses and labor union activity.
Our operations are dependent on the efforts, abilities and experience of our management and employees. We compete with other businesses and health care providers in recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our businesses including our hospitals. In some markets, the availability of nurses and other medical support personnel has been a significant operating issue to health care providers. The COVID-19 pandemic has exacerbated workforce competition and shortages. We may be required to enhance wages and benefits to recruit and retain medical and medical support personnel or to hire more expensive temporary or contract personnel. As a result, our labor costs could increase. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. If a significant portion of our employee base unionizes, it is possible our labor costs could increase. Our failure to recruit and retain qualified management, medical and support personnel, pharmacists and other personnel, or to control labor costs, could have a material, adverse effect on our results of operations.
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We are responsible for the indemnification of our officers and directors.
The Delaware General Corporation law and our bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We currently do not have any directors and officers’ liability insurance. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations. Any payment in respect of these indemnification rights could have an adverse effect on our business, financial condition, results of operations and profitability.
Risk Related to Doing Business in China
Changes in the political and economic policies of the PRC government or in relations between China and the United States or other governments may materially and adversely affect our business, financial condition, and results of operations and may result in our inability to sustain our growth and expansion strategies.
Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in the PRC or changes in government relations between China and the United States or other governments. There is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past four decades, growth has been uneven across different regions and among various economic sectors. The Chinese government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. In addition, in the past the Chinese government implemented certain measures, including interest rate increases, to manage the pace of economic growth and prevent the economy from overheating. These measures may cause decreased economic activity in China, which may adversely affect our business and results of operations.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.
Recent statements by the PRC government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. The PRC government recently initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement.
Currently, these statements and regulatory actions have had no impact on our daily business operations, the ability to accept foreign investments and list our securities on a U.S. or other foreign exchange. However, since these statements and regulatory actions are new, it is highly uncertain how the legislative or administrative regulation making bodies will further respond and what existing or new laws or regulations or detailed implementations and interpretations will be further modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operations, the ability to accept foreign investments and list our securities on a U.S., Hong Kong, or other stock exchanges. There are still substantial uncertainties as to how PRC governmental authorities will regulate overseas listing in practice and whether we are required to obtain any specific regulatory approvals from the CSRC, CAC or any other PRC governmental authorities for our offshore offerings. If the CSRC, CAC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our future offshore offerings, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company face potential uncertainty from actions taken by the PRC government affecting our business.
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Substantially all of our business operations are currently conducted in the PRC, under the jurisdiction of the PRC government. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources.
Our business and revenue growth primarily depend on the size of the healthcare market in China. As a result, our revenue and profitability may be negatively affected by changes in national, regional or local economic conditions and consumer confidence in China. External factors beyond our control that affect consumer confidence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions, and acts of war or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our product sales and negatively impact our profitability. In addition, acts of war or terrorism may cause damage to our facilities, disrupt the supply of the products and services we offer in our stores, or adversely impact consumer demand. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
If for any reason we were to fail to meet the audit requirements of the HFCAA for two consecutive years, we may be prohibited from listing our securities on a national securities exchange, including Nasdaq, or on over-the-counter markets in the United States, which could adversely affect the market price of our Common Stock and our ability to raise capital.
In recent years, the U.S. Congress and regulatory authorities have expressed concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in mainland China and with auditors located in mainland China. For example, PCAOB inspections of auditors located in mainland China and Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, and limitations on the ability of the PCAOB to inspect or investigate auditors in mainland China or Hong Kong could deprive investors of the benefits of PCAOB inspections, which could adversely affect the ability of companies using such auditors to access U.S. capital markets.
As part of the continued focus on access to audit and other information for companies with substantial operations in China, in December 2020, the United States enacted the HFCAA, which requires the SEC to identify issuers that have filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”). Under the HFCAA, as amended in December 2022, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for two consecutive years, the SEC is required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is within the jurisdiction of the SEC to regulate, including over-the-counter markets in the United States.
In 2021, the PCAOB issued a Determination Report, which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in those jurisdictions. In December 2022, the PCAOB vacated its determination that it was unable to inspect and investigate PCAOB-registered public accounting firms in mainland China. As a result, until such time as the PCAOB issues a new determination, the SEC has determined that there are no issuers currently at risk of having their securities subject to a trading prohibition under the HFCAA. Although we are not currently at risk of delisting pursuant to the HFCAA, if the PCAOB were to issue a new determination regarding limitations on its ability to inspect or investigate our independent auditor and we were to fail to meet the audit requirements of the HFCAA for two consecutive years, our securities may be prohibited from trading on a national securities exchange or over-the-counter market in the United States, and this could result in our Common Stock being delisted from Nasdaq. Delisting of our Common Stock would force holders to sell their shares of our Common Stock. The foregoing could adversely affect the market price of our Common Stock and our ability to raise capital. The market price of our Common Stock could be adversely affected as a result of anticipated negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and regardless of our actual operating performance.
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The filing or other procedures with, the CSRC or other Chinese regulatory authorities may be required in connection with issuing our equity securities to foreign investors under Chinese law, and, we cannot predict whether we will be able, or how long it will take us, to complete such filing or other procedures. If we fail to complete a filing with the CSRC, our future offering application may be impacted and we may be subject to penalties, sanctions and fines imposed by the CSRC.
On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Administrative Measures”) and relevant supporting guidelines (collectively, the “New Administrative Rules Regarding Overseas Listings”), which came into force on March 31, 2023. According to the New Administrative Rules Regarding Overseas Listings, among other things, a domestic company in the PRC that seeks to offer and list securities in overseas markets must fulfill the filing procedure with the CSRC pursuant to the requirements of the Trial Administrative Measures. Initial public offerings or listings in overseas markets must file with the CSRC within three (3) working days after the relevant application is submitted overseas. If an issuer offers securities in the same overseas market where it has previously offered and listed securities subsequently, filings have to be made with the CSRC within three (3) working days after the offering is completed. Upon occurrence of any material event, such as change of control, investigations or sanctions imposed by an overseas securities regulatory agency or other relevant competent authority, change of listing status or transfer of listing segment, or voluntary or mandatory delisting, after an issuer has offered and listed securities in an overseas market, the issuer must submit a report thereof to CSRC within three (3) working days after the occurrence and public disclosure of such event. On February 24, 2023, the CSRC promulgated the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which also became effective on March 31, 2023. The Confidentiality and Archives Administration Provisions set out rules, requirements and procedures relating to provision of documents, materials and accounting archives for securities companies, securities service providers, overseas regulators and other entities and individuals in connection with overseas offering and listing, including without limitation to, domestic companies that carry out overseas offering and listing (either in direct or indirect means) and the securities companies and securities service providers (either incorporated domestically or overseas) that undertake relevant businesses shall not leak any state secret and working secret of government agencies, or harm national security and public interest, and a domestic company shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level, if it plans to, either directly or through its overseas listed entity, publicly disclose or provide any documents and materials that contain state secrets or working secrets of government agencies. Working papers produced in the Chinese mainland by securities companies and securities service providers in the process of undertaking businesses related to overseas offering and listing by domestic companies shall be retained in the Chinese mainland. Where such documents need to be transferred or transmitted to outside the Chinese mainland, relevant approval procedures stipulated by regulations shall be followed. While we believe we do not involve leaking any state secret and working secret of government agencies, or harming national security and public interest in connection with provision of documents, materials and accounting archives, there is uncertainty how the new provisions will be interpreted and implemented in the future, and we may be required to perform additional procedures in connection with the provision of accounting archives after the Confidentiality and Archives Administration Provisions come into effect. Any failure by us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our Common Stock or our other securities, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Common Stock or such other securities to significantly decline in value or become worthless.
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PRC regulations on loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC subsidiaries and may prevent the use of our funds held in the PRC or Hong Kong or by a PRC or Hong Kong entity to fund our operations or for use outside of the PRC or Hong Kong..
As an offshore holding company of our PRC subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Such loans to our PRC subsidiaries in China and capital contributions are subject to PRC regulations and approvals or filing. For example, loans by us to our PRC subsidiaries cannot exceed statutory limits and must be registered with SAFE or its local branch. Information about capital contributions to our PRC subsidiaries must be filed with the PRC Ministry of Commerce or its local counterpart. In addition, the PRC government also restricts the convertibility of foreign currencies into Renminbi and use of the proceeds. On March 30, 2015, SAFE promulgated Circular 19, which took effect and replaced certain previous SAFE regulations from June 1, 2015. SAFE further promulgated Circular 16, effective on June 9, 2016, which, among other things, amend certain provisions of Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted under its business scope. On October 23, 2019, SAFE promulgated Circular 28, which stipulates that non-investment foreign-funded enterprises are allowed to make domestic equity investment with their capital funds on the premise that the Negative List is not violated and the projects invested thereby in China are true and compliant. Violations of the applicable circulars and rules may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. The Circular Regarding Further Optimizing the Cross-border RMB Policy to Support the Stabilization of Foreign Trade and Foreign Investment jointly promulgated by the PBOC, NDRC, the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission of the State Council, the China Banking and Insurance Regulatory Commission and SAFE on December 31, 2020 and effective on February 4, 2021 allows the non-investment foreign-invested enterprises to make domestic reinvestment with RMB capital in accordance with the law on the premise that they comply with prevailing regulations and the invested projects in China are authentic and compliant. In addition, if a foreign-invested enterprise uses RMB income under capital accounts to conduct domestic reinvestment, the invested enterprise is not required to open a special deposit account for RMB capital.
Due to interventions or the imposition of transfer restrictions by the PRC government, funds or assets located in the PRC or Hong Kong or held by a PRC or Hong Kong entity, may not be available to us to fund operations or for other use outside of the PRC or Hong Kong.
The applicable foreign exchange circulars and rules may significantly limit our ability to convert, transfer and use the net proceeds from public or private financings of equity or convertible notes or any offering of any equity securities in China, which may adversely affect our business, financial condition and results of operations. As the foreign exchange related regulatory regime and practice are complex and still evolving and involve many uncertainties, we cannot assure you that we have complied or will be able to comply with all applicable foreign exchange circulars and rules, or that we will be able to complete the necessary government registrations or filings on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or filings, our ability to contribute additional capital to fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
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Our retail, wholesale operations, pharmacies and hospitals require a number of permits and licenses in order to carry on their business.
We are required to obtain certain permits and licenses from various PRC governmental authorities to operate our businesses. We are subject to a number of regulations pertaining to the licensing of our wholesale business, retail pharmacies, and the licensing, conduct and number of medical professionals. We cannot provide any assurance that we can maintain all required licenses, permits and certifications to carry on our business at all times. Moreover, these licenses, permits and certifications are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities and the standards of such renewal or reassessment may change from time to time. We intend to apply for renewal of these licenses, permits and certifications when required by applicable laws and regulations. Any failure by us to obtain and maintain all licenses, permits and certifications necessary to carry on our business at any time could have a material adverse effect on our business, financial condition and results of operations. In addition, any inability to renew any of these licenses, permits and certifications could severely disrupt our business, and prevent us from continuing to carry on our business. Any changes in the standards used by governmental authorities in considering whether to renew or reassess our business licenses, permits and certifications, as well as any enactment of new regulations that may restrict the conduct of our business, may also decrease our revenue and/or increase our costs, materially reducing our profitability and prospects. Furthermore, if the interpretation or implementation of existing laws and regulations changes or if new regulations come into effect requiring us to obtain any additional licenses, permits or certifications that were previously not required to operate our existing businesses, we cannot provide assurance that we can successfully obtain such licenses, permits or certifications. We believe our PRC subsidiaries have obtained all applicable licenses and permits which are material to our business operations in China.
The operations of our hospitals are subject to various laws and regulations at the national and local levels. These laws and regulations mainly relate to the operations of medical institutions and licensing of medical professionals, the use and safety management of pharmaceuticals and medical equipment, the quality and pricing of healthcare services, occupational health and safety as well as environmental protection. In addition, our hospitals are subject to periodic license or permit renewal requirements and inspections by various government agencies and departments at the provincial and municipal level.
If we fail to maintain or renew any major license, permit, certificate or approval for all or any of our acquired hospitals, or if the medical professionals in above hospitals become unlicensed at any time during their practices, or if the hospitals are found to be non-compliant with any applicable laws or regulations, we may face penalties, suspension of operations or even revocation of operating licenses, depending on the nature of the findings, any of which could materially and adversely affect our business, financial condition and results of operations.
If we do not maintain the privacy and security of sensitive patient, customer and business information, we could damage our reputation, incur substantial additional costs and become subject to litigation; We may become subject to cybersecurity review.
The protection of patient, customer, employee, and company data is critical to our businesses. Our hospitals collect and maintain medical data and treatment records of our patients. PRC laws and regulations generally require medical institutions and their medical personnel to protect the privacy of their customers and prohibit unauthorized disclosure of personal information. Such medical institutions and their medical personnel will be liable for damage caused by divulging the customers’ private or medical records without consent. We have taken measures to maintain the confidentiality of our customers’ medical records, including encrypting such information in our information technology system so that it cannot be viewed without proper authorization and setting internal rules requiring our employees to maintain the confidentiality of our customers’ medical records. However, these measures may not always be effective in protecting our customers’ medical records. Our information technology systems could be breached through hacking. Personal information could be leaked due to any theft or misuse of personal information due to misconduct or negligence. Failure to protect customers’ medical records, or any restriction on or liability as a result of, our use of medical data, could have a material adverse effect on our business.
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The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements across businesses. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes. If we or those with whom we share information fail to comply with these laws and regulations or experience a data security breach, our reputation could be damaged and we could be subject to additional litigation and regulatory risks. Our security measures may be undermined due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data systems and misappropriate business and personal information. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may not immediately produce signs of intrusion, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and potentially have an adverse effect on our businesses.
Our business involves collecting and retaining certain internal and external data and information including that of our patients, customers and suppliers. The integrity and protection of such information and data are crucial to us and our business. Owners of such data and information expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.
The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the Cyberspace Administration of China, the Ministry of Industry and Information Technology, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection.
On June 10, 2021, the Standing Committee of the National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law, which went into effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.
The PRC regulatory requirements regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the Cyberspace Administration of China, the Ministry of Public Security and the State Administration for Market Regulation, have enforced data privacy and protection laws and regulations with varying and evolving standards and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on June 1, 2020. According to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security.
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On December 28, 2021, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on February 15, 2022. According to the Cybersecurity Review Measures, the procurement of any network product or service by an operator of critical information infrastructure or the conducting of data processing activities by a network platform operator, that affects or may affect national security, will be subject to a cybersecurity review. A network platform operator that possess personal information of more than one million users must apply to the Cybersecurity Review Office set up under the CAC for a cybersecurity review when it seeks to list overseas.
Moreover, the CAC promulgated the Measures for the Security Assessment of Cross-border Data Transmission, which became effective as of September 1, 2022. According to these measures, personal data processors are subject to security assessment prior to any cross-border transfer of data if the transfer involves (i) important data; (ii) personal information transferred overseas by operators of critical information infrastructure or a data processor that has processed personal data of more than one million persons; (iii) personal information transferred overseas by a data processor who has already provided personal data of 100,000 persons or sensitive personal data of 10,000 persons overseas since January 1 of last year; or (iv) other circumstances as requested by the CAC. Any cross-border data transfer activities conducted in violation of the Measures for the Security Assessment of Cross-border Data Transmission before the effectiveness of these measures are required to be rectified by March 2023. Though these measures have already taken effect, substantial uncertainties still exist with respect to the interpretation and implementation of these measures in practice and how they will affect our business operation.
The CAC has taken action against several Chinese internet companies listed on U.S. securities exchanges for alleged national security risks and improper collection and use of the personal information of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law of the People’s Republic of China (the “National Security Law”), the Cyber Security Law and the Cybersecurity Review Measures. Effective February 15, 2022, the CAC, together with 12 other PRC governmental authorities, promulgated the Revised Cybersecurity Review Measures, pursuant to which critical information infrastructure operators procuring network products and services and online platform operators carrying out data processing activities, which affect or may affect national security, shall conduct a cybersecurity review. In addition, online platform operators possessing personal information of more than one million users seeking to be listed on foreign stock markets must apply for a cybersecurity review. The relevant competent governmental authorities may also initiate a cybersecurity review against the relevant operators if the authorities believe that the network product or service or data processing activities of such operators affect or may affect national security. There are still uncertainties as to the exact scope of network product or service or data processing activities that will or may affect national security, and the PRC government authorities may have discretion in the interpretation and enforcement of these measures.
Based on the opinion of our PRC counsel, Chongqing Jinmujinyang (Jiulongpo) Law Firm (a/k/a in English: Chongqing Kingmoon & Kingyang (Jiulongpo) Law Firm), we do not expect that the current PRC laws on cybersecurity or data security will have a material adverse impact on our business operations. However, as there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, we may not be able to pass such review. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations. As of the date of this report, we have not been involved in any investigations on cybersecurity review initiated by the Cyber Administration of China or related governmental regulatory authorities, and we have not received any inquiry, notice, warning, or sanction in such respect. We believe that we are in compliance with the aforementioned regulations and policies that have been issued by the Cyber Administration of China.
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The impact of China’s regulatory reforms is unpredictable.
The regulatory system of Chinese medical service, especially the changes in the field of healthcare reform may have a material adverse effect on the operation and development of our business in the future. New laws and policies are expected to be promulgated. It is uncertain what impact these new regulations and policies would have on our competitiveness, operations and corporate structure. In recent years, the PRC government launched a new healthcare reform plan to ensure that every citizen has access to affordable basic healthcare services. In pursuit of these policy objectives, the PRC government has implemented extensive regulations and policies to address the affordability, accessibility and quality of healthcare services, medical insurance coverage, distribution of pharmaceutical products and reform of public hospitals. In addition, the PRC government has gradually reduced regulatory hurdles for establishing and investing in private hospitals, in particular by private capital, and encouraged development of hospital management groups.
Our business operations and future expansion are largely driven by the PRC government’s policies, which may change significantly and are beyond our control. There can be no assurance that the PRC government will not impose additional or stricter laws or regulations on healthcare services or foreign investments, or strengthen and tighten supervision and management of medical institutions including hospitals, in particular, private hospitals, or implement stricter or more comprehensive regulations on the distribution of pharmaceuticals, medical equipment and medical consumables.
Depending on the priorities of the PRC government, the political situation and the regulatory regime with respect to foreign investment control at any given time, and the development of the Chinese healthcare system, future regulatory changes may affect public hospital reform, limit private or foreign investments in healthcare service industry, change reimbursement rates for healthcare services provided to publicly insured patients, or implement additional price control on pharmaceuticals or healthcare services. Any of these events could have a material and adverse impact on our business, financial condition, results of operations, prospects and future growth.
The PRC government’s significant oversight over our China-based operating subsidiaries could result in a material adverse change in their operations and in the value of our Common Stock.
Our business is conducted through our operating subsidiaries in China, whose operations are governed by PRC law and regulations. The PRC government has significant oversight over the conduct of our subsidiaries and it regulates and may intervene in their operations. which could result in a material adverse change in the subsidiaries’ business operations and or the value of our Common Stock. Also, the PRC government has recently indicated an intent to exert more oversight over offerings that are conducted overseas and: or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. In addition, implementation of industry-wide regulations directly targeting our subsidiaries’· operations could cause our securities to significantly decline in value or become worthless. Therefore. investors in our company face potential uncertainty from actions taken by the PRC government affecting the business of our subsidiaries.
There are uncertainties regarding the interpretation and enforcement of Chinese laws, rules and regulations.
Our Chinese subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. The Chinese legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. In 1979, the Chinese government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China’s legal system is still developing. The laws, rules and regulations are subject to interpretation and enforcement by PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, because of the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. The regulations in China can change quickly. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
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China’s Foreign Investment Law and its implementing rule came into force in January 2020. The Foreign Investment Law and its implementing rules embody an expected regulatory trend to rationalize China’s foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the legal requirements for both foreign and domestic investments. There are still uncertainties with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules. For example, the Foreign Investment Law and its implementing rules provide that foreign invested entities established according to the previous laws regulating foreign investment prior to its implementation may maintain their structure and corporate governance for a five-year transition period. It is uncertain whether governmental authorities may require us to adjust the structure and corporate governance of certain of our Chinese subsidiaries in such transition period. Failure to take timely and appropriate measures to meet any of these or similar regulatory requirements could materially affect our current corporate governance practices and business operations and our compliance costs may increase significantly. In addition, the Security Review Rules, effective from January 18, 2021, embody China’s continued efforts to provide a legal regime for national security review comparable to similar procedures in other jurisdictions, such as CFIUS review in the United States. There are still uncertainties with respect to the interpretation, implementation and enforcement of the Security Review Rules. For example, national security remains undefined and there is no clear guidance on whether the biotechnology industry requires security review and what factors the regulatory authority may consider in determining whether there are security concerns. It is difficult to evaluate the impact of the Security Review Rules on our existing investments or potential investments in China.
It may be difficult for overseas regulators to conduct investigations or collect evidence within China. In China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. According to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC territory. According to the Revised Confidentiality and Archives Administration Provisions, where overseas securities regulators or relevant competent authorities request to inspect, investigate or collect evidence from Chinese domestic companies concerning their overseas offering and listing or their securities firms and securities service providers that undertake securities business for such Chinese domestic companies, such inspection, investigation and evidence collection must be conducted under the cross-border regulatory cooperation mechanism, and the CSRC or competent authorities of the Chinese government will provide necessary assistance pursuant to bilateral and multilateral cooperation mechanism. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of a mutual and practical cooperation mechanism. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigations or evidence collection activities within China may further increase the difficulties you face in protecting your interests. For risks associated with investing in us as a Cayman Islands company, see also “—Risks Related to Our Ordinary Shares, ADSs, and RMB Shares—We are a Cayman Islands company. Because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under Hong Kong law, Chinese law or U.S. law, our shareholders may have fewer shareholder rights than they would have under Hong Kong law, Chinese law or U.S. law and may face difficulties in protecting their interests.”
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered and could materially and adversely affect our business, financial condition and results of operations. In addition, the PRC government has announced its plans to enhance its regulatory oversight of China-based companies listed overseas and cross-border law enforcement cooperation. The Securities Opinions called for:
| ● | tightening oversight of data security, cross-border data flow and administration of classified information, as well as amendments to relevant regulation to specify responsibilities of overseas listed China-based companies with respect to data security and information security; | |
| ● | enhanced oversight of overseas listed companies as well as overseas equity fundraising and listing by China-based companies; and | |
| ● | extraterritorial application of China’s securities laws. |
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There are great uncertainties with respect to the interpretation and implementation of the Securities Opinions and the newly promulgated Overseas Listing Trial Measures. The PRC government may promulgate relevant laws, rules and regulations to impose additional and significant obligations and liabilities on overseas listed China-based companies regarding data security, cross-border data flow, and compliance with China’s securities laws. As a company with operations in China and stock listings in and outside of China, it is uncertain whether or how these laws, rules and regulations and their interpretation and implementation may affect us. However, among other things, our ability to obtain external financing through the issuance of equity securities overseas could be adversely affected if restrictions on overseas fundraising are imposed on companies like us.
The PRC government may intervene or influence our subsidiaries’ business operations at any time, which could result in a material change in their business operations or the value of our investment in such subsidiaries.
We do not conduct any business operations. our business operations are conducted through our subsidiaries in the PRC, which subject our subsidiaries and us to certain laws and regulations in China. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation. environmental regulations. land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations These regulations may be interpreted and applied inconsistently by different agencies or authorities. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. and such compliance or any associated inquiries or investigations or any other government actions may:
| ● | delay or impede our development; |
| ● | result in negative publicity or increase our operating costs: |
| ● | require significant management time and attention: and |
| ● | subject us and our subsidiaries to remedies. administrative penalties and even criminal liabilities that may harm our subsidiaries’ business, including fines assessed for our current or historical operations. or demands or orders that they modify or even cease their business practices. |
Government actions in the future. including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof. and could require us to divest ourselves of any interest we then hold in our Chinese subsidiaries.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources.
Because our funds are held in banks in the PRC that do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. A portion of our assets are in the form of cash deposited with banks in the PRC, and in the event of a bank failure, we may not have access to our funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.
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We may suffer currency exchange losses if the RMB depreciates relative to the US Dollar.
Our reporting currency is the US dollar. However, substantially all of our revenues are denominated in RMB. In July 2005, China changed its exchange rate regime by establishing a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The RMB is no longer officially pegged to the US dollar, and the exchange rate will have some flexibility. Despite fluctuations in the exchange rate in 2020, the floating exchange rate regime has remained stable. If the RMB depreciates relative to the US dollar, our revenues as expressed in our US dollar financial statements will decline in value and if the RMB appreciates relative to the US dollar, our revenues as expressed in our US dollar financial statement s will increase in value. There are very limited hedging transactions available in China to reduce our exposure to exchange rate fluctuations. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure, if at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into US dollars.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all our revenues in RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade related transactions, can be made in foreign currencies without prior approval from the Chinese State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval from SAFE or its local branch is required where RMB is to be converted into foreign currency and can be remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
The Chinese government has strengthened the regulation of investments made by Chinese residents in offshore companies and reinvestments in China made by these offshore companies. Our business may be adversely affected by these restrictions.
The SAFE has adopted certain regulations that require registration with, and approval from, Chinese government authorities in connection with direct or indirect control of an offshore entity by Chinese residents. The term “control” under SAFE regulation is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by PRC residents in the offshore special purpose vehicles or PRC companies by means of acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. The SAFE regulations retroactively require registration of investments in non-Chinese companies previously made by Chinese residents. In particular, the SAFE regulations require Chinese residents to file with SAFE information about offshore companies in which they have directly or indirectly invested and to make follow-up filings in connection with certain material transactions involving such offshore companies, such as mergers, acquisitions, capital increases and decreases, external equity investments or equity transfers. In addition, Chinese residents must obtain approval from SAFE before they transfer domestic assets or equity interests in exchange for equity or other property rights in an offshore company. A newly established enterprise in China which receives foreign investments is also required to provide detailed information about its controlling shareholders and to certify whether it is directly or indirectly controlled by a domestic entity or resident.
In the event that a Chinese shareholder with a direct or indirect stake in an offshore parent company fails to make the requisite SAFE registration, the Chinese subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the Chinese subsidiaries. Further, failure to comply with the various SAFE registration requirements described above can result in liability under Chinese law for foreign exchange evasion.
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These regulations may have a significant impact on our present and future structuring and investment. We have requested our shareholders who to our knowledge are PRC residents to make the necessary applications, filings and amendments as required under these regulations. We intend to take all necessary measures to ensure that all required applications and filings will be duly made and all other requirements will be met. We further intend to structure and execute our future offshore acquisitions in a manner consistent with these regulations and any other relevant legislation. However, because it is presently uncertain how the SAFE regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted and implemented by the relevant government authorities in connection with our future offshore financing or acquisitions, we cannot provide any assurances that we will be able to comply with, qualify under, or obtain any approvals required by the regulations or other legislation. Furthermore, we cannot assure you that any PRC shareholders of our company or any PRC company into which we invest will be able to comply with those requirements. The inability of our company or any PRC shareholder to secure required approvals or registrations in connection with our future offshore financings or acquisitions may subject us to legal sanctions, restrict our ability to pay dividends from our Chinese subsidiaries to our offshore holding company, and restrict our overseas or cross-border investment activities or affect our ownership structure.
Labor laws in the PRC may adversely affect our operations.
The Labor Contract Law of the PRC imposes liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. The law requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, this law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
The PRC may establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
PRC regulations and rules concerning mergers and acquisitions including the Rules on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, and other recently adopted regulations and rules with respect to mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that have or may have impact on the national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, according to the Anti-Monopoly Law of PRC promulgated on August 30, 2007 and the Provisions of the State Council on the Threshold of Filings for Undertaking Concentrations, or the Prior Notification Rules issued by the State Council in August 2008 and amended on September 2018, the concentration of business undertakings by way of mergers, acquisitions or contractual arrangements that allow one market player to take control of or to exert decisive impact on another market player must also be notified in advance to the MOFCOM when the threshold is crossed and such concentration shall not be implemented without the clearance of prior notification. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions. We believe that our business is not in an industry that raises “national defense and security” or “national security” concerns. However, the MOFCOM or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, may be closely scrutinized or prohibited. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.
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It may be difficult to enforce any civil judgments against us or our board of directors or officers because all of our operating and/or fixed assets are located in the PRC.
Although we are incorporated in the State of Delaware, all of our operating and fixed assets are located in the PRC. As a result, it may be difficult for investors to enforce judgments outside the United States obtained in actions brought against us in the United States, including actions predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. In addition, several of our directors and officers are based in the PRC and all or a substantial portion of their assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon those directors and officers, or to enforce against them or us judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States or of the securities laws of any state of the United States. We have been advised by our PRC counsel, Chongqing Jinmujinyang (Jiulongpo) Law Firm (a/k/a in English: Chongqing Kingmoon & Kingyang (Jiulongpo) Law Firm), that, in their opinion, there is doubt as to the enforceability in the PRC, in original actions or in actions for enforcement of judgments of United States courts, of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any state of the United States.
Because our assets are located overseas, shareholders may not receive distributions that they would otherwise be entitled to if we were declared bankrupt or insolvent.
Because all of our assets are located in the PRC, they may be outside of the jurisdiction of U.S. courts to administer if we are the subject of an insolvency or bankruptcy proceeding. As a result, if we declared bankruptcy or insolvency, our shareholders may not receive the distributions on liquidation that they would otherwise be entitled to if our assets were to be located within the U.S., under U.S. Bankruptcy law.
Risks Related to Our Company’s Common Stock
We will need to raise additional capital that will likely cause dilution to our shareholders.
We believe that we will need to raise additional capital to fund our ongoing operations, repay our debt and fund future acquisitions. To the extent that we raise additional capital through the sale of equity or convertible debt, our shareholders’ ownership interest will be diluted.
The trading volume of our Common Stock has fluctuated from time to time, which may make it difficult for investors to sell their shares at times and prices that investors feel are appropriate.
To date, the trading volume of our Common Stock has fluctuated, sometimes significantly. Generally, lower trading volumes adversely effects the liquidity of our Common Stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us. This may result in lower prices for our Common Stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our Common Stock.
The Nasdaq Capital Market imposes listing standards on our Common Stock that we may not be able to fulfill, thereby leading to a possible delisting of our Common Stock.
As a listed Nasdaq Capital Market company, we are subject to rules covering, among other things, certain major corporate transactions, the composition of our Board of Directors and committees thereof, minimum bid price of our Common Stock and minimum stockholders equity. In order to comply with the minimum bid price rule, we adopted a 1-for-5 reverse split effective as of February 3, 2022 and a 1-for-10 share reverse-split effective as of December 9, 2022. The failure to meet the Nasdaq Capital Market requirements may result in the de-listing of our Common Stock from the Nasdaq Capital Market, which could adversely affect the liquidity and market price thereof.
If our Common Stock were to be de-listed, selling shares of our Common Stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our Common Stock is de-listed, broker-dealers have certain regulatory requirements imposed upon them, which may discourage broker-dealers from effecting transactions in our Common Stock, further limiting the liquidity thereof. These factors could result in lower prices for shares of our Common Stock and/or limit an investor’s ability to execute a transaction. In addition, delisting from NASDAQ could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could lead to significant dilution to our stockholders caused by our issuing equity in financing or other transactions at a price per share significantly below the then market price.
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Because we have not paid dividends and have no present intention of paying dividends, investors will not realize any income from an investment in our Common Stock unless and until investors sell their shares at profit.
We have never paid any dividends on our Common Stock and do not anticipate paying any dividends in the near future. Investors will only realize income on an investment in our stock in the event they sell or otherwise dispose of their shares at a price higher than the price they paid for their shares. Such a gain would result only from an increase in the market price of our Common Stock, which is uncertain and unpredictable.
The payment of any future dividends will be at the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, the success of our business activities, general financial condition, future prospects, general business conditions and such other factors as our Board of Directors may deem relevant.
ITEM 1B. UNRESOLVED STAFF COMMENTS
On July 12, 2022, we received a comment letter from the Staff of the SEC’s Division of Corporation Finance relating to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The SEC subsequently requested additional information pertaining to the 2021 Form 10-K and our Form 10-Q for the quarterly period ended September 30, 2022. These comments are material and still under review as set forth below.
Form 10-K
| ● | We have been asked to further revise and to clearly state in future filings that: (a) we are not a Chinese operating company and that this structure involves unique risks to investors, (b) BIMI Medical International Inc. is the entity in which investors hold shares of our common stock and that it does not conduct any of our operations and (c) we do not use a VIE structure. The staff also asked we include the ownership of BIMI International Medical Inc. in our holding company diagram. We have provided the requested disclosure. |
| ● | We have been asked to indicate whether there have been any cash flows or transfers of assets from our subsidiaries and the holding company and describe whether there are restrictions on our ability to transfer cash between entities, across borders, and to U.S. our ability to distribute earnings to BIMI Medical International Inc. and its U.S. investors. We have provided the requested disclosure. |
| ● | We have been asked to clarify whether there are any restrictions on our ability to transfer cash to BIMI Medical International, as a Delaware incorporated holding company. We have provided the requested disclosure. |
| ● | We have been asked to clarify the disclosure in the risk factor “PRC regulations on loans and direct investments by offshore holding companies to PRC entities...” We have provided the requested disclosure. |
| ● | We have been asked to revise the section captioned “Permissions Required from the PRC Authorities for Our Operations” relating to the permission requirements from the Cyber Administration of China. We have provided the requested disclosure. |
| ● | We have been asked to revise our discussion of operating expenses. We have provided the requested disclosure. |
| ● | We have been asked to reconcile the amortization of convertible notes to the amounts presented in the Statements of Cash Flows for both fiscal 2021 and 2020. We have reconciled the amounts. |
| ● | We have been asked to clarify our disclosure in footnote 5 relating to our hospital acquisitions. We have provided the requested disclosure. |
Form 10-Q for the Quarterly Period Ended September 30, 2022
| ● | We have been asked to revise future filings to provide an analysis of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets in a note or separate statement. |
| ● | We have been as to how we accounted for the June 9, 2022, issuance of a $5 million subordinated promissory note. We provided the requested information to the staff. |
| ● | We have been to disclose how the January 24, 2022 issuance of 1,000,000 shares and 500,000 shares for salaries are reflected in our financial statement and to explain why there is no related adjustment in your adjustments to reconcile net loss to cash used in operating activities in the Consolidated Statement of Cash Flows. |
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| ● | We have been asked how the conversions of convertible notes in the nine months ended September 30, 2022 are reflected in our financial statements as well as the Convertible Note footnote table. We provided such information to the Staff. |
| ● | We have been asked to reconcile amounts presented in the Statements of Equity to the transactions in the Notes to the Unaudited Condensed Consolidated Financial Statement in future filings. |
ITEM 2. PROPERTIES
Our executive offices are located at 725 5th Avenue, 15th Floor, Suite 15-01, New York, NY. In July 2022, we entered into a lease agreement for 4,633 square feet pursuant to a five-year lease with an annual rental charge of approximately $274,000, subject to a fixed annual increase of two and one-half percent (2.5%).
As of December 31, 2022, we operated four pharmacy stores averaging a little over 200 square meters each in size with one-year lease terms, having an annual aggregate rental charge of approximately $137,828. At the conclusion of the current leases, we expect to have the ability to renew the leases. On a regular basis and as part of our normal business, we evaluate store performance and may reduce the size, close or relocate a store if the store is redundant, underperforming or otherwise deemed unsuitable. In such event, we may continue to have a leasing obligations until the end of the term of the lease. In September 2021, we closed a pharmacy because of poor performance due to road renovations around the pharmacy.
Guanzan owns a building in Chongqing which is used as offices by Guanzan and Lijiantang. The building was purchased in November 2019 and consists of 944.68 square meters. We rent a warehouse for use of Guanzan and Shude that consists of 1,150 square meters pursuant to a one-year lease expiring in December 2021, having an annual rental charge of approximately $51,391.
Pusheng rents a warehouse that consists of 1,636 square meters pursuant to a one-year lease expiring in June 2022, having an annual rental charge of approximately $30,434.
Guoyitang hospital rents a building that consists of 4,000 square meters pursuant to a ten-year lease expiring in June 2029, having an annual rental charge of approximately $293,759.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. MINE SAFTEY DISCLOSURE
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividend Policy
Our Common Stock trades under the symbol “BIMI” on the Nasdaq Capital Market. As of December 31, 2022 we had 960 stockholders of record of our Common Stock. This number excludes stockholders whose shares are held in nominee or street name by brokers.
No dividends have been declared or paid on our Common Stock. We do not currently anticipate that we will pay any cash dividends in the foreseeable future.
ITEM 6. RESERVED
Not Applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Report on Form 10-K. The discussion in this section of this Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, those discussed in “Risk Factors” and those discussed elsewhere in this Report on Form 10-K.
Overview
From 2007 until October 2019, we, through the NF Group, were engaged in the energy efficiency enhancement business. With the decline in the constructions of power generation plants and municipal water, gas, heat and energy pipelines in China due to a policy change by the PRC government, the demand for our products and services declined markedly. As a result, our energy efficiency enhancement business incurred operating losses for seven years, especially in 2018, when the PRC government adopted a series of policies to favor more environmentally friendly projects and products. Our net loss from the operation of the energy efficiency enhancement business was $16.79 million in 2018 and $2.18 million in 2019. We explored many different alternatives in an effort to revive this business, including attempts to expand into international markets, before we determined this business was not sustainable for us. In late 2019, we committed to a plan to dispose of the NF Group and on March 31, 2020, we entered into an agreement for the sale of the NF Group. The sale closed on June 23, 2020 when the $10 million sales price was paid to us in full.
Concurrent with our decision to dispose of the NF Group, we decided to focus our business activity on the healthcare industry in the PRC. On October 14, 2019, we acquired Boqi Zhengji, an operator of a pharmacy chain business in the PRC. This was the first step of our shift of focus from the energy sector to the healthcare business. Boqi Zhengji, however, suffered significant setbacks during 2020. The COVID-19 pandemic caused the pharmacy stores to record almost no sales for several months due to the national shutdown order and other government orders specifically targeting OTC drugs. While we offered support to Boqi Zhengji with the implementation of the Boqi Guanzan Healthy Future Pharmacy Plan and other programs aimed to offer the resources of our other subsidiaries to the pharmacy chain, such efforts failed to help improve Boqi Zhengji’s poor performance. To avoid exposing our other businesses to further risks and potential joint liabilities, we decided to divest the pharmacy chain. On December 11, 2020, we entered into an agreement to sell Boqi Zhengji for $1,700,000 in cash. On December 18, 2020, we received the full consideration from the buyer and the control of the Boqi Zhengji business was transferred. Due to the Chinese government’s alternative working schedule and other delays caused by COVID-19, the government record reflecting the transfer of ownership was not updated until February 2, 2021.
The disposal of NF Group and Boqi Zhengji and the actions taken to fulfill the plans resulted in our classifying the businesses of NF Group and Boqi Zhengji as discontinued operations according to ASC 205-20 Presentation of Financial Statements – Discontinued Operation. As a result, all of the assets and liabilities of the NF Group and Boqi Zhengji were reclassified as assets and liabilities of a discontinued operation in the statement of position as of December 31, 2020, and the results of the operation are presented under the line item net loss from discontinued operations for the year ended December 31, 2020.
On March 18, 2020, we completed the Guanzan acquisition. The rationale for the acquisition was for us to expand our healthcare operation by acquiring a medical devices and pharmaceuticals distribution business. We believed that Guanzan had strong sales capabilities and procurement resources in the local area of Chongqing, the largest city in Southwest region of the PRC. The acquisition was in line with our expansion strategy, which focuses on deeper penetration of the healthcare market in the Southwest region of China and gaining a wider footprint in the PRC. On April 9, 2021, we increased our equity interest in Shude from 80% to 95.2% by making a direct capital investment in Shude.
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On February 2, 2021, we acquired Guoyitang, the owner and operator of a private general hospital in Chongqing with 50 hospital beds and 98 employees, including 14 doctors, 28 nurses, 43 other medical staff and 13 non-medical staff. The Guoyitang acquisition was the first step in our efforts to build a hospital chain specializing in obstetrics and gynecology.
On February 8, 2021, we acquired Zhongshan, a private hospital in the southeast region of China with 160 hospital beds (of which 110 beds are currently in use) and 95 employees, including 20 doctors, 48 nurses, 10 other medical staff and 17 non-medical staff. Zhongshan is a general hospital known for its complex minimally invasive surgeries and equipped with high-end diagnostics equipment and surgical instruments for gynecology and obstetrics use. The Zhongshan acquisition marked the second step in our effort to establish a nationwide hospital chain specializing in obstetrics and gynecology.
On April 9, 2021, we acquired Qiangsheng, Eurasia and Minkang hospitals, three private hospitals in the south, northern and southwest region of China, respectively. Qiangsheng has 20 hospital beds and 63 employees, including 18 doctors, 17 nurses, 8 other medical staff and 20 non-medical staff. Eurasia has 12 hospital beds and 52 employees, including 12 doctors, 15 nurses, 7 other medical staff and 18 non-medical staff. Minkang has 126 hospital beds and 116 employees, including 24 doctors, 58 nurses, 12 other medical staff and 22 non-medical staff. The three hospitals acquisition marked the third step in our effort to establish a nationwide hospital chain specializing in obstetrics and gynecology.
On September 10, 2021, we acquired Zhuoda, a company engaged in the distribution of medical devices and pharmaceuticals, based in Chongqing, the largest city in Southwest region of the PRC. The Zhuoda acquisition marked the second step in our effort to further penetrate the healthcare market in southwest China.
In response to the poor performance of Zhuoda since its acquisition, whose operations were impacted by COVID-19, on October 19, 2022, we entered into a sale and purchase agreement to sell Zhuoda back to the former owners. Pursuant to the agreement, we sold 100% of the equity interests in Zhuoda in consideration for the return of the 44,000 shares of Common Stock previously issued to the former owners of Zhuoda. The transaction closed effective November 23, 2022, when 100% of the equity interests in Zhuoda were transferred to the former owners and the 440,000 shares of Common Stock were returned to us.
Our hospitals performed poorly in 2022 due in great measure to the impact of COVID-19 and the PRC’s policies to combat its spread. In response to the poor performance of Zhongshan, on December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the seller. As consideration for the transfer, the seller will return to us 40,037 shares of Common Stock, which were previously issued to the seller as part of the closing consideration for Zhongshan.
The transaction is expected to close in the second quarter of 2023.
In response to the poor performance of the Qiangsheng, Eurasia and Minkang hospitals, on December 28, 2022 we entered into an agreement to transfer 90% of the equity interests in the three hospitals back to the sellers. As consideration for the transfer, the sellers will return to us 80,000 shares of Common Stock, which were previously issued to them upon the acquisition of the hospitals. Pursuant to the agreement, we will continue to own 10% of the equity interests in each of the three hospitals. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
The actions taken to fulfill the plans to dispose of the majority of our ownership interests in the Zhongshan, Qiangsheng, Eurasia and Minkang hospitals resulted in our classifying these hospitals as held for sale operations according to ASC 205-20 Presentation of Financial Statements – Discontinued Operation. As a result, all of the assets and liabilities of the Zhongshan, Qiangsheng, Eurasia and Minkang hospitals were reclassified as assets and liabilities of a held for sale operation in the statement of position as of December 31, 2022, and the results of the operation are presented under the line item net loss from held for sale operations for the year ended December 31, 2022.
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We have restated our financial statements for the year ended December 31, 2021, to correct errors identified in our prior financial statements. In FY2021, we recorded amortization of convertible note in G&A expense account, it has been revised to record amortization of convertible note in other income(expense) account. The restatement was necessary to address misstatement of financial statements. The impact of the restatement on our financial statement is reclassification of other expense in financial statements. We have concluded that the restatement does not materially affect our liquidity or our compliance with debt covenants or other financial obligations.
We have taken steps to address the cause of the restatement and to improve our internal controls over financial reporting. We hired a consulting firm to assist us on daily internal controls and financial reporting process review. And we also improved our internal accounting department management as well. We are committed to maintaining the integrity of our financial statements and to providing accurate and transparent financial information to our investors.
Going Concern Uncertainties
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As reflected in the accompanying consolidated financial statements, for the years ended December 31, 2022 and 2021, we incurred net losses of approximately $22.32 million and $34.92 million, respectively. In addition, we reported a cash outflow of $2.27 million in the year ended December 31, 2022. As of December 31, 2022, we had an accumulated deficit of $70.14 million. Management believes these factors raise substantial doubt about our ability to continue as a going concern for the next twelve months. The continuation of our company as a going concern through the next twelve months is dependent upon (1) the continued financial support from our stockholders or external financing. Management believes that our existing stockholders will provide the additional cash to meet our obligations as they become due, and (2) that we will be able to implement our business plan to expand our company’s operations and generate sufficient revenues to meet our obligations. While we believe in the viability of our strategy to increase sales volume and in our ability to raise additional funds, there can be no assurance to that effect, nor that our company will be successful in securing sufficient funds to sustain the operations.
These conditions raise substantial doubt about our company’s ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for our company to continue as a going concern.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue, receivable, inventory, and accrued expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are recorded in the period in which they become known.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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Revenue Recognition
We adopted Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contract with Customers (“ASC 606”) for all periods presented. Under ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company’s customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods and services, net of value-added tax. We determine revenue recognition through the following steps:
| ● | Identify the contract with a customer; |
| ● | Identify the performance obligations in the contract; |
| ● | Determine the transaction price; |
| ● | Allocate the transaction price to the performance obligations in the contract; and |
| ● | Recognize revenue when (or as) the entity satisfies a performance obligation. |
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied by the control of the promised goods and services is transferred to the customers, which at a point in time or over time as appropriate.
Our revenues are net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to the sales of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is paid to the relevant PRC tax authorities.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from delivery. Credit is extended based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of each period, we specifically evaluate individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. We will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to its customers.
Leases
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, we elected to apply the package of practical expedients. Based on this guidance, we did not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on our consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
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Goodwill
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.
The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to assess qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.
The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The fair value of discounted cash flow was determined using management’s estimates and assumptions.
Management evaluated the recoverability of goodwill by performing a qualitative assessment before using a two-step impairment test approach at the reporting unit level. If the Company reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill will be reassigned based on the relative fair value of each of the affected reporting units. As of December 31, 2022 and 2021, the Company recorded impairments for goodwill of $5,385,811 and $26,128,171, respectively.
At the date of the most recent annual goodwill impairment test, all the reporting units’ fair value were either equal to or slightly higher than their carrying values. None of the reporting units’ fair values were substantially in excess of their carrying values. The fair value of the goodwill associated with each of the Guanzan Group (which covers the wholesale pharmaceutical, wholesale medical devices and the Lijiantang Pharmacies segments) and the medical services segment (consisting of Guoyitang, Zhongshan and the Qiangsheng, Eurasia and Minkang hospitals), were equal to their carrying value after their last impairment test and the fair value of the goodwill for Zhuoda only exceeded its carrying value by approximately 5.62 %. Accordingly, the goodwill associated with , Guanzan Group, Guoyitang, Zhongshan and Qiangsheng, Eurasia and Minkang are considered at risk for impairment in future periods. The sale of Zhongshan is expected to close in the second quarter of 2023. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
The fair value of a reporting unit is based on discounted estimated future income statement. The assumptions used to estimate fair value include management’s estimates of future growth rates, operating revenue, and discount rates. We disclose the methodology used to determine the fair values of our reporting units for our annual impairment review as using the income approach.
All of our reporting units share similar characteristics due to the nature of their businesses and operating model. As a result, the methodology used to determine fair value and the key estimates and assumptions used in our annual goodwill review are consistent for all of our reporting units.
Our key assumptions used includes revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates, other assumptions deemed reasonable by the management and relevant comparable to similar industry.
We believe that the estimates and assumptions made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material. A deterioration in profitability, adverse market conditions, changes in regulatory developments, changes in category growth rates as a result of changing consumer preferences, loss of key personnel, the disposition of a significant portion of a reporting unit and competitive activity or a slower or weaker economic recovery than currently estimated by management could have a significant impact on the assumption and estimation in calculating the fair value of our reporting units and could result in an impairment charge in the future.
Potential events and changes in circumstances that could reasonably be expected to negatively affect the key assumptions are general economic conditions, regulatory developments, changes in category growth rates as a result of changing consumer preferences, loss of key personnel, the disposition of a significant portion of a reporting unit and competitive activity.
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Businesses Held for Sale
In late 2022, we committed to a plan to dispose of the Zhongshan, Minkang, Eurasia, Qiangsheng and Guoyitang hospitals.
On December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the prior owner. As consideration for the transfer, the seller agreed to return to us the 40,037 shares of Common Stock, that were previously issued as part of the closing consideration. The transaction is expected to close in the second quarter of 2023.
On December 28, 2022, we entered into an agreement to transfer 90% of the equity interests in Qiangsheng, Minkang and Eurasia to the previous owners. As consideration for the transfer, the sellers agreed to return to us the 80,000 shares of Common Stock which were previously issued upon the acquisition of the three hospitals. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
The Company determined that the plan and the subsequent actions taken to dispose of the four hospitals qualified as a held for sale operation under the criteria set forth in the ASC 205-20 Presentation of Financial Statements – Discontinued Operation.
The carrying amount of the major classes of assets and liabilities of the business held for sale as of December 31, 2022 and 2021 consist of the following:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets from held for sale | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 53,928 | $ | 87,741 | ||||
| Accounts receivable, net | 501,054 | 146,805 | ||||||
| Advances to suppliers | 211,335 | 136,425 | ||||||
| Amount due from related parties | 350,577 | 622,554 | ||||||
| Inventories, net | 155,736 | 238,309 | ||||||
| Prepayments and other receivables | 827,043 | 393,020 | ||||||
| Operating lease-right of use assets | - | - | ||||||
| Total current assets | 2,099,673 | 1,624,854 | ||||||
| Non-current assets | ||||||||
| Deferred tax assets | (133 | ) | (145 | ) | ||||
| Property, plant and equipment, net | 1,254,328 | 1,573,342 | ||||||
| Intangible assets, net | - | - | ||||||
| Operating lease-right of use assets | 2,506,954 | 3,120,810 | ||||||
| Goodwill | - | - | ||||||
| Long-term investment | - | - | ||||||
| Total non-current assets | 3,761,149 | 4,694,007 | ||||||
| Total assets from held for sale | $ | 5,860,822 | $ | 6,318,861 | ||||
| Liabilities from held for sale | ||||||||
| Current liabilities | ||||||||
| Short-term loans | $ | 215,375 | $ | 235,268 | ||||
| Long-term loans due within one year | - | - | ||||||
| Convertible promissory notes, net | - | - | ||||||
| Accounts payable, trade | 1,480,098 | 1,870,661 | ||||||
| Advances from customers | 1,537 | 48,486 | ||||||
| Amount due to related parties | - | - | ||||||
| Taxes payable | 336,755 | 354,057 | ||||||
| Other payables and accrued liabilities | 739,873 | 533,663 | ||||||
| Lease liability-current | 466,312 | 503,452 | ||||||
| Total current liabilities | 3,239,950 | 3,545,587 | ||||||
| Non-current liabilities | ||||||||
| Lease liability-non current | 2,245,373 | 2,746,512 | ||||||
| Long-term loans - non-current | - | - | ||||||
| Total non-current liabilities | 2,245,373 | 2,746,512 | ||||||
| Total liabilities | 5,485,323 | 6,292,099 | ||||||
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The summarized operating results of the business held for sale included in the Company’s consolidated statements of operations consist of the following:
| For the year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 5,446,619 | 5,350,061 | |||||
| Cost of revenues | 2,644,003 | 3,213,602 | ||||||
| Gross profit | 2,802,616 | 2,136,459 | ||||||
| Operating expense | 3,077,452 | 2,137,692 | ||||||
| Other expense | (352,145 | ) | (201,268 | ) | ||||
| Loss before income taxes | (626,981 | ) | (202,501 | ) | ||||
| Income tax expense | 22,164 | 26,339 | ||||||
| Net loss from business held for sale | $ | (649,145 | ) | $ | (228,840 | ) | ||
Convertible Promissory Notes
We record debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the FASB Accounting Standards Codification. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.
Beneficial Conversion Feature
We evaluate the conversion feature of the convertible debt that we issue to determine whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible notes payable and may not be settled in cash upon conversion, is treated as a discount to the convertible notes payable. This discount is amortized over the period from the date of issuance to the date the notes is due using the effective interest method. If the notes payable are retired prior to the end of their contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.
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Derivative Instruments
We enter into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. We account for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. We determine the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our Common Stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Common Stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Common Stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
Foreign Currencies Translation
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations. The reporting currency of our company is the United States Dollar (“$”). Our subsidiaries in the PRC maintain their books and records in their local currency, the Renminbi Yuan (“RMB”), which is the functional currency as it is the primary currency of the economic environment in which these entities operate.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the $ are translated into $, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
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Segment Reporting
In 2022 and 2021, we were engaged in four business segments, wholesale pharmaceuticals, wholesale medical devices, medical services and retail pharmacies.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2022 and 2021
| 2022 | % of Revenues | 2021 | Amount increase (decrease) | Percentage increase (decrease) | ||||||||||||||||
| Revenues | $ | 11,830,379 | 100 | % | $ | 21,319,610 | $ | (9,489,231 | ) | (45 | )% | |||||||||
| Cost of revenues | 9,880,429 | 84 | % | 18,893,667 | (9,013,238 | ) | (48 | )% | ||||||||||||
| Gross profit | 1,949,950 | 16 | % | 2,425,943 | (475,993 | ) | (20 | )% | ||||||||||||
| Operating expenses | 17,288,404 | 146 | % | 34,337,960 | (17,049,556 | ) | (50 | )% | ||||||||||||
| Other income (expense) | (6,283,860 | ) | (53 | )% | (2,751,928 | ) | (3,531,932 | ) | 128 | % | ||||||||||
| Loss before income tax | (21,622,314 | ) | (183 | )% | (34,663,945 | ) | 13,041,631 | (38 | )% | |||||||||||
| Income tax expense | 6,092 | 0 | % | 29,674 | (23,582 | ) | (79 | )% | ||||||||||||
| Net loss from continuing operations | (21,628,406 | ) | (183 | )% | (34,693,619 | ) | 13,065,213 | (38 | )% | |||||||||||
| Income (loss) from operations of discontinued operations | (689,650 | ) | (5 | )% | (229,554 | ) | 460,096 | 200 | % | |||||||||||
| Less: non-controlling interest | 75,203 | 1 | % | 64,211 | 10,992 | ) | 17 | % | ||||||||||||
| Net loss attributable to BIMI International Medical Inc. | $ | (22,393,259 | ) | (189 | )% | $ | (34,985,956 | ) | $ | 12,592,697 | (36 | )% | ||||||||
Revenues
Revenues for the years ended December 31, 2022 and 2021 were $11,830,379 and $21,319,610, respectively. The decrease of $9,489,231 is mainly due to the $10,712,363 decrease in sales of wholesale pharmaceuticals, the $1,048,318 decline in medical services revenues, offset in part by the $697,348 increase in medical devices revenues and the $539,949 increase in pharmacy retail revenues.
For the year ended December 31, 2022, the revenues of the retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services were $856,596, $4,142,455, $6,831,328 and $Nil, respectively. For the year ended December 31, 2021, the revenues of the retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services were $316,647, $3,445,107, $16,495,373 and $1,048,318, respectively.
As the Zhongshan, Qiangsheng, Eurasia and Minkang were held for sale as of December 31, 2022, the revenues of these hospital amounting to $5,446,619 are not included.
Cost of revenues
Cost of revenues consists of primarily of the cost of the medical devices, pharmaceuticals and other products sold to customers. Cost of revenues for the year ended December 31, 2022 was $9,880,429 compared with $18,893,667 for the year ended December 31, 2021. The decrease was due to the four hospitals (Zhongshan, Qiangsheng, Eurasia and Minkang) that were held for sale are accounted for separately. For the year ended December 31, 2022, the cost of revenues of Zhongshan, Qiangsheng, Eurasia and Minkang were $2,644,003.
Cost of revenue of the retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services for the year ended December 31, 2022 were $179,386, $3,273,768, $6,417,821 and $Nil, respectively.
Cost of revenue of the retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services for the year ended December 31, 2021 were $200,162, $3,033,702, $14,553,641 and $1,000,582, respectively.
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Gross profit
For the year ended December 31, 2022 we had a gross profit margin of 16% compared with a gross profit margin of 11% for the year ended December 31, 2021. The increase in the gross profit margin in 2022 was mainly due to the increase in the gross profit margin of the retail pharmaceuticals segment from 36.8% in 2021 to 79% in 2022 caused by a change in the product mix. In addition, in 2022,some suppliers to our retail pharmacies provided significant promotions and discounts.
The gross profit margin of our retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services segments for the year ended December 31, 2022 were 79.1%, 21.0%, 8.5% and 51.5%, respectively. The gross profit margin of our retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services segments for the year ended December 31, 2021 were 36.8%, 12.0%, 2.7% and 57.3%, respectively.
Operating expenses
Operating expenses consist mainly of the impairment loss of goodwill, general and administrative expenses including auditing and legal service fees, other professional service fees and promotional expenses. Operating expenses for the year ended December 31, 2022, consisted mainly of general and administrative expenses of $10,599,818 and selling expenses in the amount of $1,302,775. The Company recorded an impairment loss of goodwill of $5,385,811.
Operating expenses were $17,288,404 for the year ended December 31, 2022 compared to $34,337,960 for the year ended December 31, 2021, a decrease of $17,049,556, or 50%, primarily due to the decrease in goodwill impairment charges in the year ended December 31, 2022. The goodwill impairment charge in 2022 was mainly attributable to the Qiangsheng, Eurasia and Minkang hospitals which were held for sale in 2022. Operating expenses for the year ended December 31, 2022 consisted mainly of general and administrative expenses of $10,599,818, selling expenses in the amount of $1,302,775. As of December 31, 2022, the Company recorded impairment loss of goodwill of $5,385,811, respectively.
For the year ended December 31, 2022, operating expenses of $7,806,362 were allocated to the parent company, which expenses include salaries of $6,237,183 and professional service fees of $1,569,179. For the year ended December 31, 2021, operating expenses of $3,908,957 were allocated to the parent company, which expenses include salaries of $1,121,083 and professional service fees of $2,787,874.
Operating expenses of the wholesale medical devices segment for the years ended December 31, 2022 and 2021 were $510,637 and $633,241, respectively. The decrease in 2022 of $122,604 is attributable to the influence of the epidemic control policy. The operation hours of Hu Zhong Tang, a subsidiary of Guoyitang, in 2022 were relatively short and the expenses were greatly reducing.
Operating expenses of the wholesale pharmaceuticals segment for the years ended December 31, 2022 and 2021 were $2,192,312 and $190,359, respectively; the reasons for the decrease are the establishment of a bad debt allowance of $1.4 million in accounts receivable and the increase of $0.7 million in expenses due to the full operation of Pusheng in 2022.
Operating expenses of the retail pharmacies segment for the years ended December 31, 2022 and 2021 were $592,973 and $681,140, respectively. The decrease in 2022 was attributable to improved internal management and controls.
Operating expenses of the medical services segment for the years ended December 31, 2022 and 2021 were $68,669 and $956,021, respectively. The decline in 2022 was attributable to the imposition of the PRC government’s COVID-19 control policy, Guoyitang only opened for a short period of time in 2022, resulting in a sharp drop in costs. The decrease in 2022 was attributable to the held for sale status of Zhongshan, Qiangsheng, Eurasia and Minkang, which are accounted for separately.
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Other income (expense)
For the year ended December 31, 2022, we reported other expense of $6,283,860 compared to other expense of $2,751,928 for the year ended December 31, 2021. In both years this expense related to the amortization of the convertible notes and also included $1,799,671 of penalties in 2022 relating to the convertible notes. No penalties were assessed in 2021.
In 2022, the exchange rate of Chinese RMB to US dollars decreased from $1 = ¥6.3757 to $1 = ¥ 6.9646. Since substantially all of our assets and revenues are denominated in RMB, we reported an exchange loss of $6,583 for the year ended December 31, 2022, taking into consideration of such exchange rate change and exchange gains/losses related to non-currency assets and liabilities, compared to exchange gains of $24,967 for the year ended December 31, 2021.
Net loss from continuing operations
Net loss from continuing operations was $21,628,406 for the year ended December 31, 2022 compared to a net loss of $34,693,619 for the year ended December 31, 2021, an increase $13,065,213, which was primarily due to the impairment of goodwill and a result of the significant increase in operating expenses of our consolidated company.
Loss from operations of discontinued operations
As a result of the disposition of Zhuoda and its Qianmei subsidiary the businesses of Zhuoda and Qianmei are recorded as discontinued operations in accordance with ASC 205-20 Presentation of Financial Statements – Discontinued Operation and the results of the operations of the Zhuoda and Qianmei are presented under the line item net loss from discontinued operations for the years ended December 31, 2022.
As a result of the plans to dispose of the Zhongshan, Qiangsheng, Eurasia and Minkang and the actions taken to fulfill the plans, the businesses of the four hospitals are recorded as held for sale in accordance with ASC 205-20 Presentation of Financial Statements – Discontinued Operation and the results of the operations of the Zhongshan, Qiangsheng, Eurasia and Minkang are presented under the line item net loss from discontinued operations of held for sale for the years ended December 31, 2022. Loss from the discontinued operation was $689,650 for the year ended December 31, 2022.
Net Loss
We reported a net loss of $22,318,056 for the year ended December 31, 2022 compared to a net loss of $34,921,745 for the year ended December 31, 2021, a decrease of $12,603,689.
Foreign currency translation
We reported a negative foreign currency translation adjustment of $1,577,289 for the year ended December 31, 2022 compared to a positive foreign currency translation adjustment of $598,481 for the year ended December 31, 2021. This is the difference between accumulated other comprehensive income in 2022 and 2021.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. As of December 31, 2022, we had cash and cash equivalents of $2,336,636 and negative working capital of $1,973,736 as compared to cash and cash equivalents of $4,609,431 and negative working capital of $932,492 on December 31, 2021.
In order to improve our financial condition, on February 27, 2023, we entered into a stock purchase agreement (the “February SPA”) with Mr. Oudom, whereby the Company agreed to sell 2,500,000 shares of Common Stock to Mr. Oudom for $3,000,000 in cash, based on a purchase price of $1.50 per share, subject to shareholder approval of the issuance of such shares. Such issuance was approved by the Company’s shareholders on April 13, 2023.
Beginning on September 27, 2019, we sold $1,534,250 of convertible notes to various investors that matured during the period beginning September 27, 2020 and ending on March 13, 2021. Each of these notes was issued for a term of 12 months, carrying 6% annual interest rate and convertible into Common Stock. According to the applicable agreements, each holder of such notes had the right during the period beginning one hundred eighty (180) calendar days following the date of their issuance and ending on the maturity date, to convert all or any part of the outstanding and unpaid principal into shares of Common Stock. All of these notes were converted into shares of Common Stock during the year ended December 31, 2020.
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On February 1, 2020, we entered into a stock purchase agreement to acquire Guanzan. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Guanzan and its 80% owned subsidiary, Shude, for RMB 100,000,000 (approximately $14,285,714) to be paid by the issuance of 190,000 shares of Common Stock and the cash payment of RMB 80,000,000 (approximately $11,428,571.) On March 18, 2020, we closed the Guanzan acquisition by delivering 190,000 shares of Common Stock. In addition, we assumed bank indebtedness of $1,135,884 in connection with the acquisition. On April 9, 2021, we increased our equity interest in Shude from 80% to 95.2% by making a direct capital investment of $4,892,293 in Shude.
On May 18, 2020, we entered into a securities purchase agreement (the “May SPA”) with two institutional investors to sell convertible notes having a face amount of $6,550,000 at an aggregate original issue discount of 19.85% (the “2020 Notes”) and ranking senior to all outstanding and future indebtedness of the Company. The 2020 Notes do not bear interest except upon the occurrence of an event of default. Each Institutional Investor also received a warrant (the “Institutional Investor 2020 Warrant”) to purchase 325,000 shares of Common Stock at an initial exercise price of $14.225 per share (post-Split price and subject to an Event Market Price Adjustment (as defined below). The placement agent for the private placement received a warrant (the “Placement Agent 2020 Warrant”, together with the Institutional Investor 2020 Warrant, the “2020 Warrants”) to purchase up to 10% of the aggregate number of shares of Common Stock issued pursuant to the 2020 Notes at an initial exercise price of $14.225 per share (post-Split price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares Common Stock issued pursuant to the 2020 Notes.
Pursuant to the May SPA, two 2020 Notes each in the face amount of $2,225,000 were issued to the Institutional Investors in consideration of the payment of $1,750,000 in cash for each 2020 Note ($3,500,00 in the aggregate).
The May SPA, the 2020 Notes and the warrants provide that each and every reference to share prices, shares of Common Stock and any other numbers therein that relate to the Common Stock will be automatically adjusted for any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions that occur with respect to the Common Stock (each, a “Stock Combination Event”, and such date thereof, the “Stock Combination Event Date”) thereafter. The May SPA, the 2020 Notes and the 2020 Warrants further provide if after a Stock Combination Event, the Event Market Price is less than the conversion price (in the case of the Convertible Notes) or the exercise price (in the case of the warrants) then in effect (after giving effect to the above adjustments), then on the sixteenth (16th) trading day immediately following such Stock Combination Event Date, the conversion price or exercise then in effect on such sixteenth (16th) trading day (after giving effect to the above adjustments) will be reduced (but in no event increased) to the Event Market Price. “Event Market Price” means, with respect to any Stock Combination Event Date, the quotient determined by dividing (x) the sum of the dollar volume-weighted average price of the Common Stock for each of the five (5) trading days with the lowest dollar volume-weighted average price of the Common Stock during the fifteen (15) consecutive trading day period ending and including the trading day immediately preceding the sixteenth (16th) trading day after such Stock Combination Event Date, divided by (y) five (5). The price adjustment described in this paragraph is hereinafter referred to as the “Event Market Price Adjustment.”
The 2020 Notes, which matured on the eighteen-month anniversary of the issuance date, were payable in installments and convertible at the election of the investors at the conversion price of $12.95 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to adjustment in the event of default. Each investor also received a warrant to purchase 130,000 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant to purchase up to 34,369 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares of Common Stock issued pursuant to the 2020 Notes. Pursuant to the May SPA, additional convertible notes in an aggregate original face amount not to exceed $2,100,000 (the “Additional Notes”) could also be issued to the Institutional Investors under certain circumstances.
On June 23, 2020, we completed the disposition of the NF Group, at which time we received $10 million from the buyer.
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On February 24, 2021, we entered into an amendment to the May SPA with the Institutional Investors to increase the amount of the Additional Notes by $3,300,000 to $5,400,000. On February 26, 2021, Additional Notes in an aggregate original principal amount of $5,400,000 were issued to the Institutional Investors, together with the issuance of warrants to acquire an aggregate of 152,000 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant to purchase up to 34,749 shares of our Common Stock at an initial exercise price of $14.23 per share post-Split Price and (subject to the Event Market Price Adjustment), subject to increase based on the number of shares of Common Stock issued pursuant to the Additional Notes.
On November 18, 2021, we entered into a securities purchase agreement (the “November SPA”) with the same two Institutional Investors to sell them a series of senior convertible notes (the “2021 Notes”) with an original issue discount of 20% and ranking senior to all outstanding and future indebtedness of the Company in a private placement. Each Institutional Investor paid $3,250,000 in cash for a 2021 Note in the face amount of $3,900,000. The November SPA also provided for the issuance of additional 2021 Notes in an aggregate original principal amount not to exceed $3,900,000 under certain circumstances. The November SPA also contains provisions about the Market Event Price. The 2021 Notes, which were issued on November 22, 2021, mature on the eighteen-month anniversary of the issuance date, are payable by the Company in installments and are convertible at the election of the Institutional Investors at the conversion price of $3.25 (post-Split Price and subject to the Event Market Price Adjustment), which is subject to adjustment in the event of default. Each Institutional Investor also received a warrant (the “Institutional Investor 2021 Warrant”) to purchase 180,000 shares of Common Stock at an initial exercise price of $3.55 per share (subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant (the “Placement Agent 2021 Warrant”, together with the Institutional Investor 2021 Warrant, the “2021 Warrants”) to purchase up to 8% of the aggregate number of shares of Common Stock at an initial exercise price of $3.55 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares Common Stock issued pursuant to the 2021 Notes.
On December 11, 2020, we entered into a release agreement extinguishing our obligation to pay any additional consideration in connection with the purchase of Boqi Zhengji. We subsequently sold all the issued and outstanding shares of the capital stock of Boqi Zhengji in consideration of $1,700,000 on December 11, 2020.
On December 14, 2020, we entered into a stock purchase agreement to acquire Chongqing Cogmer Biology Technology Co., Ltd. (“Cogmer”) , a distributor of medical devices including in vitro diagnostic devices, focused on sales to hospitals and sub-distributors in the southwest region of the PRC. Pursuant to the agreement, we agreed to purchase all the issued and outstanding equity interests in Cogmer for RMB 116,000,000 (approximately $17,737,000), to be paid by the issuance of 40,000 shares of our Common Stock and the payment of RMB 76,000,000 in cash. In December 2020, we paid a deposit of $3,065,181 to the shareholders of Cogmer. On March 15, 2021, we terminated the Cogmer SPA upon mutual agreement with the Cogmer shareholders without incurring any penalties as a result of the termination. We recovered the deposit of $3,065,181 from the shareholders of Cogmer on November 29, 2021.
The Company implemented a 1-for-5 reverse stock split (the “Split”) on February 3, 2022 and a second 1-for-10 reverse split as of December 9, 2022.
The 2020 Notes were fully converted before the Split, and therefore no price adjustment was actually implemented at the conversion, although the price information provided above about the 2020 Notes was post-split price. The conversion price of the 2021 Notes and the exercise price of the 2020 Warrants and the 2021 Warrants will be adjusted pursuant to the Event Market Price formula upon conversion or exercise.
Our hospitals performed poorly in 2022 due in great measure to the impact of COVID-19 and the PRC’s policies to combat its spread In response to the poor performance of Zhongshan since its acquisition, on February 1, 2022, we entered into an amendment to the Zhongshan acquisition agreement providing for the reduction of the purchase price, including a retroactive 50% decrease in the closing cash payment, a 50% retroactive decrease in the deferred closing stock payment and a 50% reduction of the 2021 and 2022 performance targets. As a result of such amendment, the former owner agreed to return RMB 40,000,000 in cash and 20,000 shares of Common Stock to us in 2022.
On December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the prior owner. As consideration for the transfer, the seller agreed to return to us the 40,037 shares of Common Stock, that were previously issued as part of the closing consideration.
Subsequent to their issuance, such shares were consolidated into 40,037 shares as a result of a 1-for-5 reverse stock split on February 3, 2022 and a 1-for-10 reverse stock split on December 9, 2022. The prior owner will release our company from any and all claims relating to the earnout payments that were payable under the original purchase agreement and we will receive a put option to sell part or all of our 13% interest in Zhongshan before December 31, 2032, based on a valuation determined by a reputable third-party appraisal firm jointly chosen by us and the prior owner. The transaction is expected to close in the second quarter of 2023.
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In response to the poor performance of the Qiangsheng, Eurasia and Minkang hospitals we entered into an agreement on December 28, 2022, to transfer 90% of the equity interests in the three hospitals back to the sellers. As consideration for the transfer, the sellers will return to us 80,000 shares of Common Stock, which were previously issued to them upon the acquisition of the hospitals. Pursuant to the agreement, we will continue to own 10% of the equity interests in each of the three hospitals. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
In response to the poor performance of Zhouda since its acquisition, whose operations were impacted by COVID-19, we entered into a sale and purchase agreement to sell Zhuoda back to the former owners on October 19, 2022, Pursuant to the agreement, we sold 100% of the equity interests in Zhuoda in consideration for the return of the 440,000 shares of Common Stock previously issued to the former owners of Zhouda. The transaction closed effective November 23, 2022, when 100% of the equity interests in Zhuoda were transferred to the former owners and the 440,000 shares of Common Stock were returned to us.
On December 20, 2021, we entered into a stock purchase agreement to acquire Bengbu Mali OB-GYN Hospital Co., Ltd. (“Mali Hospital”), a private OB-GYN specialty hospital with 199 beds located in Bengbu city in the southeast region of the People’s Republic of China. We agreed to purchase all the issued and outstanding equity interests in Mali Hospital in consideration of $16,750,000. On January 4, 2022, we paid RMB7,227,000 to the seller as partial consideration. On December 15, 2022, we entered into an agreement to terminate the stock purchase agreement. Pursuant to the Termination Agreement, the Original Agreement will terminate effective as of the date of the return of the 60,000 shares of the Company’s common stock previously issued to the sellers of Mali Hospital and certain third-party beneficiaries. Such return is expected to take place promptly. The Company did not incur any penalties as a result of the termination of the Original Agreement. As of the date of this annual report, we have not received the refund of RMB7,227,000 we paid on January 4, 2022.
Our PRC operating subsidiaries have individually incurred debt in connection with their operations.
Short-term loans
Zhongshan borrowed $215,375 from Wuhu Yangzi Rural Commercial Bank on July 27, 2022. The loan is due on July 27, 2023 with an interest rate of 5.80%. Guanzan borrowed $703,558 from Postal Savings Bank of China On December 22,2022. The loan is due on December 20,2023 with an interest rate of 4.50%. Shude borrowed $114,867 from China Minsheng Bank on March 17,2022, which is due on March 17, 2023, with an interest rate of 6.20%.
Long-term loan-current portion
Guanzan borrowed $24,514 from We Bank on December 26, 2020, which is due on March 26, 2023, with an interest rate of 10.06%. Guanzan borrowed $42,341 from We Bank on July 24, 2021, which are due on July 26, 2023, with an interest rate of 13.68%. Guanzan borrowed $39,109 from We Bank on October 7, 2021, which is due on September 26, 2023, with an interest rate of 12.96%.
Long-term loans
Guanzan borrowed $59,926 from Chongwing Nan’an Zhongyin Fuden Village Bank Co. Ltd. on February 25,2021, which is due on February 24, 2024, with an interest rate of 8.00%.Guanzan borrowed $71,792 from We Bank on April 26, 2022, for a term of two years, with an interest rate of 9.45%. Guanzan borrowed $23,931 and $119,653 and $39,485 from We Bank on September 6,2022, for a term of two years, with an interest rate of 14.40%.
As of December 31, 2022, the total short-term debt, current portion of long-term debt
and long- term debt of our operating subsidiaries in the PRC were $1,033,800, $105,965 and $314,786, respectively.
The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended December 31, 2022 and 2021:
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (10,255,206 | ) | $ | (4,436,775 | ) | ||
| Net cash used in (provided by) investing activities | (536,866 | ) | 1,310,641 | |||||
| Net cash provided by financing activities | 8,433,596 | 6,877,883 | ||||||
| Exchange rate effect on cash | 85,681 | 722,372 | ||||||
| Net cash (outflow) inflow | $ | (2,272,795 | ) | $ | 4,474,122 | |||
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Operating Activities
We used $10,255,206 in our operations during the year ended December 2022 as compared to $4,436,775 used in our operations in the year ended December 31, 2021. During pandemic, we focused on cash flow efficiency and cut extra operations expense.
The increase in the amount of cash used in operating activities was primarily attributable to the change in other payables and accrued liabilities and operating lease liabilities. During the year ended December 31, 2022, adjustments for non-cash items primarily included the decrease recorded on the amortization of convertible notes of $3.26 million.
Investing Activities
Cash used in investing activities was $536,866 for the year ended December 31, 2022 compared to $1,310,641 used in investing activities for the year ended December 31, 2021. Cash used in investing activities for the year ended December 31, 2022 was due to the payment for the acquisition of Phenix Bio Inc and the disposal of Zhuoda and held for sale status of Minkang, Qiangsheng and Eurasia. Cash used in investing activities for the year ended December 31, 2021 was due to the payment for the acquisition of Qiangsheng, Eurasia and Minkang Hospital and the deposit for the acquisition of Cogmer.
Financing Activities
Cash provided by our financing activities was $8,433,596 for the year ended December 31, 2022 compared to $6,877,883 for the year ended December 31, 2021. During the year ended December 31, 2022, we reduced $6.5 million from issuance of convertible promissory notes and $0.5 million from the repayment of long-term loans.
On June 9, 2022, we entered into a stock purchase agreement with our Chairman of the Board, Mr. Fnu Oudom, whereby Mr. Oudom agreed to purchase 1,250,000 (post a 1-for-10 reverse split in December 2022) shares of Common Stock for $5 million, or $0.40 per share, subject to the approval of our stockholders. On July 18, 2022, 1,250,000 (post a 1-for-10 reverse split in December 2022) shares of Common Stock were issued to Mr. Oudom upon the approval of the stockholders at our 2022 annual meeting of shareholders.
On December 6, 2022, we sold a convertible promissory note (the “Note”) to Mr. Fnu Oudom for $ 2 million. The Note carries an annual interest rate of 6%, which is payable together with the principal amount one (1) year after the date of the Note. Seven (7) business days before the maturity date of the Note, the Note holder has the right to exercise a conversion right at a conversion price of $0.40, to have the aggregate amount of the principal and accrued interests repaid in shares (the “Note Shares”) of our Common Stock, in lieu of cash payment. The conversion price of $0.40 reflects a 60% premium on the closing price of the Common Stock on NASDAQ on the date of issuance of the Note, which was $0.25). On February 27, 2023, the Company and Mr. Oudom entered into an agreement (the “Prepayment Agreement”) whereby the parties agreed that the Company will exercise its prepayment right under the Convertible Note by issuing shares of Common Stock. In consideration of Mr. Oudom’s agreement to convert the Convertible Note in shares of Common Stock and to waive his right to any and all interest accrued and to be accrued under the Convertible Note, the Company agreed to issue 1,330,000 shares of Common Stock (the “Prepayment Shares”) at a conversion price of $1.50 per share, subject to the shareholders’ approval, as full payment of the $2,000,000 principal of the Convertible Note and accrued interest. Such issuance was approved by the Company’s shareholders on April 13, 2023.
Contingent Contractual Obligations
On December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to its prior owner, and will continue to own 13% of the equity interests in Zhongshan. .As consideration for the transfer, the former owner will return the 200,000 shares of our company’s common stock, which were previously and will release us from any and all claims relating to two earnout payments that were payable under the original purchase agreement. Our company will receive a put option to sell part or all of the retained shares before December 31, 2032, based on a valuation determined by a third party appraisal firm jointly chosen by the parties. The transaction is expected to close in the second quarter of 2023.
On December 28, 2022, we entered into an agreement to transfer 90% of the equity interests in the Qiangsheng, Eurasia and Minkang hospitals to the former owners and will continue to retain 10% equity interests in each of the three hospitals. As consideration for the transfer, the former owners will return to our company the 400,000 shares of our common stock, which were previously issued. Our company will also receive a put option to sell part or all of the retained shares to the former owners before December31, 2032, based on a valuation determined by a third party appraisal firm jointly chosen by the parties. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.
On July 5, 2022, we entered into a stock purchase agreement (as amended on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire 100% of the equity interests in Phenix Bio Inc. (“Phenix”), a distributor of healthcare products. The transaction closed effective March 15, 2023. The aggregate purchase price for the equity interests in Phenix was $180,000 in cash, which has been paid, plus 5,270,000 shares of our company’s common stock, of which 270,000 shares will be issued upon the approval of the issuance by our shareholders and the balance of 5,000,000 shares will be issued if the aggregate net profit generated by Phenix is at least $2,500,000 in calendar year 2023 or in any fiscal quarter of 2023, subject to the approval of our shareholders.
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Inflation and Seasonality
We do not believe that our operating results have been materially affected by inflation or seasonality during the preceding two years. There can be no assurance, however, that our operating results will not be affected by inflation in the future. At present we are able to increase our product sale prices to offset the rising prices charged by our suppliers.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements.
IMPACT OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS
We do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of the Independent Registered Public Accounting Firm and our Financial Statements and accompanying Notes to the Financial Statements that are filed as part of the report, are listed under “Item 15. Exhibits and Financial Statement Schedules” and are set forth beginning on page F-1 immediately following the signature pages to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
| (a) | Evaluation of Disclosure Controls and Procedures. |
Our chief executive officer and interim chief financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2022, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective, based on the material weaknesses described below.
| (b) | Management’s Annual Report on Internal Control over Financial Reporting |
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with management authorization; and |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting is not effective.
In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2022:
| ● | We have restated our financial statements for year ended December 31, 2021 to correct errors identified in our prior financial statements. The impact of the restatement on our financial statement is a reclassification of other expense in financial statements. We have concluded that the restatement does not materially affect our liquidity or our compliance with debt covenants or other financial obligations. |
| ● | Due to our limited resources, we do not have enough accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in our financial transactions in accordance with US GAAP. | |
| ● | The Company has insufficient written policies and procedures for accounting and financial reporting, which led to inadequate financial statement closing process. |
Based on the above factors, management concluded that the control deficiency over accounting and finance personnel was the material weaknesses as of December 31, 2022, as our accounting staff continues to lack sufficient U.S. GAAP experience and requires further substantial training.
We have taken steps to address the cause of the restatement and to improve our internal controls over financial reporting. We hired a consulting firm to assist our accounting department on internal controls and financial reporting. We are committed to maintaining the integrity of our financial statements and to providing accurate and transparent financial information to our investors.
Management’s Remediation Plan
We expect to implement the following measures in 2023 to continue to remediate the material weaknesses identified:
| ● | To establish additional written policies and procedures for accounting and financial reporting to improve the Company’s financial statement closing process. | |
| ● | To continue providing applicable training for our financial and accounting staff to enhance their understanding of U.S. GAAP and internal control over financial reporting. | |
| ● | To continue providing applicable training for our accounting manager to improve our internal review process. |
We hired a consulting firm to assist our accounting department on internal controls and financial reporting since July of 2022.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the exemption provided to issuers that are neither “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
| (c) | Changes in Internal Controls |
No change in our internal control over financial reporting occurred during the last fiscal quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
In December 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and confirmed that until such time as the PCAOB issues any new determination, there are no Commission-Identified Issuers at risk of having their securities subject to a trading prohibition under the HFCAA.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The persons listed below are the current officers and directors of the Company as of the filing date of this report. Our directors are elected at the annual meeting of shareholders, or may be appointed by the Board to fill an existing vacancy, and hold office for one year and until their successors are elected and qualified. Our officers are appointed by the Board of Directors and serve at the pleasure of the Board.
| Name | Age | Position | ||
| Fnu Oudom | 68 | Chairman of the Board | ||
| Tiewei Song | 51 | Director, Chief Executive Officer | ||
| Baiqun Zhong | 61 | Interim Chief Financial Officer | ||
| Xiaoping Wang | 43 | Chief Operating Officer, Director | ||
| Mia Kuang Ching | 57 | Independent Director, Chair of Audit Committee | ||
| Sammi Earn Seok Ang | 47 | Independent Director, Chair of Nomination and Governance Committee | ||
| Barry I. Regenstein | 67 | Independent Director, Chair of Committee Committee | ||
| Timothy H. Safransky | 59 | Independent Director |
Biographical Information of Our Current Directors and Executive Officers
Fnu Oudom has served as Chairman of the Board and President of the Company since May 12, 2022., Mr. Fnu Oudom served as the President at FCCC Inc., a US company focused on strategic investments and acquisitions since April 2021. He was Chairman of the Board of the Time Chain Group, a pharmaceutical and nutritional product research & development and distribution company, from March 2015 to March 2021. From May 2018 to December 2020, he was the Representative of Vanuatu to the United Nations Economic and Social Council for Asia and the Pacific, dedicated to promoting higher standards of living, economic and social progress for the island country. From April 2014 to April 2016, he was the Representative of Tuvalu to the United Nations Economic and Social Council for Asia and the Pacific, focused on the promotion of the island country’s social economic development and facilitation of the island country’s cultural and educational exchange with other member countries. He was a visiting professor at Taiwan Mingdao University in 2014. From Sept 1998 to March 2014, he was the President of Suranaree Industrial Zone., LTD in Thailand, leading the establishment and development of the industrial zone. Mr. Oudom received a bachelor’s degree in Philosophy from Sichuan University in China and studied as a postgraduate at the Institute of Political Science and Law at the French Academy of Social Sciences in Paris from Sept 1989 to May 1995.
Tiewei Song was elected to the Board of Directors on May 18, 2018. He was appointed as our CEO and President in October 2019. From December 2012 to October 2019, Mr. Song served as both the president and director of Shenyang Langzi Investment Management Co., Ltd., an asset management consulting firm. From July 2008 to July 2013, Mr. Song was the chief representative of German Varengold Bank in China. From October 1999 to May 2008, Mr. Song was the executive director and president of Liaoning Jiachang Group, a consulting firm. He also serves as a director of BIQI International Holdings Corp. Mr. Song graduated from Peking University with bachelor’s and master’s degrees in mathematics.
Baiqun Zhong served as our Interim CFO from May 21, 2021 until July 14, 2021 and assumed such role once again on September 27, 2021. Prior thereto, Mr. Zhong was the CFO of the Company’s wholly-owned subsidiary Bimai Pharmaceutical (Chongqing) Co., Ltd. From October 2019 to October 2020, she was the CFO of the Company’s wholly-owned subsidiary, Chongqing Guanzan Technology Co., Ltd. From January 2009 to September 2019, Ms. Zhong was the Chief Accountant of Chongqing Yichen Trade Company, in charge of the company’s financial affairs. From January 2006 to December 2008, she was the Supply and Distribution Manager of Chongqing Cafu Automobile Co., Ltd., an automobile retailer. From January 2001 to December 2005, she was the Chief Accountant of Guangzhou Baiyun Lantian Medical Co., Ltd. Ms. Zhong holds a bachelor’s degree in accounting from Chongqing Technology and Business University and a Chinese CPA license.
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Xiaoping Wang has been our Chief Operating Officer since February 2020 and was elected as a director on June 15, 2021. He is supervising our retail pharmacy, wholesale pharmaceuticals and wholesale medical device segments. From July 2014 to January 2020, he served as the Supervisor of Chongqing Guanzan Technology Co., Ltd. and the General Manager of Chongqing Shude Pharmaceutical Co., Ltd. From October 2004 to June 2014, he was the President of Sales, and later the President of National Sales at Fujian Hongcheng Bio-Medical Co., Ltd.. Mr. Wang graduated from Chongqing Pharmaceutical High Level Specialty School and holds an MBA degree from Chongqing Normal University.
Mia Kuang Ching has served as an independent director of our company since August 2009 and is Chairman of the Audit Committee. Since October 2013, he has served as the Managing Director of Le Yu Corporate Advisory Pte Ltd., a human resources consulting firm. From January 2012 to October 2013, he worked as an M&A consultant. May 2001 until December 2, 2011 he was the managing partner of SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. From 1997 to 2000, he was the Chief Accountant of Dalian Container Terminal, a joint venture formed by PSA Corporation of Singapore and the Port of Dalian Authority. From 1994 to 1997, he was the Group Financial Controller of Fullmark Pte. Ltd., responsible for operations in China, Hong Kong, Malaysia and Vietnam and was in-charge of its strategic investment, group financing and mergers and acquisitions. From 1992 to 1994 he was Regional Accountant (South Europe) of Singapore Airlines.
Sammi Earn Seok Ang has served as an independent director of our company since May 2022. She has worked at Pacific Rainbow International In, as a buyer of dietary nutritional raw materials since October 2017. From Dec 2013 to May 2016, she worked at M/A-COM Technology Solutions Holdings, Inc. as a Logistics Analyst. From Dec 2012 to Dec 2013, she worked at Mindspeed Technologies, Inc., a semiconductor manufacturer as a buyer/planner. From Feb 2012 to Jul 2012, she worked at Paper Mart, an industrial & retail packaging company as a buyer. From Jan 2008 to July2010, she worked at RJ Sports, a softgoods importer/wholesaler/manufacturer of golf bags and accessories as a product manager. Ms. Seok Ang holds two Bachelor’s degrees in International Business – Management and in Computer Information Systems Track – Client-Server and a Masters’ degree in Business Administration – Logistics and Transportation from Missouri State University.
Barry I. Regenstein has served as an independent director of our company since July 2022. He is a co-founder of Sperry Re Capital LLC, a commercial real estate services provider in New York City and has worked as President since January 2021. He has worked at SC Property Development, LLC, a residential and commercial real estate developer in New York City as the Managing Director and Chief Financial Officer since January 2020. He has also worked at Suzuki Capital LLC, a real estate investment, development and management company in New York City as the Chief Financial Officer since June 2016. Mr. Regenstein worked at Tumbleweed Holdings, a finance organization for a development stage company in New York City as the Interim Chief Financial Officer from October 2014 to September 2018; and at KRR Ventures, Inc., a finance firm in New York City as the Managing Director from April 2015 to September 2018. He worked at Lightship Partners, a consulting firm in Roslyn Heights, NY as a partner from February 2014 to September 2018. From August 2004 to March 2013, he worked at Command Security Corporation (NYSE MKT: MOC), a security and aviation services company in Lagrangeville, NY as President (2006-2013), Chief Financial Officer (2004-2013), Director (2007-2012), and Executive Vice President and Chief Operating Officer (2004-2005). From July 1982 to June 2003, he worked at Globeground North America (formerly Hudson General Corporation), a services provider to the general aviation community in Great Neck, NY, as Senior Vice President and Chief Financial Officer (2001-2003), and Vice President and Chief Financial Officer (1997-2001). Mr. Regenstein has a bachelor’s degree in accounting from the University of Maryland and a masters’ degree from Long Island University. He is a Certified Public Accountant and a licensed Real Estate Salesperson. He is a member of the American Institute of Certified Public Accountants, the New York State Society of Certified Public Accountants and the Institute of Management Accountants.
Timothy H. Safransky has served as an independent director of our company since July 2022. He has worked at Commonwealth Development of Florida LLC, a real estate financing firm in Tampa, Florida since January 2004 as the Managing Member. Previously, he worked at Greystone Capital Corporation, a real estate financing firm in Tampa, Florida as President from January 1997 to January 2004. He worked at Amex Tax & Business, a tax consulting firm in Tampa, Florida as a senior accountant from January 1990 to December 1994. Mr. Safransky has a bachelor’s of arts degree in accounting from University of West Florida. He has been a Certified Public Accountant since 1988.
On May 28, 2022, Messrs. Ju Li and Jianxin Wang informed the Company that they were not seeking re-election to the Board. There are no familial relationships among our directors or nominees.
Family Relationships
There are no family relationships between or among any of the current directors or executive officers.
Audit Committee
The current members of our audit committee are Mia Kuang Ching (Chair), Sammi Ean Seok Ang & Timothy H. Safransky each of whom we believe satisfies the independence requirements of the Securities and Exchange Commission and NASDAQ. We believe Mr. Ching is qualified as an audit committee financial expert under the regulations of the SEC by reason of his work experience. Our audit committee assists our Board of Directors in its oversight of:
| ● | The integrity of our financial statements; |
| ● | Our independent registered public accounting firm’s qualifications and independence; and |
| ● | The performance of our independent auditors. |
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Code of Ethics
The Company has adopted a code of ethics (the “Code of Ethics”) that applies to the Company’s principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics has been filed as an exhibit to this Annual Report. The Code of Ethics is designed with the intent to deter wrongdoing, and to promote the following:
| ● | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| ● | Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the SEC and in other public communication made by the Company; |
| ● | Compliance with applicable governmental laws, rules and regulations; |
| ● | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and |
| ● | Accountability for adherence to the Code. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file.
Nomination and Governance Committee
Sammi Ean Seok Ang, Timothy H. Safransky, and Barry I. Regenstein are the members of our Nominating and Governance Committee where Sammi Ean Seok Ang serves as the chairman. All members of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. Our Board adopted and approved a charter for the Nominating and Governance Committee. According to the Nominating and Governance Committee’s Charter, the Nominating and Governance Committee is responsible for identifying and proposing new potential director nominees to the board of directors for consideration and the review of our corporate governance policies.
Compensation Committee
Our Compensation Committee consists of Sammi Ean Seok Ang, Timothy H. Safransky, and Barry I. Regenstein. Barry I. Regenstein serves as the chairman of our Compensation Committee. All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board policies, practices and procedures relating to the compensation of the Company’s executive officers and other managerial employees, including the determination, in its discretion, of the amount of annual bonuses, if any, for our executive officers and other professionals. The Compensation Committee advises and consults with our senior executives as may be requested regarding managerial personnel policies.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation during the last two fiscal years for our named executive officers whose total salary in fiscal 2022 totaled $100,000 or more:
| Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock ($) | Option Awards ($) | Other Compensation ($) | Total ($) | |||||||||||||||||||
| Tiewei Song | 2022 | 1,000,000 | - | 1,000,000 | - | - | 2,000,000 | |||||||||||||||||||
| (CEO, Director) (1) | 2021 | 625,000 | - | 235,000 | - | - | 860,000 | |||||||||||||||||||
| Baiqun Zhong | 2022 | - | - | - | - | - | ||||||||||||||||||||
| (CFO) (2) | 2021 | 145,833 | - | 500,000 | - | - | 145,833 | |||||||||||||||||||
| Xiaoping Wang | 2022 | 500,000 | - | 500,000 | - | - | 1,000,000 | |||||||||||||||||||
| (COO) (3) | 2021 | - | - | - | - | 500,000 | ||||||||||||||||||||
| (1) | On January 24, 2022, the Company issued 1,000,000 shares of Common Stock as the salary for Mr. Tiewei Song. We accrued $235,000, as part of the stock compensation of his annual salary in 2021 based on the terms his amended agreement. Agreement. We have not paid, but have accrued $3,020,000 in salary expense for Mr. Song since January 2022. |
| (2) | We have not paid, but have accrued $250,000 in salary expense for Ms. Zhong since January 2022. |
| (3) | On January 1, 2022, under the COO Executive Employment Agreement, Mr. Wang’s compensation will consist of an annual salary of $500,000 in cash and stock compensation of 500,000 shares of the Company’s common stock. We issued 50,000 shares of our common stock to Mr. Wang in January 2022. |
Employment Agreements, Termination of Employment and Change-in-Control Arrangements
We entered into an employment agreement (the “Song Agreement”) with Mr. Song dated October 1, 2019, under which Mr. Song agreed to serve as our Chief Executive Officer for a term of two years commencing October1, 2019 with base annual cash compensation of $500,000, which has not been paid as yet. The Song Agreement was renewed on October 28, 2021 for one (1) year. Under the renewed agreement, we agreed to pay him an annual base salary of $1,000,000 in cash and an annual stock compensation of 1,000,000 shares of our Common Stock. During each renewal period thereafter his salary will consist of an annual base salary of $300,000 in cash, subject to an annual review by the Board of Directors or the Compensation Committee thereof. We have not paid, but have accrued $3,020,000 in salary expense for Mr. Song since January 2022.
During the term of employment, Mr. Song will perform the duties as are commensurate and consistent with his position and will devote his full working time, attention and efforts to the Company and to discharging the responsibilities of his position, and such other duties as may be assigned from time to time by the Company, which relate to the business of the Company and are reasonably consistent with his position. During the term of employment, Mr. Song will not engage in any business activity that, in the reasonable judgment of the board of directors of the Company, conflicts with his duties under the Song Agreement, whether or not such activity is pursued for gain, profit or other advantage.
The Song Agreement and employment thereunder may be terminated (1) automatically upon the death or total disability of Mr. Song, (2) without Cause by the Company or for Good Reason (both as defined in the Song Agreement) by Mr. Song, in which case Mr. Song will be entitled to receive termination payments and benefits, including without limitation, an amount equal to six (6) months’ salary, unpaid salary earned through the date of termination and unused vacation that has accrued and would be payable under the Company’s standard benefits, or (3) in connection with a Change of Control, in which case Mr. Song will be entitled to receive a severance payment in the amount equal to $10,000,000, and other benefits.
On January 27, 2022, we entered into an employment agreement with Baiqun Zhong, our interim Chief Financial Officer, for a term of one (1) year, effective May 21, 2021, taking into consideration that she served as the Interim CFO from May 21, 2021 until July 14, 2021 and assumed such role once again on September 27, 2021. Under the agreement, Ms. Zhong’s compensation consists of an annual salary of $250,000 in cash. We have not entered into a renewal agreement with Ms. Zhong, thus terms in the previous employment agreement continue to apply. As of the date of this annual report, we have not made any cash payment to Mrs. Zhong.
On January 27, 2022, we entered into an employment agreement with Mr. Xiaoping Wang for a term of one (1) year, effective January 1, 2022. Under the agreement, Mr. Wang’s compensation will consist of an annual salary of $500,000 in cash and stock compensation of 50,000 shares of the Company’s common stock. We issued 50,000 shares of our common stock to Mr. Wang in January, 2022. As of the date of this annual report, we have not made any cash payment to Mr. Wang. We have not entered into a renewal agreement with Mr. Wang, thus terms in the previous employment agreement continue to apply.
On December 23, 2022, Mr. Tiewei Song and Mr. Xiaoping Wang provided written performance pledges (the “Performance Pledges”) to the Company, whereby they pledged to use their best efforts to ensure that the aggregate amount of the available cash (excluding cash received as loans or capital infusions or cash held in restricted accounts or otherwise unavailable for unrestricted use for any reason) of Chongqing Bimai Pharmaceutical Technology Group Co., Ltd., a subsidiary of Bimai Pharmaceutical (Chongqing) Co., Ltd., and its subsidiaries, as of December 31, 2023, held in bank accounts of financial banking institutions, as audited by the Company’s independent auditors will be not less than $2 million (the “Performance Target”). If the Performance Target is not met by December 31, 2023, Mr. Song will forfeit his unpaid cash salary accrued from October 1, 2021 to September 30, 2022 in the amount of $1 million, and Mr. Wang will forfeit all his unpaid cash salary accrued through the end of 2023 and will return to the Company the 50,000 shares of the Company’s common stock he previously received as salary.
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Compensation of Directors
As of December 31, 2022, we had four non-employee directors, of whom only Mr. Mia Kuang Ching has received compensation, as set forth in the table below. As of December 6, 2021, the Company entered into Board of Directors Agreements (the “BOD Agreements”) with each of Messrs. Fengsheng Tan, Ju Li, Jianxin Wang and Ching Mia Kuang, independent directors of the Company. Pursuant to the BOD Agreements, each of Messrs. Fengsheng Tan, Ju Li, Jianxin Wang and Ching Mia Kuang are entitled to a monthly cash payment of $2,000. No cash payments were made in 2022. The BOD Agreements also contain customary provisions addressing obligations for agreements of this type such as confidentiality, dispute resolution, termination, the Company’s duty to reimburse reasonable expenses, etc. On March 6, 2022, Mr. Fengsheng Tan resigned as a director, at which time the Company paid him a lump sum payment of $8,000 for his services as a director of the Company since 2018 during which period he did not receive any compensation. Directors who are also employees of the Company and/or its subsidiaries received no additional compensation for their services as directors.
| Name | Compensation | Other Fees | Total | |||||||||
| Ching Mia Kung | $ | 24,000 | - | $ | 24,000 | |||||||
Outstanding Equity Awards
We have not implemented a stock option plan at this time and since inception, we have not issued any stock options, stock appreciation rights or other equity awards to our executive officers. We may decide, at a later date, and reserve the right to, initiate such a plan or plans as deemed appropriate by the Board of Directors.
Pension Benefits
We have not entered into any pension benefit agreements with any of our executive officers or directors. We contribute to the social insurance for our employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and housing provision funds in accordance with PRC regulations.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding beneficial ownership of our Common Stock as of April 26, 2023 for: (i) each stockholder known by us to be the beneficial owner of more than 5% of the outstanding shares of our Common Stock; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our directors and executive officers as a group:
| Name and Address(1) of Beneficial Owner(s) | Amount and Nature of Beneficial Owner(s) (2) | Percentage of Beneficial Ownership | ||||||
| Fnu Oudom, Chairman of the Board and President | 1,250,000 | 28.51 | % | |||||
| Tiewei Song, Director, Chief Executive Officer | 100,000 | 2.28 | % | |||||
| Baiqun Zhong, Interim Chief Financial Officer | - | - | ||||||
| Xiaoping Wang, Director, Chief Operating Officer | 50,000 | 1.14 | % | |||||
| Mia Kuang Ching, Director | - | - | ||||||
| Sammi Earn Seok Ang, Director | - | - | ||||||
| Barry I. Regenstein, Director | - | - | ||||||
| Timothy H. Safransky, Director | - | - | ||||||
| All officers and directors as a group (8 persons) | 1,400,000 | 31.93 | % | |||||
| (1) | Unless indicated otherwise, the beneficial owner’s address is 725 5th Avenue, 15th Floor, 15-01, New York, NY. |
| (2) | Applicable percentage of ownership is based on 4,384,780 shares of Common Stock outstanding as of April 26, 2023. Beneficial ownership is determined in accordance with the rules of the United States Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to securities exercisable or convertible into shares of Common Stock that are currently exercisable or exercisable within 60 days of April 26, 2023, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. There are no options, warrants, rights, conversion privileges or similar rights to acquire the Common Stock of our company and our common Stock is the only outstanding class of equity securities of our company. |
Pursuant to Rule 13-d-3 under the Securities Exchange Act of 1934, as amended, beneficial ownership of a security consists of sole or shared voting power (including the power to vote or direct the voting) and/or sole or shared investment power (including the power to dispose or direct the disposition) with respect to a security whether through a contract, arrangement, understanding, relationship or otherwise. Unless otherwise indicated, each person indicated above has sole power to vote, or dispose or direct the disposition of all shares beneficially owned.
84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Agreements entered into with our Chairman, Fnu Oudom
On June 9, 2022, we entered into a stock purchase agreement with our Chairman of the Board, Mr. Fnu Oudom, whereby Mr. Oudom agreed to purchase 1,250,000 (post a 1-for-10 reverse split in December 2022) shares of Common Stock for $5 million, or $0.40 per share, subject to the approval of our stockholders. On July 18, 2022, 1,250,000 (post a 1-for-10 reverse split in December 2022) shares of Common Stock were issued to Mr. Oudom upon the approval of our stockholders at our 2022 annual meeting of shareholders.
On July 5, 2022, we entered into a stock purchase agreement (as amended on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire 100% of the equity interests in Phenix Bio Inc. (“Phenix”), a distributor of healthcare products. The transaction closed effective March 15, 2023. The aggregate purchase price for the equity interests in Phenix was $180,000 in cash, which has been paid, plus 5,270,000 shares of the Company’s common stock, of which 270,000 shares will be issued upon the approval of the issuance by the Company’s shareholders and the balance of 5,000,000 shares will be issued if the aggregate net profit generated by Phenix is at least $2,500,000 in calendar year 2023 or in any fiscal quarter of 2023, subject to the approval of the Company’s shareholders. Such issuance of shares was approved by the Company’s shareholders on April 13, 2023.
On December 6, 2022, we sold a convertible promissory note (the “Note”) to Mr. Fnu Oudom for $ 2 million. The Note carries an annual interest rate of 6%, which is payable together with the principal amount one (1) year after the date of the Note. Seven (7) business days before the maturity date of the Note, the Note holder has the right to exercise a conversion right at a conversion price of $0.40, to have the aggregate amount of the principal and accrued interests repaid in shares (the “Note Shares”) of our Common Stock, in lieu of cash payment. The conversion price of $0.40 reflects a 60% premium on the closing price of the Common Stock on NASDAQ on the date of issuance of the Note, which was $0.25). On February 27, 2023, the Company and Mr. Oudom entered into an agreement (the “Prepayment Agreement”) whereby the parties agreed that the Company will exercise its prepayment right under the Convertible Note by issuing shares of Common Stock. In consideration of Mr. Oudom’s agreement to convert the Convertible Note in shares of Common Stock and to waive his right to any and all interest accrued and to be accrued under the Convertible Note, the Company agreed to issue 1,330,000 shares of Common Stock (the “Prepayment Shares”) at a conversion price of $1.50 per share, subject to the shareholders’ approval, as full payment of the $2,000,000 principal of the Convertible Note and accrued interest. Such issuance was approved by the Company’s shareholders on April 13, 2023.
On February 27, 2023, the Company entered into a stock purchase Agreement (the “February SPA”) with Mr. Oudom, whereby the Company agreed to sell 2,500,000 shares of Common Stock to Mr. Oudom for $3,000,000 in cash, based on a purchase price of $1.50 per share, subject to shareholder approval of the issuance of such shares. Such issuance was approved by the Company’s shareholders on April 13, 2023.
Transactions with middle management personnel
Amount due to related parties and middle management personnel
As of December 31, 2022 and December 31, 2021, the total amounts due to related parties and mid-management officers was $4,600,441 and $730,285, respectively, which included:
| ● | As of December 31, 2022 and 2021, amount payable to Mr. Yongquan Bi, the former Chief Executive Officer and Chairman of the Board of directors of the Company, of $27,699 and $30,258, respectively, free of interest and due on demand. These amounts represent the remaining balance that Mr. Yongquan Bi advanced for third party services on behalf of the Company during the ordinary course of business of the Company since the beginning of 2018. |
| ● | As of December 31, 2022 and 2021, amount payable to Mr. Li Zhou, the legal representative (general manager) of Guanzan, of $248,690 and $477,128 respectively is for daily operation and third party profession fees with no interest. |
| ● | As of December 31, 2022 and 2021, amounts payable to Mr. Fuqing Zhang, the Chief Executive Officer of Xinrongxin of $172,730 and $188,684, respectively, free of interest and due on demand. The amount due to Mr. Fuqing Zhang is for reimbursable operating expenses that the Company owed to Mr. Zhang prior to the acquisition of Boqi Zhengji. |
| ● | As of December 31, 2022 and 2021, amounts payable to Mr. Youwei Xu, the financial manager of Xinrongxin of $11,784 and $12,872, respectively, free of interest and due on demand. The amount due to Mr. Xu, relates to reimbursable operating expenses that was owed to Mr. Xu prior to the acquisition of Boqi Zhengji. |
| ● | As of December 31, 2022 and 2021, amounts payable to Shaohui Zhuo, the general manager of Guoyitang of $4,671 and $5,102, respectively, for amounts advanced for daily operation with no interest. |
| ● | As of December 31, 2022 and 2021, amounts payable to Nanfang Xiao, a director of Guoyitang of $10,482 and $11,450, respectively, was for amounts advanced for daily operation with no interest. |
| ● | As of December 31, 2022 and 2021, amounts payable to Jia Song, the manager of Guoyitang of $4,385 and $4,791, respectively, was for amounts advanced for daily operation with no interest. |
| ● | As of December 31, 2022, Other payable to Mr. Fnu Oudom of $3,620,000, was for $2,000,000 personal loan with 6% interest rate on December 6, 2022, and $1,620,000 for the remaining balance for sale of Phoenix Entity. |
| ● | As of December 31, 2022, Other payable to Mr. Song Tie Wei of $500,000, was personal loan on October 28, 2022, with a term of three months from November 3, 2022 to February 3, 2023. No interest if return on time. 1% interest from 3/3/2023. |
85
Equity Interest Increase in Shude
On April 9, 2021, we increased our equity interest in Shude from 80% to 95.2% by making a direct capital investment of $4,892,293 in Shude.
Director Independence
We undertook a review of the independence of our directors and, using the definitions and independence standards for directors provided in the rules of The NASDAQ Stock Market, considered whether any director has a material relationship with us that could interfere with his or her ability to exercise independent judgment in carrying out their responsibilities. As a result of this review, we determined that Mia Kuang Ching, Ju Li and Jianxi Wang were “independent directors” as defined under the rules of The NASDAQ Stock Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table represents the aggregate fees billed for professional audit services rendered by our independent auditors, Audit Alliance LLP, for their audit of our annual financial statements during the years ended December 31, 2022 and 2021 respectively:
| 2022 | 2021 | |||||||
| Audit Fees | $ | 310,000 | $ | 250,000 | ||||
| Audit-Related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Accounting Fees and Services | 310,000 | 250,000 | ||||||
Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for the review of the financial statements included in our filings on Form 10-Q, and for services that are normally provided in connection with statutory and regulatory filings or engagements. The amounts shown for Audit Alliance LLP in 2022 and 2021, respectively, relate to the audits of our annual financial statements and the review of the financial statements included in our filings on Form 10-Q.
Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements. There were no audit-related fees billed during the years ended December 31, 2022 and 2021.
Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning. There were no tax fees billed during the years ended December 31, 2022 and 2021.
All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e. Audit Fees, Audit-Related Fees, Tax Fees and allowable working costs. There were no other fees billed during the years ended December 31, 2022 and 2021.
The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent registered public accounting firm and overseeing their work. All audit services to be provided to us and all non-audit services, other than de minims non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
A list of the financial information included herein, are included in Part II, Item 8 of this Report
(a)(2) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or Notes thereto.
(a)(3) Exhibits. The list of Exhibits filed as a part of this Form 10-K are set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.
Item 16. FORM 10-K SUMMARY
We have elected not to provide summary information.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned.
| BIMI INTERNATIONAL MEDICAL INC. | ||
| By: | /s/ TIEWEI SONG | |
| Tiewei Song | ||
| Chief Executive Officer | ||
| Dated: May 4, 2023 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signatures | Title | Date | ||
| /s/ Tiewei Song | Director and Chief Executive Officer | May 4, 2023 | ||
| Tiewei Song | (Principal Executive Officer), | |||
| /s/ Fnu Oudom | Director; Chairman of the Board | May 4, 2023 | ||
| Fnu Oudom | ||||
| /s/ Mia Kuang Ching | Director | May 4, 2023 | ||
| Mia Kuang Ching | ||||
| /s/ Xiaoping Wang | Director | May 4, 2023 | ||
| Xiaoping Wang | ||||
| /s/ Sammi Ean Seok Ang | Director | May 4, 2023 | ||
| Sammi Ean Seok Ang | ||||
| /s/ Timothy H. Safransky | Director | May 4, 2023 | ||
| Timothy H. Safransky | ||||
| /s/ Barry I. Regenstein | Director | May 4, 2023 | ||
| Barry I. Regenstein | ||||
| /s/ Baiqun Zhong | Interim Chief Financial Officer | May 4, 2023 | ||
| Baiqun Zhong | (Principal Financial and Accounting Officer) |
88
INDEX TO EXHIBITS
| Exhibit Number | Description | Incorporated by Reference to | ||
| 3.1 | Certificate of Incorporation | Exhibits with the corresponding numbers filed with our registration statement on Form 10-SB filed January 17, 2003.(File No. 000-50155). | ||
| 3.2 | Certificate of Amendment | Exhibits submitted with our registration statement on Form 10-SB filed January 17, 2003.(File No. 000-50155) | ||
| 3.3 | Certificate of Amendment to Certificate of Incorporation | Incorporated by reference from the Company’s Definitive Information Statement on Schedule 14C, filed July 23, 2009 | ||
| 3.4 | Certificate of Amendment to Certificate of Incorporation | Incorporated by reference from the Company’s Current Report on Form 8-K, dated September 16, 2010 | ||
| 3.5 | Certificate of Amendment to Certificate of Incorporation | Incorporated by reference from the Company’s Current Report on Form 8-K dated December 18, 2019 | ||
| 3.6 | Certificate of Amendment to Certificate of Incorporation | |||
| 3.7 | Certificate of Amendment to Certificate of Incorporation | Incorporated by reference from the Company’s Current Report on Form 8-K dated June 25, 2021 | ||
| 3.8 | Certificate of Amendment to Certificate of Incorporation | |||
| 3.9 | Amended and Restated Certificate of Incorporation | Incorporated by reference from the Company’s Current Report on Form 8-K dated July 21, 2022 | ||
| 3.10 | Certificate of Amendment to Amended and Restated Certificate of Incorporation | |||
| 3.11 | Bylaws | Exhibits submitted with our registration statement on Form 10-SB filed January 17, 2003. (File No. 000-50155) | ||
| 3.12 | Amended and Restated Bylaws | Incorporated by reference from the Company’s Current Report on Form 8-K dated June 1, 2022 | ||
| 4.1 | Description of Securities Registered Under Section 12 of the Exchange Act | Incorporated by reference from the Company’s Annual Report on Form 10-K for year December 31, 2019 | ||
| 10.1 | Executive Employment Agreement (Song, Tiewei) dated October 1, 2019 | Incorporated by reference from the Company’s Current Report on Form 8-K dated October 4, 2019 | ||
| 10.2 | Form of Securities Purchase Agreement dated May 18, 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020 | ||
| 10.3 | Form of Secured Convertible Promissory Note dated May 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020 | ||
| 10.4 | Form of Warrant dated May 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020. | ||
| 10.5 | Form of Shareholder Pledge Agreement dated May 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020 | ||
| 10.6 | Form of Voting Agreement dated May 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020 | ||
| 10.7 | Form of Registration Rights Agreement dated May 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated May 18, 2020 | ||
| 10.8 | Prepayment and Amendment Agreement dated November 20, 2020 | Incorporated by reference from the Company’s Current Report on Form 8-K dated November 24, 2020 |
89
| 10.9 | Amendment to Stock Purchase Agreement dated February 24, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated February 24, 2021 | ||
| 10.10 | Stock Purchase Agreement dated April 9, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated April 13, 2021 | ||
| 10.11 | Stock Purchase Agreement dated April 16, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated April 22, 2021 | ||
| 10.12 | Stock Purchase Agreement dated September 10, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated September 14, 2021 | ||
| 10.13 | Executive Employment Agreement (Song, Tiewei) dated October 28, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated November 1, 2021 | ||
| 10.14 | Form of Secured Convertible Promissory Note dated November 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated November 18, 2021 | ||
| 10.15 | Form of Warrant dated November 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated November 18, 2021 | ||
| 10.16 | Form of Registration Rights Agreement dated November 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated November 18, 2021 | ||
| 10.17 | Amendments to three Stock Purchase Agreements dated December 17, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated December 17, 2021 | ||
| 10.18 | Stock Purchase Agreement dated December 20, 2021 | Incorporated by reference from the Company’s Current Report on Form 8-K dated December 22, 2021 | ||
| 10.19 | Employment Agreement (Wang, Xiaoping) dated January 27, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K dated January 31, 2022 | ||
| 10.20 | Employment Agreement (Zhong, Baiqun) dated January 27, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K dated January 31, 2022 | ||
| 10.21 | Amendment No. 3 to the Stock Purchase Agreement and Settlement Agreement dated February 1, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K dated February 3, 2022 | ||
| 10.22 | Stock Purchase Agreement dated June 9,2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on June 10, 2022 | ||
| 10.23 | Stock Purchase Agreement dated July 5,2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on July 7, 2022 | ||
| 10.24 | Sale and Purchase Agreement dated October 19, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on October 24, 2022 | ||
| 10.25 |
|
Convertible Promissory Note Dated December 6, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 8, 2022 | |
| 10.26 | Amendment No. 3 to Stock Purchase Agreement and Settlement Agreement dated December 9, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 13, 2022 | ||
| 10.27 | Termination Agreement dated December 15, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 20, 2022 | ||
| 10.28 | Performance Pledges dated December 23, 2022 | Incorporated by reference from the Company’s Current Report on Form 8-K, filed on December 28, 2022 |
90
91
BIMI INTERNATIONAL MEDICAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
 |
 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
BIMI International Medical, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BIMI International Medical, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2022 and 2021, and related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021 and the consolidated results of its operations and its cash flows for the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.
Substantial doubt about the Company’s ability to continue as a going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, As discussed in Note 2 to the consolidated financial statements, the Company incurred a net loss of $22,393,259 and $34,985,956 and recorded a cash outflow from operating activities of $10,255,206 and $4,436,774 for the financial years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company in net current liabilities of $2,126,672 and $932,492 and had accumulated deficit of $70,143,785and $47,900,930, respectively. These factors indicate material uncertainty exists that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Goodwill – Refer to Note 4,5,6,7,8 and 18
Critical Audit Matter Description
As described in Notes 4,5,6,7,8 and 18 to the consolidated financial statements, the Company acquired the Guanzan Group in 2020 and acquired the Guoyitang Hospital, the Zhongshan Hospital, the Qiangsheng, Eurasia and Minkang Hospitals and Zhuoda in 2021. Zhuoda has been stripped off on October 31,2022, so there is no goodwill of Zhuoda for impairment assessment in 2022. The goodwill associated with the acquisition of: (i) Guanzan of $6,914,232; (ii) Guoyitang of $7,154,393; (iii) Zhongshan of $10,443,494, and (iv) Minkang, Qiangsheng and Eurasia of $9,067,529, were initially recognized at the acquisition closing date.
Management assessed goodwill for potential impairment as of December 31, 2022 and 2021 by comparing the carrying amount of the cash-generating unit to which goodwill has been allocated with the recoverable amount determined by assessing the value-in-use (“VIU”) by preparing a discounted cash flow forecast. Preparing a discounted cash flow forecast involves the exercise of significant management judgement, in particular in forecasting revenue growth and operating profit and in determining an appropriate discount rate.
Goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company has elected to perform quantitative assessment. In the quantitative assessment, the Company’s evaluation of goodwill for impairment involves the comparison of the fair value to the carrying value. The Company used the discounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related to discount rates and forecasts of future revenues and operating margins. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge. Based on the quantitative assessment performed, if it is more likely than not that the fair value is less than the carrying amount. During the year ended December 31, 2022 and 2021, impairment losses on goodwill in the amount of $5,385,811 and $26,128,171 were recognized based on the quantitative assessment performed, respectively.
We identified goodwill impairment as a critical audit matter because of the significant judgments made by management to estimate the fair value of the acquired companies and the difference between the fair value and carrying value. This required a high degree of auditor judgment and an increased efforts, including the need to involve our valuation specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and operating margin.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures relating to the discount rate and forecasts of future revenue and operating margin used by management to estimate the fair value of the acquired companies included the following, among others:
| ● | We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to management’s historical forecasts. |
| ● | We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the forecasts to historical revenues and operating margins. |
| ● | With the assistance of our valuation specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: |
| a. | Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation; |
| b. | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
/s/
We have served as the Company’s auditor since 2020.
May 4, 2023
F-3
BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advances to suppliers | ||||||||
| Inventories, net | ||||||||
| Prepayments and other receivables | ||||||||
| Current assets from discontinued operations-disposal | ||||||||
| Current assets from discontinued operations-held for sale | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Deferred tax assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease-right of use assets | ||||||||
| Goodwill | ||||||||
| Long-term investment | ||||||||
| Non-current assets from discontinued operations-disposal | ||||||||
| Non-current assets from discontinued operations-held for sale | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loans | $ | $ | ||||||
| Long-term loans due within one year | ||||||||
| Convertible promissory notes, net | ||||||||
| Accounts payable, trade | ||||||||
| Advances from customers | ||||||||
| Amount due to related parties | ||||||||
| Taxes payable | ||||||||
| Other payables and accrued liabilities | ||||||||
| Lease liability-current | ||||||||
| Current liabilities from discontinued operations-disposal | ||||||||
| Current liabilities from discontinued operations-held for sale | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Lease liability-non current | ||||||||
| Long-term loans - non-current | ||||||||
| Non-current liabilities from discontined operations-disposal | ||||||||
| Non-current liabilities from discontined operations-held for sale | ||||||||
| Total non-current liabilities | 5,134,910 | 4,699,795 | ||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Additional paid-in capital | ||||||||
| Statutory reserves | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total BIMI International Medical Inc.’s equity | ||||||||
| NON-CONTROLLING INTERESTS | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| * |
The accompanying notes are an integral part of the consolidated financial statements
F-4
BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For
the Years Ended | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | ||||||||
| COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Impairment loss of goodwill | ||||||||
| Total operating expenses | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Exchange gains | ( | ) | ||||||
| Amortization of convertible notes(1) | ( | ) | ( | ) | ||||
| Other expense | ( | ) | ( | ) | ||||
| Total other income (expense), net | ( | ) | ( | ) | ||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
| PROVISION FOR INCOME TAXES | ||||||||
| NET LOSS FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ||||
| DISCONTINUED OPERATIONS | ||||||||
| Loss from operations of discontinued operations-disposal | ( | ) | ||||||
| Loss from operations of discontinued operations-held for sale | ( | ) | ( | ) | ||||
| NET LOSS | ( | ) | ( | ) | ||||
| Less: net income attributable to non-controlling interest | ||||||||
| NET LOSS ATTRIBUTABLE TO BIMI INTERATIONAL MEDICAL INC. | $ | ( | ) | $ | ( | ) | ||
| OTHER COMPREHENSIVE LOSS | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| TOTAL COMPREHENSIVE LOSS | ( | ) | ( | ) | ||||
| Less: comprehensive loss attributable to non-controlling interests | ( | ) | ( | ) | ||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO BIMI INTERNATIONAL MEDICAL INC. | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES | ||||||||
| LOSS PER SHARE | ||||||||
| $ | ( | ) | $ | ( | ) | |||
| $ | ( | ) | $ | ( | ) | |||
| $ | ( | ) | $ | ( | ) | |||
The accompanying notes are an integral part of the condensed consolidated financial statements
F-5
BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Statutory | Non Controlling | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||
| Shares* | Amount | Capital | (Loss)/Income | Reserve | Interest | Deficit | Equity | |||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common shares | ||||||||||||||||||||||||||||||||
| Net income/(loss) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Disposal of discontinued operations and subsidiaries-disposal | - | |||||||||||||||||||||||||||||||
| Discontinued operations and subsidiaries -held for sale | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | |||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||
| Issuance of common shares | ||||||||||||||||||||||||||||||||
| Net income/(loss) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Disposal of discontinued operations and subsidiaries-disposal | - | |||||||||||||||||||||||||||||||
| Discontinued operations and subsidiaries-held for sale | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | |||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||
| * |
The accompanying notes are an integral part of the consolidated financial statements
F-6
BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment loss of Goodwill | ||||||||
| Inventories impairment reserve | ||||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Amortization of discount of convertible promissory notes | ||||||||
| Profit/Loss on disposal of discontinuing operations and subsidiaries | ( | ) | ||||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Advances to suppliers | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepayments and other receivables | ||||||||
| Operating lease-right of use assets | ( | ) | ( | ) | ||||
| Accounts payable, trade | ( | ) | ||||||
| Advances from customers | ( | ) | ||||||
| Operating lease liabilities | ||||||||
| Taxes payable | ( | ) | ( | ) | ||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Net cash used in operating activities from continuing operations | ( | ) | ( | ) | ||||
| Net cash provided by operating activities from discontinued operations | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Cash received from acquisition of subsidiaries | ||||||||
| Disposal of Zhuoda | ||||||||
| Payment for the acquisition of Qiangsheng, Eurasia and Mingkang Hospitals | ( | ) | ||||||
| Payment for the acquisition of Phenix Bio Inc | ( | ) | ||||||
| Deposit for the acquisition of Cogmer | ||||||||
| Discontinued operations-Disposal of Zhuoda | ( | ) | ||||||
| Discontinue operations-held for sale of Zhongshan, qiangsheng, Eurasia and Mingkang | ||||||||
| Purchase of property, plant, and equipment | ( | ) | ||||||
| Net cash used in investing activities from continuing operations | ( | ) | ||||||
| Net cash provided by investing activities from discontinued operations | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Issuance of common stocks | ||||||||
| Proceeds from short-term loan | ( | ) | ||||||
| Proceeds from long-term loan | ||||||||
| Net proceeds from issuance of convertible promissory notes | ||||||||
| Repayment of short-term loans | ||||||||
| Repayment of long-term loans | ( | ) | ||||||
| Amount financed from (to) related parties | ||||||||
| Net cash provided by financing activities from continuing operations | ||||||||
| Net cash provided by financing activities from discontinued operations | ||||||||
| Net cash provided by investing activities | ||||||||
| EFFECT OF EXCHANGE RATE ON CASH | ||||||||
| (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | $ | ||||||
| Cash paid for interest expense, net of capitalized interest | $ | $ | ||||||
| NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES | ||||||||
| Issuance of shares of Common stock for the equity acquisition of Chongqing Guanzan Technology Co., Ltd. | $ | $ | ||||||
| Issuance of shares of Common stock for equity acquisition of Zhongshan Chaohu Hospital | $ | $ | ||||||
| Issuance of shares of Common stock for equity acquisition of Guoyitang Hospital | $ | $ | ||||||
| Issuance of shares of Common stock for equity acquisition of Minkang, Qiangsheng and Eurasia hospitals | $ | $ | ||||||
| Issuance of shares of Common stock for equity acquisition of Zhuoda | $ | |||||||
| Issuance of shares of Common stock for payment of improvements to offices | $ | |||||||
| Goodwill recognized from equity acquisition of Zhongshan Chaohu Hospital | $ | $ | ||||||
| Goodwill recognized from equity acquisition of Guoyitang Hospital | $ | $ | ||||||
| Goodwill recognized from equity acquisition of Minkang, Qiangsheng and Eurasia hospitals | $ | $ | ||||||
| Outstanding payment for equity acquisition of Zhongshan Chaohu Hospital | $ | |||||||
| Outstanding payment for equity acquisition of Guoyitang Hospital | $ | $ | ||||||
| Outstanding payment for equity acquisition of Minkang, Qiangsheng and Eurasia hospitals | $ | $ | ||||||
| Common stock to be issued upon conversion of convertible promissory notes | ||||||||
| Issuance of common share for equity acquisition of Mali Hospital | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements
F-7
BIMI INTERNATIONAL MEDICAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
1. ORGANIZATION AND BUSINESS BACKGROUND
BIMI International Medical, Inc. (the “Company” or “BIMI”) was incorporated in the State of Delaware as Galli Process, Inc. on October 31, 2000. On February 7, 2002, the Company changed its name to Global Broadcast Group, Inc. On November 12, 2004, the Company changed its name to Diagnostic Corporation of America. On March 15, 2007, the Company changed its name to NF Energy Saving Corporation of America, and on August 24, 2009, the Company changed its name to NF Energy Saving Corporation. On December 16, 2019, the Company changed its name to BOQI International Medical Inc., to reflect the Company’s refocus of its business from the energy saving industry to the health care industry. Since March 7, 2012, the common stock of the Company (the “Common Stock”) has been traded on the Nasdaq Capital Market.
Until October 14, 2019, the Company, through NF Energy Saving Investment Limited and its subsidiaries (the “NF Group”), operated in the energy saving enhancement technology industry in the People’s Republic of China (the “PRC”). The NF Group focused on providing services relating to energy saving technology, optimization design, energy saving reconstruction of pipeline networks and contractual energy management for the electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries in the PRC and the manufacture and sales of energy-saving flow control equipment. In late 2019, the Company committed to a plan to dispose of all its equity interests in the NF Group and on March 31, 2020, the Company entered into an agreement to sell the NF Group. The sale of the NF Group closed on June 23, 2020.
On October 14, 2019, the Company acquired
On June 24, 2020, the Company established a wholly owned subsidiary Boyi (Liaoning) Technology Co. Ltd (“Liaoning Boyi”), in order to be qualified to participate in local healthcare projects. On December 22, 2020, the Company established another subsidiary, Bimai Pharmaceutical (Chongqing) Co., Ltd. (“Chongqing Bimai”), to replace Xinronxin as the holding company for all the retail, wholesale and hospital operations in China.
On March 18, 2020, the Company, through its wholly
owned subsidiary, Xinrongxin, acquired
On December 11, 2020, the Company entered into a stock purchase agreement to sell Boqi Zhengji. The sale of the Boqi Zhengji was closed by the end of 2020, although the government record was not updated until February 2, 2021 due to the Chinese government’s alternative working schedule and other delays caused by COVID-19.
F-8
On December 9, 2020, the Company entered into an
agreement to acquire
On December 15, 2020, the Company entered into a stock purchase agreement to acquire Chaohu Zhongshan Minimally Invasive Hospital (“Zhongshan”), a private hospital in the east region of China. The transaction closed on February 5, 2021.
On April 9, 2021, the Company entered into a stock purchase agreement to acquire three private hospitals in the PRC, Wuzhou Qiangsheng Hospital (“Qiangsheng”), Suzhou Eurasia Hospital(“Eurasia”) and Yunnan Yuxi MinKang hospital (“Minkang”). The transaction closed on May 6, 2021.
On April 21, 2021, Bimai Hospital Management (Chongqing) Co. Ltd. was incorporated in the PRC by the Company to manage the operations of the Company’s medical devices segment.
On April 21, 2021, Pusheng Pharmaceutical Co., Ltd. was incorporated in the PRC by the Company to manage its wholesale distribution of generic drugs.
On September 10, 2021, the Company entered into
a stock purchase agreement to acquire
On December 20, 2021, the
Company entered into a stock purchase agreement to acquire Bengbu Mali OB-GYN Hospital Co., Ltd. (“Mali Hospital”). We agreed
to purchase all the issued and outstanding equity interests in Mali Hospital in consideration of $
The Pharmacy Group engages in the retail sale of medicine and other healthcare products in the PRC. The Pharmacy Group sells its medicine and other healthcare products to customers through its directly-owned stores. The Pharmacy Group offers a wide range of products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, traditional Chinese medicines, personal and family care products and medical devices, as well as miscellaneous items.
The Company’s wholesale segments are engaged in the distribution of medical devices and pharmaceuticals.
The Company’s medical services segments are engaged in providing medical services in the hospitals.
F-9
As of December 31,2022, the details of the Company’s major subsidiaries are as follows:
| Name | Place of incorporation and kind of legal entity | Principal activities and place of operation | Effective interest held(%) | |||||
| Lasting Wisdom Holdings Limited | ||||||||
| Pukung Limited | ||||||||
| Beijing Xinrongxin Industrial Development Co., Ltd. | ||||||||
| Boyi (Liaoning) Technology Co., Ltd | ||||||||
| Dalian Boyi Technology Co., Ltd | ||||||||
| Chongqing Guanzan Technology Co., Ltd. | ||||||||
| Chongqing Shude Pharmaceutical Co., Ltd. | ||||||||
| Chongqing Lijiantang Pharmaceutical Co., Ltd. | ||||||||
| Bimai Pharmaceutical (Chongqing) Co., Ltd. | ||||||||
| Chongqing Guoyitang Hospital Co., Ltd. | ||||||||
| Chongqing Huzhongtang Healthy Technology Co., Ltd. | ||||||||
| Chaohu Zhongshan Minimally Invasive Hospital Co.,Ltd. | ||||||||
| Yunnan Yuxi Minkang Hospital Co., Ltd. | ||||||||
| Wuzhou Qiangsheng Hospital Co., Ltd. | ||||||||
| Suzhou Eurasia Hospital Co., Ltd. | ||||||||
| Bimai Hospital Management (Chongqing) Co. Ltd | ||||||||
| Pusheng Pharmaceutical Co., Ltd | ||||||||
F-10
2. GOING CONCERN UNCERTAINTIES
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
As reflected in the accompanying consolidated financial
statements, the Company incurred a net loss of $
The continuation of the Company as a going concern through the next twelve months is dependent upon (1) the continued financial support from its stockholders or its ability to obtain external financing, and (2) further implement management’s business plan to extend its operations and generate sufficient revenues to meet its obligations. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be neither any assurances to that effect, nor any assurance that the Company will be successful in securing sufficient funds to sustain the operations.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for the Company to continue as a going concern.
We have restated our financial statements for year ended December 31, 2021 to correct errors identified in our prior financial statements. In FY2021,we recorded amortization of convertible note in G&A expense account, it has been revised to record amortization of convertible note in other income(expense) account. The restatement was necessary to address misstatement of financial statements. The impact of the restatement on our financial statement is reclassification of other expense in financial statements. We have concluded that the restatement does not materially affect our liquidity or our compliance with debt covenants or other financial obligations.
We previously erroneously recorded amortization of our convertible
note as G&A expense in the financial statements for the year ended December 31, 2021 and 2020. We now record the amortization of
the convertible notes in other income expense account, consistent with our statement of cash flow. The amortization of convertible note
for the year ended December 31, 2022 and 2021 is $
We have taken steps to address the cause of the restatement and to improve our internal controls over financial reporting. We hired a consulting firm to assist our accounting department on internal controls and financial reporting. We are committed to maintaining the integrity of our financial statements and to providing accurate and transparent financial information to our investors.
F-11
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| ● | Basis of presentation |
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). These consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.
The consolidated financial information as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP, have been omitted pursuant to those rules and regulations. The consolidated financial information should be read in conjunction with the consolidated financial statements and the notes.
| ● | Use of estimates |
The preparation of the consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions made by management include, among others, useful lives and impairment of long-lived assets, impairment of goodwill, collectability of accounts receivable, advances to suppliers, allowance for doubtful accounts, reserve of inventory and valuation of derivative liabilities. While the Company believes that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
| ● | Business combination |
The Company accounted for its business combination using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the acquisition date amounts of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Subsequent to the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any further adjustments are recorded in the consolidated income statements.
F-12
In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.
When there is a change in ownership interests or a change in contractual arrangements that results in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date control is lost. Any retained non-controlling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or loss upon deconsolidation of the subsidiary.
| ● | Cash |
Cash consists primarily of cash on hand and cash in banks which is readily available in checking and saving accounts. The Company maintains cash with various financial institutions in the PRC where its accounts are uninsured. The Company has not experienced any losses from funds held in bank accounts and believes it is not exposed to any risk on its cash held in its bank accounts.
| ● | Accounts receivable and allowance for doubtful accounts |
Accounts receivable are recorded at the invoiced
amount and do not bear interest, which are due within contractual payment terms, generally
| ● | Advances to suppliers |
Advances to suppliers consist of prepayments to the Company’s vendors, such as pharmaceutical manufacturers and medicine suppliers. The Company typically prepays for the purchase of our merchandise, especially for those salable, scarce, personalized medicine or medical devices. The Company typically receive products from vendors within three to nine months after making prepayments. The Company continuously monitor delivery from, and payments to, the vendors while maintaining a provision for estimated credit losses based upon historical experience and any specific supplier issues, such as discontinuing of inventory supply, that have been identified. If the Company has difficulty receiving products from a vendor, the Company would cease purchasing products from such vendor, request return of our prepayment promptly, and if necessary, take legal action. The Company has not taken such type of legal action during the reporting periods. If none of these steps are successful, management will then determine whether the prepayments should be reserved or written off. As of December 31, 2022 and 2021, the allowance for doubtful accounts was $, respectively.
F-13
| ● | Business held for sale |
In late 2022, the Company committed to a plan to dispose of the Zhongshan, Minkang, Eurasia, Qiangsheng and Guoyitang hospitals.
On December 28, 2022, we entered into an agreement
to transfer
On December 28, 2022, we entered into an agreement to transfer
The Company determined that the plan and the subsequent actions taken to dispose of the four hospitals qualified as a held for sale operation under the criteria set forth in the ASC 205-20 Presentation of Financial Statements – Discontinued Operation.
The carrying amount of the major classes of assets and liabilities of the business held for sale as of December 31, 2022 and 2021 consist of the following:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets from held for sale | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advances to suppliers | ||||||||
| Amount due from related parties | ||||||||
| Inventories, net | ||||||||
| Prepayments and other receivables | ||||||||
| Operating lease-right of use assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Deferred tax assets | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease-right of use assets | ||||||||
| Goodwill | ||||||||
| Long-term investment | ||||||||
| Total non-current assets | ||||||||
| Total assets from held for sale | $ | $ | ||||||
| Liabilities from held for sale | ||||||||
| Current liabilities | ||||||||
| Short-term loans | $ | $ | ||||||
| Long-term loans due within one year | ||||||||
| Convertible promissory notes, net | ||||||||
| Accounts payable, trade | ||||||||
| Advances from customers | ||||||||
| Amount due to related parties | ||||||||
| Taxes payable | ||||||||
| Other payables and accrued liabilities | ||||||||
| Lease liability-current | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Lease liability-non current | ||||||||
| Long-term loans - non-current | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
F-14
The summarized operating results of the business held for sale included in the Company’s consolidated statements of operations consist of the following:
| For the year ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | |||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expense | ||||||||
| Other expense | ( | ) | ( | ) | ||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Loss from business held for sale | $ | ( | ) | $ | ( | ) | ||
| ● | Inventories |
Inventories are stated at the lower of cost or net
realizable value. Costs include the purchase price of the inventories and freight, the cost is determined using the weighted average method
and net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products.
The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. The Company reviews historical
sales activity quarterly to determine excess, slow moving items and potentially obsolete items. The Company provides inventory reserve
based on the excess quantities on hand equal to the difference, if any, between the cost of the inventory and its estimated market value,
or obsolescence of inventories determined principally by customer demand. As of December 31, 2022 and 2021, the Company recorded allowance
for obsolete inventories (the Pharmacy Group’s expired medicine) of $
| ● | Property, Plant and Equipment |
Property, Plant and Equipment are stated at cost less accumulated depreciation and impairment, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:
| Items | Expected useful lives | Residual value | ||||
| Building | % | |||||
| Office equipment | % | |||||
| Electronic equipment | % | |||||
| Furniture | % | |||||
| Medical equipment | % | |||||
| Vehicles | % | |||||
| Leasehold Improvement | % | |||||
Expenditures for repairs and maintenance are expensed as incurred. When assets have been retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.
F-15
| ● | Leases |
On January 1, 2020 the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, we elected to apply the package of practical expedients. Based on this guidance, the Company did not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
| ● | Goodwill |
Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized, and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.
The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to assess qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.
The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.
If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit. over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The fair value of discounted cash flow was determined using management’s estimates and assumptions.
Management evaluated the recoverability of goodwill
by performing a qualitative assessment before using a two-step impairment test approach at the reporting unit level. If the Company reorganizes
its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill will be reassigned based
on the relative fair value of each of the affected reporting units. As of December 31, 2022 and 2021, the Company recorded impairments
for goodwill of $
F-16
At the date of the most recent annual goodwill impairment test, all the reporting units’ fair value were either equal to or slightly higher than their carrying values. None of the reporting units’ fair values were substantially in excess of their carrying values. The fair value of the goodwill associated with each of the Guanzan Group (which covers the wholesale pharmaceutical, wholesale medical devices and the Lijiantang Pharmacies segments) and the medical services segment (consisting of Guoyitang, Zhongshan and the Qiangsheng, Eurasia and Minkang hospitals), were equal to their carrying value after their last impairment test and the fair value of the goodwill for Zhuoda only exceeded its carrying value by approximately 5.62%. Zhuoda has been stripped off on October 31,2022, so there is no goodwill of Zhuoda for impairment assessment in 2022. Accordingly, the goodwill associated with Guanzan Group, Guoyitang, Zhongshan and Qiangsheng, Eurasia and Minkang are considered at risk for impairment in future periods.
The fair value of a reporting unit is based on discounted estimated future income statement. The assumptions used to estimate fair value include management’s estimates of future growth rates, operating revenue, and discount rates. We disclose the methodology used to determine the fair values of our reporting units for our annual impairment review as using the income approach.
All of our reporting units share similar characteristics due to the nature of their businesses and operating model. As a result, the methodology used to determine fair value and the key estimates and assumptions used in our annual goodwill review are consistent for all of our reporting units.
Our key assumptions used includes revenue growth, profit margins, terminal value growth rates, capital expenditures projections, assumed tax rates, discount rates, other assumptions deemed reasonable by the management and relevant comparable to similar industry.
We believe that the estimates and assumptions made are reasonable, but they are susceptible to change from period to period. Actual results of operations, cash flows and other factors will likely differ from the estimates used in our valuation, and it is possible that differences and changes could be material. A deterioration in profitability, adverse market conditions, changes in regulatory developments, changes in category growth rates as a result of changing consumer preferences, loss of key personnel, the disposition of a significant portion of a reporting unit and competitive activity or a slower or weaker economic recovery than currently estimated by management could have a significant impact on the assumption and estimation in calculating the fair value of our reporting units and could result in an impairment charge in the future.
Potential events and changes in circumstances that could reasonably be expected to negatively affect the key assumptions are general economic conditions, regulatory developments, changes in category growth rates as a result of changing consumer preferences, loss of key personnel, the disposition of a significant portion of a reporting unit and competitive activity.
| ● | Impairment of long-lived assets and intangible assets |
In accordance with the provisions of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
F-17
| ● | Revenue recognition |
We adopted Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contract with Customers (“ASC 606”) for all periods presented. Under ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods and services, net of value-added tax. The Company determines revenue recognition through the following steps:
| ● | Identify the contract with a customer; |
| ● | Identify the performance obligations in the contract; |
| ● | Determine the transaction price; |
| ● | Allocate the transaction price to the performance obligations in the contract; and |
| ● | Recognize revenue when (or as) the entity satisfies a performance obligation. |
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied by the control of the promised goods and services is transferred to the customers, which at a point in time or over time as appropriate.
The Company’s revenues are net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to the sales of products and services. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is paid to the relevant PRC tax authorities.
The primary sources of the Company’s revenues are as follows:
| (1) | Pharmacy retail sales |
The physical pharmacies sell prescription drugs, over-the-counter (“OTC”) drugs, nutritional supplements, health foods, sundry products and medical devices. Revenue from sales of prescription medicine at drugstores is recognized when the prescription is filled and the customer picks up and pays for the prescription. Revenue from sales of other merchandise at drugstores is recognized at the point of sale, which is when a customer pays for and receives the merchandise. Usually the majority merchandise, such as prescription and OTC drugs, are not refundable after the customers leave the counter. Returns of other products, such as sundry products, are minimal. Sales of drugs reimbursed by the local government medical insurance agency and receivables from the agency are recognized when a customer pays for the drugs at a store. The Company based on historical experience, a reserve for potential losses from denial of reimbursement on certain unqualified drugs is made to the receivables from the government agency.
| (2) | Wholesale medical devices and wholesale pharmaceuticals |
The Group sales of wholesale medical device mainly through Guanzan, the group sales of wholesale pharmaceuticals mainly through Shude, Pusheng and Zhuoda, until its sale in October 2022.. The medical device and wholesale pharmaceuticals businesses primarily involve purchasing wholesale medical device and wholesale pharmaceuticals from the suppliers and then selling to customers. Upon obtaining purchase orders, the Company instructs warehouse agent to transfer ownership of products to customers. The transaction is normally completed within a short period of time, ranging from a few days to a month. The Company recognizes revenue from product sales when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers.
F-18
| (3) | Medical service |
The medical services segment conducts its hospital business through Guoyitang hospital, Zhongshan hospital, Qiangsheng hospital, Eurasia hospital and Mingkang hospital. Revenue from ancillary medical services is recognized when the related services have been rendered and includes outpatient and inpatient services..
For outpatient services, the patient normally receives outpatient treatment which contains various treatment components. Outpatient services contain more than one performance obligations, including (i) provision of consultation services and (ii) sale of pharmaceutical products. The Group allocates the transaction price to each performance obligation on relative stand-alone selling price basis. Both (i) provision of consultation services and (ii) sale of pharmaceutical products for which the control of services or pharmaceutical products is transferred at a point in time, revenue is recognized when the customer obtains the control of the completed services or pharmaceutical products and the Group has satisfied its performance obligations with present right to payment and the collection of the consideration is probable.
For inpatient services, the customers normally receive inpatient treatment which contains various treatment components. Inpatient services contain more than one performance obligations, including (i) sale of pharmaceutical products and (ii) provision of inpatient healthcare services. The Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis.
For revenue from (i) sale of pharmaceutical products for which control of services or pharmaceutical products is transferred at a point in time, revenue is recognized when the customer obtains the control of the completed services or pharmaceutical products and the Group has satisfied its performance obligations with present right to payment and the collection of the consideration is probable.
For revenue from (ii) provision of inpatient healthcare services, the corresponding revenue is recognized over the service period when customers simultaneously receive the services and consumes the benefits provided by the Group’s performance as the Group performs.
| ● | Cost of revenue |
Cost of revenues consists primarily of cost of goods purchased from suppliers plus direct material costs for packaging and storage, direct labor, which are directly attributable to the acquisition and maintaining of products for sales. Cost of revenues also include impairment loss of our products which are obsolete or expired for sale, if any. Shipping and handling costs, associated with the distribution of finished products to customers, are borne by the customers.
| ● | Comprehensive income |
ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.
F-19
| ● | Beneficial conversion feature |
The Company evaluates the conversion feature to determine whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible notes payable and may not be settled in cash upon conversion, is treated as a discount to the convertible notes payable. This discount is amortized over the period from the date of issuance to the date the notes is due using the effective interest method. If the notes payable are retired prior to the end of their contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.
| ● | Income taxes |
Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how
companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to
be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely
than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be
measured as the largest amount of tax benefit that has a greater than
For the years ended December 31, 2022 and 2021, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2022, the Company did not have any significant unrecognized uncertain tax positions.
The Company conducts the majority of its businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the PRC.
| ● | Value added tax |
Sales revenue represents the invoiced value of goods,
net of VAT. All of the Company’s products are sold in the PRC and are subject to a VAT on the gross sales price. The VAT rates range
up to
| ● | Convertible promissory notes |
The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the FASB Accounting Standards Codification. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.
F-20
| ● | Debt issuance costs and debt discounts |
The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed.
| ● | Discontinued operation |
In accordance with ASC 205-20, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and non-current liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.
On December 28, 2022,
Pursuant to the Agreement, the Company will transfer 87% of the equity interests in Zhongshan to the former owner and will continue to own 13% of the equity interests in Zhongshan. As consideration for the sale of the 87% interest in Zhongshan, the former owner will return to the Company the 40,037 shares of the Company’s common stock, which were previously issued to him. Subsequent to their issuance, such shares were consolidated into 40,037shares as a result of a 1-for-5 reverse stock split on February 3, 2022 and a 1-for-10 reverse stock split on December 9, 2022. The former owner will release the Company from any and all claims relating to two earn out payments that were payable under the original purchase agreement. The Company will receive a put option to sell part or all of its 13% interest in Zhongshan before December 31, 2032, based on a valuation determined by a reputable third party appraisal firm jointly chosen by the Parties. The transaction is expected to close in the second quarter of 2023.
F-21
| ● | Derivative instruments |
The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our Common Stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Common Stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Common Stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
| ● | Net loss per share |
The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.
| ● | Foreign currencies translation |
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company is the United States Dollar (“$”). The Company’s subsidiaries in the PRC maintain their books and records in their local currency, the Renminbi Yuan (“RMB”), which is the functional currency as being the primary currency of the economic environment in which these entities operate.
In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the $ are translated into $, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.
Translation of amounts from RMB into $ has been made at the following exchange rates for the respective year:
| December 31, 2022 | December 31, 2021 | |||||||
| Year-end RMB: $1 exchange rate | ||||||||
| Annual average RMB: $1 exchange rate | ||||||||
F-22
| ● | Related parties |
Parties, which can be a corporation or individuals, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.
| ● | Segment reporting |
ASC Topic 280, “Segment Reporting”
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization
structure as well as information about geographical areas, business segments and major customers in financial statements. For the year
ended December 31, 2022, the Company operated in
| ● | Fair value of financial instruments |
The carrying value of the Company’s financial instruments (excluding bank loans and convertible promissory notes): cash, accounts receivable, prepayments and other receivables, accounts payable, income tax payable, amount due to related parties, other payables and accrued liabilities approximate at their fair values because of the short-term nature of these financial instruments.
Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation under finance lease and short-term bank borrowing approximate the carrying amount.
The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
| Level 1: | Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets; |
| Level 2: | Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and |
| Level 3: | Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. |
Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The carrying amount of cash, restricted deposits, trade receivables, other accounts receivable, bank credit, trade payables and other accounts payable approximate their fair value due to the short-term maturity of these instruments.
F-23
| ● | Recent accounting pronouncements |
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
In October 2021, the FASB issued ASU No. 2021-08, “‘Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for the Company beginning after December 15, 2023, and are applied prospectively to business combinations that occur after the effective date. The Company does not expect the adoption of ASU 2021-04 will have a material effect on the consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
| 4. | THE ACQUISITION OF THE GUANZAN GROUP |
On February 1, 2020, the Company entered into a stock
purchase agreement to purchase the Guanzan Group (the “Guanzan SPA”). Guanzan is a distributor of medical devices whose customers
are primarily drug stores, private clinics, pharmaceutical dealers and hospitals in the Southwest of China (the “Guanzan Acquisition”).
Guanzan holds business licenses in the PRC such as a Business Permit for Medical Devices and a Recordation Certificate for Business Activities
Involving Class II Medical Devices, etc., which qualify Guanzan to engage in the distribution of medical devices in the PRC. Pursuant
to the Guanzan SPA, we agreed to purchase all the issued and outstanding shares of the Guanzan Group (the “Guanzan Shares”)
for RMB
The following summarizes the identified assets acquired and liabilities assumed pursuant to the Guanzan Acquisition as of March 18, 2020:
| Items | Amount | |||
| Assets: | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Advances to suppliers | ||||
| Amount due from related parties | ||||
| Inventories, net | ||||
| Prepayments and other receivables | ||||
| Property, plant and equipment, net | ||||
| Intangible assets | ||||
| Goodwill | ||||
| Liabilities: | ||||
| Short-term loans | ( | ) | ||
| Long-term loans due within one year | ( | ) | ||
| Accounts payable, trade | ( | ) | ||
| Advances from customers | ( | ) | ||
| Amount due to related parties | ( | ) | ||
| Taxes payable | ( | ) | ||
| Other payables and accrued liabilities | ( | ) | ||
| Long-term loans – non current | ( | ) | ||
| Non-controlling interests | ( | ) | ||
| Total-net assets | $ | |||
F-24
On November 20, 2020, the parties to the Guanzan
SPA entered into a Prepayment and Amendment Agreement (the “Prepayment Agreement”) for the prepayment of a portion of the
Guanzan Cash consideration in the amount of RMB
The following reconciles the identified assets acquired and liabilities assumed pursuant to the Guanzan Acquisition and the Prepayment and Amendment Agreement made on November 20, 2020:
| The value of the shares issued on March 12, 2020 | ||||
| The value of the shares issued on November 30, 2020 | ||||
| The value of the shares issued on August 27, 2021 | ||||
| Total consideration | $ |
The fair value of all assets acquired and liabilities
assumed is the estimated book value of Guanzan Group. Goodwill represent the excess of the fair value of purchase price over the amounts
assigned to the fair value of the assets acquired and the liabilities assumed of Guanzan Group at the acquisition date. Upon the Guanzan
Acquisition, the Company recognized its non-controlling interest in Shude in the amount of $
| 5. | THE ACQUISITION OF THE GUOYITANG HOSPITAL |
On December 9, 2020, the Company entered into an
agreement to acquire all of the outstanding equity of Guoyitang, the owner and operator of a private general hospital in Chongqing City,
a southwest city of China, with 100 hospital beds. The aggregate purchase price for Guoyitang was $
The following summarizes the identified assets acquired and liabilities assumed pursuant to the acquisition of Guoyitang as of February 2, 2021.
| Items | Amount | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Advances to suppliers | ||||
| Amount due from related parties | ||||
| Inventories, net | ||||
| Prepayments and other receivables | ||||
| Property, plant and equipment, net | ||||
| Operating lease-right of use assets | ||||
| Goodwill | ||||
| Liabilities | ||||
| Accounts payable, trade | ( | ) | ||
| Amount due to related parties | ( | ) | ||
| Taxes payable | ( | ) | ||
| Other payables and accrued liabilities | ( | ) | ||
| Lease liability-current | ( | ) | ||
| Lease liability-non current | ( | ) | ||
| Total net assets | $ | |||
The fair value of all assets acquired and liabilities assumed is the estimated book value of the Guoyitang. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Guoyitang at the acquisition date.
F-25
| 6. | THE ACQUISITION OF THE ZHONGSHAN HOSPITAL |
On December 15, 2020, the Company entered into an
agreement to acquire Zhongshan Hospital, a private hospital in the east region of China with 65 hospital beds. Zhongshan Hospital is a
general hospital known for its complex minimally invasive surgeries. Pursuant to the agreement, the Company agreed to purchase all
the issued and outstanding equity interests in Zhongshan Hospital in consideration of approximately $
The following summarizes the identified assets acquired and liabilities assumed pursuant to the Zhongshan Acquisition as of February 5, 2021:
| Items | Amount | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Inventories, net | ||||
| Prepayments and other receivables | ||||
| Property, plant and equipment, net | ||||
| Operating lease-right of use assets | ||||
| Goodwill | ||||
| Liabilities | ||||
| Short-term loans | ( | ) | ||
| Accounts payable, trade | ( | ) | ||
| Advances from customers | ( | ) | ||
| Amount due to related parties | ( | ) | ||
| Other payables and accrued liabilities | ( | ) | ||
| Lease liability-current | ( | ) | ||
| Lease liability-non current | ( | ) | ||
| Total net assets | $ | |||
The fair value of all assets acquired and liabilities assumed is the estimated book value of the Zhongshan. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Zhongshan Hospital at the acquisition date.
On December 28, 2022, we entered into an agreement
to transfer
| 7. | THE ACQUISITION OF THE QIANGSHENG, EURASIA AND MINKANG HOSPITALS |
On April 9, 2021, the Company and Chongqing Bimai
entered into a stock purchase agreement to acquire three private hospitals in the PRC, the Qiangsheng, Eurasia and Minkang hospitals.
F-26
The following summarizes the identified assets acquired and liabilities assumed pursuant to the Qiangsheng, Eurasia and Minkang acquisitions as of May 6, 2021:
| Items | Amount | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Inventories, net | ||||
| Advances and other receivables | ||||
| Property, plant and equipment, net | ||||
| Operating lease-right of use assets | ||||
| Goodwill | ||||
| Liabilities | ||||
| Accounts payable, trade | ( | ) | ||
| Advances from customers | ( | ) | ||
| Tax payable | ( | ) | ||
| Other payables and accrued liabilities | ( | ) | ||
| Lease liability-current | ( | ) | ||
| Lease liability-non current | ( | ) | ||
| Total net assets | $ | |||
The fair value of all assets acquired and liabilities assumed is the estimated book value of the Qiangsheng, Eurasia and Minkang hospitals. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Qiangsheng, Eurasia and Minkang Hospitals at the acquisition date.
On December 28, 2022, we entered into an agreement to transfer
| 8. | THE ACQUISITION OF ZHUODA |
On September 10, 2021, Guanzan entered into an agreement
to acquire Zhuoda. Pursuant to the agreement, Guanzan agreed to purchase all the issued and outstanding equity interests in Zhuoda
in consideration of $
The following summarizes the identified assets acquired and liabilities assumed pursuant to Zhuoda acquisition as of October 8, 2021:
| Items | Amount | |||
| Assets | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable, net | ||||
| Inventories, net | ||||
| Advances and other receivables | ||||
| Property, plant and equipment, net | ||||
| Operating lease-right of use assets | ||||
| Goodwill | ||||
| Liabilities | ||||
| Short-term loans | ( | ) | ||
| Accounts payable, trade | ( | ) | ||
| Advances from customers | ( | ) | ||
| Tax payable | ( | ) | ||
| Other payables and accrued liabilities | ( | ) | ||
| Lease liability-current | ( | ) | ||
| Lease liability-non current | ( | ) | ||
| Total net assets | $ | |||
The fair value of all assets acquired and liabilities assumed is the estimated book value of the Zhuoda. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Zhuoda at the acquisition date.
On October 19, 2022, the Company entered into an agreement to sell Zhuoda to its former owners.
F-27
Pursuant to the agreement,
the Company will sell
| 9. | THE SALE OF ZHUODA |
The Company’s wholly-owned Guanzan
subsidiary agreed to sell its
The summarized operating results of the Zhuoda and its subsidiary in the Company’s condensed consolidated statements of operations for the year ended December 31, 2022 consisted of the following:
| For the year ended December 31, | ||||
| 2022 | ||||
| Revenues | $ | |||
| Cost of revenues | ||||
| Gross profit | ||||
| Operating expense | ||||
| Other income (expense) | ( | ) | ||
| Loss before income taxes | ( | ) | ||
| Income tax expense | ||||
| Net income/(loss) from discontinued operations | $ | ( | ) | |
The assets and liabilities for discontinued operations of Zhuoda con sisted of the following items as of December 31, 2021:
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets from discontinued operations | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Advances to suppliers | ||||||||
| Amount due from related parties | ||||||||
| Inventories, net | ||||||||
| Prepayments and other receivables | ||||||||
| Operating lease-right of use assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Deferred tax assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease-right of use assets | ||||||||
| Goodwill | ||||||||
| Long-term investment | ||||||||
| Total non-current assets | ||||||||
| Total assets from discontinued operations | $ | $ | ||||||
| Liabilities from discontinued operations | ||||||||
| Current liabilities | ||||||||
| Short-term loans | $ | $ | ||||||
| Long-term loans due within one year | ||||||||
| Convertible promissory notes, net | ||||||||
| Accounts payable, trade | ||||||||
| Advances from customers | ||||||||
| Amount due to related parties | ||||||||
| Taxes payable | ||||||||
| Other payables and accrued liabilities | ||||||||
| Lease liability-current | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Lease liability-non current | ||||||||
| Long-term loans – non-current | - | |||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
F-31
| 10. | ACCOUNTS RECEIVABLE |
The majority of the Company’s pharmacy retail revenues are derived from cash sales, except for sales to the government social security bureaus or commercial health insurance programs, which typically settle once a month. The Company routinely evaluates the need for allowance for doubtful accounts based on specifically identified amounts that the management believes to be uncollectible. If the actual collection experience changes, revisions to the allowance may be required. As of December 31, 2022 and 2021, accounts receivable consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable, cost | $ | $ | ||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Accounts receivable, net | $ | $ | ||||||
| 11. | ADVANCES TO SUPPLIERS |
Advances to suppliers represent the amount the Company prepaid to its suppliers for merchandise for sale in the ordinary course of business. As of December 31, 2022 and 2021, the Company reported advances to suppliers as follow:
| December 31, 2022 | December 31, 2021 | |||||||
| Advances to suppliers, cost | $ | $ | ||||||
| Advances to suppliers, net | $ | $ | ||||||
| 12. | INVENTORIES |
The Company’s inventories consist of medical devices and pharmaceuticals that were purchased from third parties for resale to third party pharmacies, clinics, hospitals, and in our retail pharmacy stores, etc. Inventories consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Pharmaceuticals | $ | $ | ||||||
| Medical devices | ||||||||
| Less: allowance for obsolete and expired inventory | ( | ) | ( | ) | ||||
| $ | $ | |||||||
For the years ended December 31, 2022 and 2021,
the Company accrued allowances of $
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| 13. | PREPAYMENT AND OTHER RECEIVABLES |
Prepayments and other receivables represent the amount that the Company prepaid as rent deposits for its retail stores, hospitals and office space, special medical device purchase deposits, prepaid rental fee and professional services, advances to employees in the ordinary course of business, VAT deductibles and other miscellaneous receivables. The table below sets forth the balances as of December 31, 2022 and 2021, respectively.
| December 31, 2022 | December 31, 2021 | |||||||
| Deposits for rentals | $ | $ | ||||||
| Deposit for property rights trading | ||||||||
| Prepaid expenses and improvements of offices | ||||||||
| Deposit for purchase of medical devices | ||||||||
| VAT deductibles | ||||||||
| Deferred offering cost | ||||||||
| Deposit for sales platform | ||||||||
| Receivables from third party | ||||||||
| Others | ||||||||
| Less: allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Prepayments and other receivables, net | $ | $ | ||||||
Management evaluates the recoverable value of these
balances periodically according to the Company’s policy of credit and allowance for doubtful accounts. For the years ended December
31, 2022 and 2021, the Company recorded bad debt expenses of $
| 14. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Building | $ | $ | ||||||
| Office equipment | ||||||||
| Electronic equipment | ||||||||
| Furniture | ||||||||
| Vehicles | ||||||||
| Medical equipment | ||||||||
| Leasehold improvement | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation expenses for the years ended December
31, 2022 and 2021 were $
| 15. | INTANGIBLE ASSETS |
| December 31, 2022 | December 31, 2021 | |||||||
| Software | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
Amortization expense for the years ended December
31, 2022 and 2021 were $
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| 16. | LONG-TERM INVESTMENT |
| December 31, 2022 | December 31, 2021 | |||||||
| Long-term investment in Phenix Bio Inc | $ | $ | ||||||
| Total long-term investment | $ | $ | ||||||
On July 5, 2022, we entered into a stock purchase agreement (as amended
on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire
| 17. | LEASES |
Balance sheet information related to the Company’s operating leases as of December 31, 2022 and 2021 was as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Right of Use Assets | ||||||||
| Operating lease | $ | |||||||
| Total right of use assets | $ | |||||||
| Operating Lease Obligations | ||||||||
| Current operating lease liabilities | $ | |||||||
| Non-current operating lease liabilities | $ | |||||||
| Total Lease Liabilities | $ | |||||||
Lease liability maturities as of December 31, 2022, are as follows:
| Operating Lease | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total minimum lease payments | ||||
| Less: Amount representing interest | ( | ) | ||
| Total | $ | |||
| 18. | GOODWILL |
Changes in the carrying amount of goodwill for the years ended December 31, 2022 and 2021 consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Disposal of Zhuoda | ( | ) | ||||||
| Addition during the year | ||||||||
| Impairment during the year | ( | ) | ( | ) | ||||
| Goodwill | $ | $ | ||||||
The goodwill associated with the acquisition of (i)
Guanzan of $
As of December 31, 2022 and December 31, 2021, our
goodwill amounted to $
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| 19. | LOANS |
Short-term loans
| December 31, 2022 | December 31, 2021 | |||||||
| China Minsheng Bank | $ | $ | ||||||
| Postal Savings Bank of China | ||||||||
| Total | $ | $ | ||||||
Guanzan borrowed $
Shude borrowed $
For the years ended December 31, 2022 and 2021, the
interest expense on short-term loans amounted to $
Long-term loans
| December 31, 2022 | December 31, 2021 | |||||||
| Standard Chartered Bank | $ | $ | ||||||
| China Minsheng Bank | ||||||||
| Construction bank of China | ||||||||
| Chongwing Nan’an Zhongyin Fuden Village Bank Co. Ltd. | ||||||||
| We Bank | ||||||||
| China Construction Bank Chongqing Zhongxian Sub-branch | ||||||||
| Subtotal of long-term loans | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term loans – non current portion | $ | $ | ||||||
Guanzan borrowed $
Guanzan borrowed $
Guanzan borrowed $
F-35
For the years ended December 31, 2022 and 2021, the
interest expense on our long-term loans amounted to $
Long-term loans maturities as of December 31, 2022, are as follows:
| December 31, 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total | $ | |||
| 20. | CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE INSTRUCTIONS |
On May 18, 2020, we entered into a securities purchase
agreement (the “May SPA”) with two institutional investors (the “Institutional Investors”) to sell convertible
notes having a face amount of $
Pursuant to the May SPA, two 2020 Notes each in the
face amount of $
The May SPA, the 2020 Notes and the warrants provide that each and every reference to share prices, shares of Common Stock and any other numbers therein that relate to the Common Stock will be automatically adjusted for any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions that occur with respect to the Common Stock (each, a “Stock Combination Event”, and such date thereof, the “Stock Combination Event Date”) thereafter. The May SPA, the 2020 Notes and the 2020 Warrants further provide if after a Stock Combination Event, the Event Market Price is less than the conversion price (in the case of the Convertible Notes) or the exercise price (in the case of the warrants) then in effect (after giving effect to the above adjustments), then on the sixteenth (16th) trading day immediately following such Stock Combination Event Date, the conversion price or exercise then in effect on such sixteenth (16th) trading day (after giving effect to the above adjustments) will be reduced (but in no event increased) to the Event Market Price. “Event Market Price” means, with respect to any Stock Combination Event Date, the quotient determined by dividing (x) the sum of the dollar volume-weighted average price of the Common Stock for each of the five (5) trading days with the lowest dollar volume-weighted average price of the Common Stock during the fifteen (15) consecutive trading day period ending and including the trading day immediately preceding the sixteenth (16th) trading day after such Stock Combination Event Date, divided by (y) five (5). The price adjustment described in this paragraph is hereinafter referred to as the “Event Market Price Adjustment.”
The 2020 Notes, which matured on the eighteen-month
anniversary of the issuance date, were payable in installments and were convertible at the election of the investors at the conversion
price of $
On February 24, 2021, we entered into an amendment
to the May SPA with the Institutional Investors to increase the amount of the Additional Notes by $
| Consolidated | ||||||||
| December 31, 2022 | December 31, 2021 | |||||||
| Carrying value as at January 1 | ||||||||
| Interest accrued at effective interest rate | ||||||||
| Shares issued for interest payment | ||||||||
| Redemption of convertible promissory note | ( | ) | ( | ) | ||||
| Exchange differences | ||||||||
| Carrying value as at December 31 | ||||||||
F-36
On November 18, 2021, we entered into a securities
purchase agreement (
Upon evaluation, the Company determined that the two agreements contained embedded beneficial conversion features which met the definition of Debt with Conversion and Other Options covered under the Accounting Standards Codification topic 470 (“ASC 470”). According to ASC 470, an embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Convertible note – principal | $ | $ | ||||||
| Convertible note – discount | - | ( | ) | |||||
| $ | $ | |||||||
Additionally, the Company accounted for the embedded conversion option liability in accordance with the Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with these standards, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument. The initial fair value of the embedded conversion option liability associated with each Note was valued using the Black-Scholes model. The assumptions used in the Black-Scholes option pricing model are as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Dividend yield | $ | % | $ | % | ||||
| Expected volatility | % | % | ||||||
| Risk free interest rate | % | % | ||||||
| Expected life (year) | ||||||||
The value of the conversion option liability underlying the Notes and Convertible Notes as of December 31, 2022 and 2021 were . The Company recognized a loss from the increase in the fair value of the conversion option liability in the amount of for the year ended December 31, 2022 and 2021.
F-37
| 21. | RELATED PARTIES AND RELATED PARTIES TRANSACTIONS |
As of December 31, 2022 and 2021, the total amounts
payable to related parties and mil-level management was $
| 1. | As of December 31, 2022 and 2021, Amount payable to Mr. Yongquan Bi, the former Chief Executive Officer and Chairman of the Board of directors of the Company, of $ |
| 2. | As of December 31, 2022 and 2021, Amount payable to Mr. Li Zhou, the legal representative (general manager) of Guanzan, of $ |
| 3. | As of December 31, 2022 and 2021, Amounts payable to Mr. Fuqing Zhang, the Chief Executive Officer of Xinrongxin of $ |
| 4. | As of December 31, 2022 and 2021, Amounts payable to Mr. Youwei Xu, the financial manager of Xinrongxin of $ |
| 5. | As of December 31, 2022 and 2021, Amounts payable to Shaohui Zhuo, the general manager of Guoyitang of $ |
| 6. | As of December 31, 2022 and 2021, Amounts payable to Nanfang Xiao, a director of Guoyitang of $ |
| 7. | As of December 31, 2022 and 2021, Amounts payable to Jia Song, the manager of Guoyitang of $ |
| 8. | As of December 31, 2022, Other payable to Mr. Fnu Oudom of
$ |
| 9. | As of December 31, 2022, Other payable to Mr. Song Tie Wei
of $ |
| 22. | OTHER PAYABLES AND ACCRUED LIABILITIES |
Other payables and accrued liabilities consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Payroll payable | $ | $ | ||||||
| Salary payable – related party (1) | ||||||||
| Accrued operating expenses | ( | ) | ||||||
| Social security payable | ||||||||
| Acquisition payable (2) | ||||||||
| Long-term payable | ||||||||
| Other payables | ||||||||
| Other payables and accrued liabilities, net | $ | $ | ||||||
| (1) |
The Company entered into the employment Agreement
with Ms. Baiqun Zhong dated January 27, 2022, as the Interim CFO from May 21, 2021 until July 14, 2021 with base annual cash compensation
of $
Mr. Xiaoping Wang (the “COO Executive Employment
Agreement”) is for a term of
F-38
| 23. | STOCKHOLDERS’ EQUITY |
The Company is authorized to issue
On April 20, 2019 and October 7, 2019, the Company
issued an aggregate of
On March 12, 2020, the Company issued
From April 6, 2020 through October 20, 2020, Power
Up Lending Group Ltd., Crown Bridge Partners, LLC, Labrys Fund, LP, Morningview Financial, LLC,TFK Investments LLC, BHP Capital NY Inc.,
Firstfire Global Opportunities Fund, LLC and Platinum Point Capital LLC converted $
On November 30, 2020, the Company issued
On December 2, 2020, the Institutional Investor,
Hudson Bay Master Fund Ltd (“Hudson Bay”), converted $
From December 2, 2020, the Institutional Investor,
CVI Investments, Inc.(“CVI”), converted $
From January 4, 2021 to February 9, 2021, Hudson
Bay converted 2020 Notes in the aggregate principal amount of $
From January 4, 2021 to March 1, 2021, CVI converted
2020 Notes in the aggregate principal amount of $
On February 2, 2021, the Company issued
On February 3, 2021, a holder of a convertible note
issued on December 16, 2019 converted a part of the note in the aggregate principal amount of $
On February 11, 2021, the Company issued
On March 26, 2021, the Company issued
On April 20, 2021, the Company issued
On April 29, 2021, the Company issued
F-39
On June 18, 2021,
On July 23, 2021, the Company issued
From August 26, 2021 to November 30, 2021, Hudson
Bay converted 2020 Notes in the aggregate principal amount of $
From August 26, 2021 to November 30, 2021, CVI converted
Convertible Notes in the aggregate principal amount of $
On August 27, 2021, the Company issued
On September 22, 2021, the Company issued
On January 7, 2022, the Company issued
On January 24, 2022, the Company issued
On January 27, 2022, the Company entered
into an employment agreement with Mr. Xiaping Wang for a term of one (1) year, effective January 1, 2022. Under the agreement, Mr. Wang’s
compensation will consist of an annual salary of $
On February 1, 2022, the Company issued
On February 2, 2022, the Company issued a press release announcing a 1-for-5 reverse stock split of its common stock would become effective on February 3, 2022.
On July 18,
2022,
On December 8, 2022, the Company issued a press release announcing that a 1-for-10 reverse stock split of its common stock would become effective on December 9, 2022.
On November 23, 2022, the Zhouda
sale transaction closed, when
As of December 31, 2022, the Company has issued
From the legal perspective, the Reverse Split applied to the issued shares of the Company on the date of the Reverse Split and does not have any retroactive effect on the Company’s shares prior that date. However, for accounting purposes only, references to our ordinary shares in this annual report are stated as having been retroactively adjusted and restated to give effect to the Reverse Split, as if the Reverse Split had occurred by the relevant earlier date.
F-40
| 24. | TAXES |
Income Taxes
United States of America
BIMI is registered in the State of Delaware and is subject to the tax laws of United States of America.
The Company has no tax position at December 31, 2022 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company does not recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2022. The Company’s utilization of any net operating loss carry forward may be unlikely as a result of its intended activities.
As of December 31, 2022, the operations in the United
States of America incurred $
Hong Kong
The Company’s subsidiary, Pukung is incorporated
in Hong Kong and had no operating profit or tax liabilities during the period. Pukung is subject to tax at
The PRC
The Company’s subsidiaries operating in the
PRC are subject to the Corporate Income Tax Law of the PRC at a unified income tax rate of
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Loss before income taxes from operation in the PRC | $ | ( | ) | $ | ( | ) | ||
| Statutory income tax rate | % | % | ||||||
| Income tax expense at statutory rate | ( | ) | ( | ) | ||||
| Tax effect of non-deductible items | ||||||||
| Tax effect of non-taxable entities | ||||||||
| Tax effect of preferential tax rate | ( | ) | ||||||
| Income tax expense | $ | $ | ||||||
Value-Added Tax and Other Withholding and Other Levies
The Company’s products are sold in the PRC
and are subject to VAT on the gross sales price. The VAT rates range up to
The Company is also subject to other levies such
as stamp tax, unban construction tax, additional education tax which are charged by local governments. The rates of such levies are small
and vary among the different jurisdictions in which the Company does business. The Company also acts as the personal income tax withholding
agent for the salaries paid its employees. As of December 31, 2022 and 2021, the Company recorded other levies and withholding $
F-41
25. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common shares outstanding during the year. The dilutive effect of potential common shares outstanding is included in diluted net loss per share. The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2022 and 2021, giving effect to a 1-for-5 reverse split on February 3, 2022 and a 1-for-10 share reverse-split on December 9, 2022:
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss from continuing operation attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Net Income from discontinued operation attributable to common shareholders | ( | ) | ( | ) | ||||
| Total net loss attributable to common shareholders | ( | ) | ( | ) | ||||
| loss per share – basic and diluted: | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ( | ) | ||||
| Total | $ | ( | ) | $ | ( | ) | ||
26. STATUTORY RESERVES
Under the laws of the PRC the Company’s subsidiaries
are required to make appropriations to the statutory reserve based on after-tax net earnings and determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve
should be at least
27. SEGMENTS
General Information of Reportable Segments:
The Company operates in
The segments’ accounting policies are the same as those described in the summary of significant accounting policies. The Company’s chief operating decision maker (“CODM”), who is the CEO of the Company, evaluates performance of each of the segments based on profit or loss from continuing operations net of income tax.
The Company’s reportable business segments are strategic business units that offer different products. Each segment is managed independently because they require different operations and markets to distinct classes of customers.
F-42
Information about Reported Segment Profit or Loss and Segment Assets
BIMI, as the holding company, incurred a significant amount of general operating expenses, such as financing costs, that the Company’s CODM did not allocate to segments to evaluate the segments performance and allocate resources of the Company. In addition, except for depreciation and amortization of long-lived assets, the Company does not allocate the change in fair value of derivative liabilities and the amortization of discount of convertible notes to reporting segments in its reported profit or loss. The following amounts were used by the chief operating decision maker.
| For year ended December 31, 2022 | Retail pharmacy | Medical devices wholesale | Drugs wholesale | Medical services | Others | Total | ||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | - | $ | $ | |||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | - | $ | $ | |||||||||||||||||
| Depreciation, depletion, and amortization expense | $ | $ | $ | $ | - | $ | $ | |||||||||||||||||
| Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| For year ended December 31, 2021 | Retail pharmacy | Medical device wholesale | Drugs wholesale | Medical services | Others | Total | ||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Depreciation, depletion, and amortization expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Profit (loss) | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Reconciliations of Reportable Segment Revenues, Profit or Loss, and Assets, to the Consolidated Totals as of December 31, 2022 and 2021 and for the years ended December 31, 2022 and 2021.
| Revenues | Year ended December 31, 2022 | |||
| Total revenues from reportable segments | $ | |||
| Other revenues | ||||
| Elimination of inter segments revenues | ( | ) | ||
| Total consolidated revenues | $ | |||
| Profit or loss | ||||
| Total (loss) from reportable segments | $ | ( | ) | |
| Elimination of inter segments profit or loss | ( | ) | ||
| Unallocated amount: | ||||
| Amortization of discount of Notes and Convertible Notes | ( | ) | ||
| Other corporation expense | ( | ) | ||
| Total net loss | $ | ( | ) | |
| Assets | ||||
| Total assets from reportable segments | $ | |||
| Elimination of intersegments receivables | ( | ) | ||
| Unallocated amount: | ||||
| Other unallocated assets – Phenix Bio Inc | ||||
| Other unallocated assets – Xinrongxin | ||||
| Other unallocated assets – Liaoning Boyi | ||||
| Other unallocated assets – Dalian Boyi | ||||
| Other unallocated assets – Chongqing Bimai | ||||
| Other unallocated assets – BIMI | ||||
| Total consolidated assets | $ | |||
F-43
| Revenues | Year ended December 31, 2021 | |||
| Total revenues from reportable segments | $ | |||
| Other revenues | ||||
| Elimination of inter segments revenues | ( | ) | ||
| Total consolidated revenues | $ | |||
| Profit or loss | ||||
| Total income/(loss) from reportable segments | $ | |||
| Elimination of inter segments profit or loss | ( | ) | ||
| Unallocated amount: | ||||
| Amortization of discount of Notes and Convertible Notes | ( | ) | ||
| Other corporation expense | ( | ) | ||
| Total net loss | $ | ( | ) | |
| Assets | ||||
| Total assets from reportable segments | $ | |||
| Elimination of intersegments receivables | ( | ) | ||
| Unallocated amount: | ||||
| Other unallocated assets –Dalian Boyi | ||||
| Other unallocated assets –Chongqing Bimai | ||||
| Other unallocated assets – Liaoning Boyi | ||||
| Other unallocated assets –Xinrongxin | ||||
| Other unallocated assets – BIMI | ||||
| Total consolidated assets | $ | |||
28. ENTITY-WIDE INFORMATION AND CONCENTRATIONS OF RISK
Entity-Wide Information
| (a) | Revenues from each type of products and services |
For the years ended December 31, 2022 and 2021, respectively, the Company reported revenues for each type of product as follows:
| For the years ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Medical devices wholesale | $ | $ | ||||||
| Pharmaceuticals wholesale | ||||||||
| Medical services | ||||||||
| Pharmacy retail | ||||||||
| Others | ||||||||
| Total | $ | $ | ||||||
| (b) | Geographic areas information |
For the years ended December 31, 2022 and 2021, respectively, all of the Company’s revenues were generated in the PRC. There were no long-lived assets located outside of the PRC as of December 31, 2022 and 2021.
F-44
| (c) | Major customers |
The Company engages in wholesale medical devices,
wholesale pharmaceuticals, medical services and retail pharmacies in the PRC. All revenues were generated from customers located in the
PRC. For the year ended December 31, 2022, no customer accounted for more than
The customers who accounted for
| For the year
ended December 31, 2021 | As of December 31, 2021 | |||||||||||||
| Customers | Segment | Sales | Percentage of total sales | Account receivables | ||||||||||
| Customer B | $ | | % | $ | ||||||||||
| Customer A | % | |||||||||||||
| Customer D | % | |||||||||||||
| (d) | Major vendors |
For the year ended December 31, 2022, the vendors
who accounted for
| For the year
ended December 31, 2022 | As of December 31, 2022 | |||||||||||||
| Vendors | Segment | Purchases | Percentage of total purchases | Account payable | ||||||||||
| Vendor A | $ | | % | $ | ||||||||||
| Vendor B | ||||||||||||||
For the year ended December 31, 2021, the vendors
who accounted for
| For the year
ended December 31, 2021 | As of December 31, 2021 | |||||||||||||
| Vendors | Segment | Purchases | Percentage of total purchases | Account payable | ||||||||||
| Vendor A | $ | % | $ | |||||||||||
| (e) | Credit risk |
Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
F-45
| (f) | Interest rate risk |
The Company’s interest-rate risk arises from convertible promissory notes, short-term and long-term loans. The Company manages interest rate risk by varying the issuance and maturity dates variable rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. As of December 31, 2022 and 2021, convertible promissory notes, short-term and long-term loans were at fixed rates.
| (g) | Exchange rate risk |
The reporting currency of the Company is the United States Dollar, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between $ and RMB. If RMB depreciates against $, the value of RMB revenues and assets as expressed in $ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.
| (h) | Economic and political risks |
The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operation may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The outbreak of COVID-19 pandemic has expanded all over the world since the beginning of 2020, which has greatly slowdown the growth of the global economy, including the PRC, and this effect might be continued until the pandemic of COVID-19 was over. The slowdown of the growth of the PRC’s economy might has an adverse effect on our current business and future developments if we would not catch the opportunities of the increasing demand of medical products and the medical services in China.
The Company’s operations in the PRC are subject to special considerations. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.
29. SUBSEQUENT EVENT
On December 28, 2022, we entered into an agreement
to transfer
On December 28, 2022, we entered into an agreement
to transfer
On July 5, 2022, we entered into a stock purchase agreement (as amended
on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire
On December 6, 2022, we sold a convertible promissory note (the “Note”)
to Mr. Fnu Oudom for $
On February 27, 2023, the Company entered into a stock purchase Agreement
(the “February SPA”) with Mr. Oudom, whereby the Company agreed to sell
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