BIMI MEDICAL INTERNATIONAL INC. – 10-K/A 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.
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 Chinadue 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 in each of the last 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 millionin 2018 and $2.18 millionin 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 Groupand on March 31, 2020, we entered into an agreement for the sale of the NF Group. The sale closed on June 23, 2020when the $10 millionsales price was paid to us in full. Our current operations are focused 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 Guanzan's and other company resources to the pharmacy chain, such efforts failed to help improve Boqi Zhengji's poor performance. To avoid exposing our other business to further risks and potential joint liabilities, we decided to divest the pharmacy chain. On December 11, 2020we entered into an agreement to sell Boqi Zhengji for $1,700,000in 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 Groupand Boqi Zhengji and the actions taken to fulfill the plans resulted in our classifying the businesses of NF Groupand 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 Groupand 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 years ended December 31,
March 18, 2020, we completed the Guanzan acquisition. The rationale for the acquisition was for us to further 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 Chinaand gaining a wider footprint in the PRC. On February 2, 2021, we acquired Guoyitang, the owner and operator of a private general hospital in Chongqingwith 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 Chinawith 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 marks 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 marks 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 Zhuodaacquisition marked the second step in our effort to further penetrate the healthcare market in southwest China. On December 20, 2021, we entered into a stock purchase agreement to acquire Mali Hospital, a private OB-GYN specialty hospital with 199 beds located in Bengbu city in the southeast region of the PRC. The closing of the Mali Hospitalacquisition is expected to take place in April 2022, subject to necessary regulatory approvals.
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, 2021and 2020, we incurred net losses of approximately $34.92 millionand $1.88 million, respectively. In addition, we reported continuing cash out flow of $1.28 millionand $4.36 millionfrom our operating activities for the years ended December 31, 2021and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $47.90 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 it will be able to implement its business plan to expand our company's operations and generate sufficient revenues to meet its 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 the 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. 56
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 that the following critical accounting policies affect our most significant judgments and estimates used in the preparation of our consolidated financial statements.
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;
? Attribute the transaction price to the performance obligations of the contract;
? 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. 57 Inventories
Inventories are recorded at the lower of cost or market value (net realizable value), cost being determined using the weighted average method. Costs include materials, labor and manufacturing overhead. We review historical sales activity quarterly to determine overstock, slow moving and potentially obsolete items and also assess the impact of any anticipated changes in future demand. We provide stock allocations based on excess and obsolete inventory determined primarily by customer demand.
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 20 years 5 % Electronic equipment 3 years 5 % Office equipment 3 years 5 % Furniture 5 years 5 % Medical equipment 10 years 5 % Vehicle 4 years 5 % Leasehold Improvement Shorter of lease 5 % term or useful life 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. Leases
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.
Goodwillrepresents 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. Goodwillis not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwillis 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. 58 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, 2021and 2020, the Company recorded impairments for goodwill of $26,128,171and $Nil, 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 the 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 Zhuodaonly exceeded its carrying value by approximately 5.62%. Accordingly, the goodwill associated with Zhuoda, 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 the discounted estimated future income statement. Assumptions used to estimate fair value include management’s estimates of future growth rates, revenue and discount rates. We disclose the method used to determine the fair values of our reporting units for purposes of our annual impairment review as using the income-based 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 include revenue growth, profit margins, terminal value growth rates, capital expenditure projections, assumed tax rates, discount rates, other assumptions deemed reasonable by management and relevant comparable to a 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 adversely affect the key assumptions are general economic conditions, regulatory developments, changes in category growth rates due to consumer preferences, loss of key personnel, divestiture of a significant portion of a reporting unit and competitive business.
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.
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. 59 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 Currency 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.
January 27, 2022, we entered into an employment agreement with Mr. Xiaping Wangfor a term of one (1) year, effective January 1, 2022. Under the agreement, Mr. Wang'scompensation will consist of an annual salary of $500,000in cash and stock compensation of 500,000 shares of our Common Stock. We issued 500,000 shares of our Common Stock to Mr. Wangon February 1, 2022.
February 1, 2022, we entered into an Amendment and Settlement Agreement to amend the Stock Purchase Agreement relating to the acquisition of the Zhongshan hospital. The amendment reduced post-closing performance targets and payments and settled certain payments as a result of such amendment. Pursuant to the amendment, the purchase price was retroactively reduced by 50% from RMB 120,000,000(currently approximately $18,864,957) to RMB 60,000,000(currently approximately $9,432,479), the closing cash payment was retroactively reduced from RMB 40,000,000to nil and the deferred closing stock payment was retroactively reduced from 400,000 shares of our Common Stock to 200,000 shares of Common Stock. The 2021 revenue target was also reduced by 50% from RMB 30,000,000to RMB 15,000,000, the 2021 profit target was reduced from RMB 5,000,000to RMB 2,500,000, the 2022 revenue target was reduced from RMB 33,000,000to RMB 16,500,000and the 2022 profit target was reduced from RMB 5,500,000to RMB 2,750,000. The parties agreed that immediately after the signing of the amendment, the seller of Zhongshan hospital will execute and deliver all documents as requested by us in order to cause the return of 200,000 shares of our Common Stock on a post reverse split basis and that prior to December 31, 2022, the seller will return RMB 40,000,000to us in cash, which amount was previously paid by us. On February 2, 2022, we announced a 1-for-5 reverse split of our Common Stock, which began to trade on Nasdaq Capital Market on February 3, 2022, on a split adjusted basis. Segment Reporting In 2021, 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. 60 RESULTS OF OPERATIONS
Comparison of the years ended
Percentage Amount increase increase 2021 % of Revenues 2020 (decrease) (decrease) Revenues
$ 27,079,795100 % $ 12,844,902 $ 14,234,893111 % Cost of revenues 22,483,404 83 % 10,402,085 12,081,319 116 % Gross profit 4,596,391 17 % 2,442,817 2,153,574 88 % Operating expenses 12,703,345 47 % 6,255,098 6,448,247 103 %
Other income (expense) (26,795,423 ) (99 )% 460,552 (27,255,975 ) (5918 )% Loss before income tax (34,902,377 ) (129 )% (3,351,729 ) (31,550,648 ) 941 % Income tax expense 19,368 0 % 434,306 (414,938 ) (96 )% Net loss from continuing operations (34,921,745 ) (129 )% (3,786,035 ) (31,135,710 ) 822 % Income from operations of discontinued operations - 0 % 1,908,110 (1,908,110 ) (100 )% Less: non-controlling interest 64,211 0 % 119,158 (54,947 ) (46 )% Net loss attributable to BIMI International Medical Inc.
$ (34,985,956 )(129 )% $
$ (32,988,873 )1652 % Revenues Revenues for the years ended December 31, 2021and 2020 were $27,079,795and $12,844,902, respectively. The increase of $14,234,893is mainly due to the full year of revenues of the Guanzan Group, which was acquired in March 2020and acquisitions of the Guoyitang, Qiangsheng, Eurasia and Minkang hospitals in 2021. 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, $16,905,498and $6,398,379, respectively. For the year ended December 31, 2020,the revenues of the retail pharmacies, wholesale medical devices and wholesale pharmaceuticals were $84,087, $3,059,462and $ 9,701,353, respectively. 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, 2021was $22,483,404compared with $10,402,085for the year ended December 31, 2020. The increase reflected the costs associated with operations of the Guanzan Group, Guoyitang, Qiangsheng, Eurasia and Minkang hospitals. Cost of revenue of the retail pharmacies, wholesale medical devices, wholesale pharmaceuticals and medical services for the year ended December 31, 2021were $200,162, $3,033,702, $16,450,014and $2,733,792, respectively.
Cost of revenue for wholesale medical devices, wholesale pharmaceuticals and retail pharmacies for the year ended
For the year ended
December 31, 2021we had a gross profit margin of 17% compared with gross profit margin of 19% for the year ended December 31, 2020. The decrease in the gross profit margin in 2021 was mainly due to the decrease in the wholesale pharmaceuticals segment from 19.1% in 2020 to 2.7% in 2021 caused by a change in the product mix to products with a lower gross profit margin.
The gross profit margin of our retail pharmacy, wholesale medical device, wholesale pharmaceutical and medical services segments for the year ended
The gross profit margin of our retail pharmacies, wholesale medical devices and wholesale pharmaceuticals segments for the year ended
December 31, 2020were 16.6%,18.9% and 19.1%, respectively. 61 Operating expenses
Operating expenses consist primarily of amortization of convertible notes, audit fees and legal services, other professional service fees and promotional expenses.
Operating expenses were
$12,703,345for the year ended December 31, 2021compared to $6,255,098for the year ended December 31, 2020, an increase of $6,207,182, or 99%. The reason is the increase in salary and selling expenses for the year ended December 31,2021. The increase of selling expenses is mainly due to the acquisitions of the Guoyitang, Qiangsheng, Eurasia and Minkang hospitals in 2021.Operating expenses for the year ended December 31, 2021consisted mainly of salary and employee benefits in the amount of $2,273,313, amortization of the convertible notes in the amount of $1,977,401, selling expenses in the amount of $3,180,252, depreciation and amortization expense of $244,116, audit fees of $543,299, and other professional service fees in the amount of $906,852. Operating expenses for the year ended December 31, 2020consist mainly of amortization of the convertible notes in the amount of $2,091,927, meeting and promotional expenses in the amount of $938,086, depreciation and amortization expense of $56,041, audit fee of $329,693, convertible notes issuance-related costs in the amount of $211,425, legal fees of $172,575and other professional service fees in the amount of $880,505. For the year ended December 31, 2021, operating expenses of $4,425,022were allocated to the parent company, which include amortization of convertible notes of $1,977,401and professional service fees of $2,787,874. For the year ended December 31, 2020, operating expenses of $4,365,751were allocated to the parent company, which include amortization of convertible notes of $2,091,927and professional service fees of $903,573. Operating expenses of the wholesale medical devices segment for the years ended December 31, 2021and 2020 were $633,241and $88,932,respectively,with the increase in 2021 attributable to the expansion of this business. Operating expenses of the wholesale pharmaceuticals segment for the years ended December 31, 2021and 2020 were $3,387,536and $842,421, respectively. Operating expenses of the retail pharmacies segment for the years ended December 31, 2021and 2020 were $ 681,140and $376,415, respectively.
Other income (expenses)
For the year ended
December 31, 2021, we reported other expense of $26,795,423relating to the impairment of goodwill compared to other income of $460,552for the year ended December 31, 2020. For the year ended December 31, 2021, the Guanzan Groupincurred an impairment charge of $ 1,923,071. Such impairment charge was recorded after the completion of an earn-out period. Guoyitang incurred an impairment charge of $7,154,393, primarily because the 2021 performance targets set forth in Guoyitang's acquisition agreement were not met as a result of the pandemic and lockdowns. Zhongshan hospital incurred an impairment charge of $9,134,277, primarily because its 2021 performance targets were not met as a result of the pandemic and lockdowns. The Qiangsheng, Eurasia and Minkang hospitals incurred an impairment charge of $7,916,431, primarily because their 2021 performance targets were not met as a result of the pandemic and lockdowns. In 2021, the exchange rate of Chinese RMB to US dollars increased from $1= ¥6.4515 to $1= ¥ 6.3757. Since substantially all of our assets and revenues are denominated in RMB, we reported exchange gains of $24,967for the year ended December 31, 2021, taking into consideration of such exchange rate change and exchange gains/losses related to non-currency assets and liabilities, compared to exchange gains of $547,114for the year ended December 31, 2020.
Net loss from continuing operations
Net loss from continuing operations was
$34,921,745for the year ended December 31, 2021compared to a net loss of $3,786,035for the year ended December 31, 2020, an increase $31,135,710, which was primarily due to the impairment of goodwill and a result of the significant increase in operating expenses of our consolidated company.
Operating profit/(loss) from discontinued operations
As a result of the plans to dispose of the
NF Groupand Boqi Zhengji and the actions taken to fulfill the plans, the businesses of the NF Groupand Boqi Zhengji 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 NF Groupand Boqi Zhengji are presented under the line item net loss from discontinued operations for the years ended December 31, 2020. Income from the discontinued operation was $Nil for the year ended December 31, 2021compared to income of $1,908,110for the year ended December 31, 2020, which was primarily due to the investment income recognized from the disposal of NF Groupand Boqi Zhengji for the year ended December 31, 2020. 62 Net Loss
We recorded a net loss of
compared to a net loss of
CASH 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, 2021, we had cash of $4,797,849and negative working capital of $932,493as compared to cash of $135,309and working capital of $9,619,274on December 31, 2020. Beginning on September 27, 2019, we sold $1,534,250of convertible notes to various investors that matured during the period beginning September 27, 2020and 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 the above notes were converted into shares of Common Stock during the year ended December 31, 2020. 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 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 $1,135,884in connection with the acquisition.
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 $1,700,000on December 11, 2020. On December 14, 2020, we entered into a stock purchase agreement (the "Cogmer SPA") 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 Cogmer SPA, the Company 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 400,000 shares of our common stock and the payment of RMB 76,000,000in cash. In December, 2020, we paid a deposit of $3,065,181to 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 $3,065,181from the shareholders of Cogmer on November 29, 2021. 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 $6,550,000at 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 $14.225per share (post-Split price (as defined below) and subject to the Event Market Price Adjustment). 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 at an initial exercise price of $14.225per 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 $2,225,000were issued to the Institutional Investorsin consideration of the payment of $1,750,000in cash for each 2020 Note. 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." 63 The 2020 Notes, which matured on the eighteen-month anniversary of the issuance date, are payable in installments and are convertible at the election of the investors at the conversion price of $12.95per 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 $14.23per 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 $14.23per 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 Investorsunder certain circumstances. On February 24, 2021, we entered into an amendment to the May SPA with the Institutional Investorsto increase the amount of the Additional Notes by $3,300,000to $5,400,000. On February 26, 2021, Additional Notes in an aggregate original principal amount of $5,400,000were 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 $14.23per 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 $14.23per 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 Investorsto 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 $3,250,000in 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 $3,900,000under 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 Investorsat 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 $3.55per 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 $3.55per 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. The Company implemented a reverse stock split (the "Split") on February 2, 2022at the ratio of 5 to 1. 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. There has been no conversion of the 2021 Notes or exercise of the 2020 Warrants or the 2021 Warrants as of the date of this report.
Our operating subsidiaries in the PRC have individually incurred debt in the course of their activities.
Short-term loans Zhongshan borrowed
$223,500from Chaohu Yangzi Rural Commercial Bankon July 27, 2021. The loan is due on July 27, 2022with an interest rate of 5.80%. Shude borrowed $119,200from China Minsheng Banking Corp. Ltd. on March 17, 2022, which is due on March 17, 2023, with an interest rate of 6.2%. Zhuodaborrowed $89,400from the Industrial and Commercial Bank of China on March 15, 2022, which is due on September 11, 2022, with an interest rate of 3.7%. Zhuodaborrowed $149,000from the Agricultural Bank of China on November 30, 2021, which is due on November 30, 2022, with an interest rate of 3.85%. Zhuodaborrowed $298,000from the Construction Bank of Chinaon July 8, 2021for one year, with an interest rate of 3.70%. Qianmei borrowed $47,441from China Construction Bank on November 23, 2021, which is due on November 2, 2022, with an interest rate of 3.85%.. Guanzan borrowed $730,102from Postal Savings Bank of China on November 29, 2021, which is due on November 28, 2022, with an interest rate of 5.4%. long-term loans Guanzan borrowed $76,317from We Bankon December 26, 2020, for a term of two years, with an interest rate of 13.68%. Guanzan borrowed $81,941from We Bankon July 24,2021, for a term of two years, with an interest rate of 13.68Guanzan borrowed $55,343from Huaneng Guicheng Trust Co., LTDon October 7, 2021, which is due on September 26,2023, with an interest rate of 12.96%. Guanzan borrowed $87,143from 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%. Shude borrowed $37,250and $7,450from We Bankon December 10, 2020, which are due on December 10, 2022, with an interest rate of 10.80%. Shude borrowed $2,483from We Bankon December 10, 2020, which is due on December 2, 2022, with an interest rate of 8.64%. Shude borrowed $24,958from We Bankon January 5, 2021, which is due on January 2, 2023, with an interest rate of 12.24%. Shude borrowed $30,893on December 3, 2020from Standard Chartered Bank, for a term of two years, with an interest rate of 12.35%. Zhuodaborrowed $142,792from Minsheng Bankon May 10, 2022, which is due on May 9, 2024, for a term of two years, with an interest rate of 14.58%. 64
February 1, 2022, the Company entered into an Amendment and Settlement Agreement to amend the Stock Purchase Agreement relating to the acquisition of the Zhongshan hospital. The amendment reduced post-closing performance targets and payments and settled certain payments as a result of such amendment. Pursuant to the amendment, the purchase price was retroactively reduced by 50% from RMB 120,000,000(currently approximately $18,864,957) to RMB 60,000,000(currently approximately $9,432,479), the closing cash payment was retroactively reduced from RMB 40,000,000to nil and the deferred closing stock payment was retroactively reduced from 400,000 shares of our Common Stock to 200,000 shares of Common Stock. The 2021 revenue target was also reduced by 50% from RMB 30,000,000to RMB 15,000,000, the 2021 profit target was reduced from RMB 5,000,000to RMB 2,500,000, the 2022 revenue target was reduced from RMB 33,000,000to RMB 16,500,000and the 2022 profit target was reduced from RMB 5,500,000to RMB 2,750,000.As a result of the amendments, the parties agreed that immediately after the signing of the amendment, the seller of Zhongshan hospital will execute and deliver all documents as requested by us in order to cause the return of 200,000 shares of our Common Stock and that prior to December 31, 2022, the seller will return RMB 40,000,000to us in cash. 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, 2021and 2020, respectively. For the years ended December 31, 20212020
Net cash used in operating activities
Net cash used by investing activities (696,517 ) (724,465 ) Net cash provided by financing activities 6,140,539 3,989,066 Effect of exchange rate on cash
494,243 386,840 Net cash inflow
$ 4,662,540 $ 133,708Operating Activities We used $1,275,725in our operations during the year ended December 2021, as compared to $3,517,733used in our operations in the year ended December 31, 2020, which included cash used in the discontinued operations of $843,382. The decrease in the amount of cash used in operating activities was primarily attributable to the change in prepayments and other receivables and operating lease-right of use assets. During the year ended December 31, 2021, adjustments for non-cash items primarily included the gains recorded on the amortization of convertible notes of $554 thousand.
Cash used in investing activities was
$696,517for the year ended December 31, 2021compared to $724,465used in investing activities for the year ended December 31, 2020. Cash used in investing activities for the year ended December 31, 2021was due to the payment for the acquisition of Qiangsheng, Eurasia and Mingkang Hospitals, purchase of property, plant and equipment and the return of the funds paid in the year of 2020 as a deposit for the purchase of Cogmer, which acquisition was not completed and was cancelled in 2021.
Cash from our financing activities was
Potential contractual obligations
65 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 have no significant 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.
© Edgar Online, source