BGM 6-K
BGM Group Ltd. (BGM)
Exhibit 99.1
QILIAN INTERNATIONAL HOLDING GROUP LIMITED
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Condensed Consolidated Financial Statements | |
Condensed Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023 | F-2 |
F-3 | |
F-4 | |
F-5 | |
F-6 |
F-1
Qilian International Holding Group Limited and Subsidiaries
Condensed Consolidated Balance Sheets
As of March 31 | As of September 30 | |||||
| 2024 |
| 2023 | |||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalent | $ | | $ | | ||
Short term investment | — | | ||||
Accounts receivable, net |
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Bank acceptance notes receivable | | | ||||
Inventories, net |
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Prepayment to suppliers, net |
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Investment in trading securities | | | ||||
Other current assets | | | ||||
TOTAL CURRENT ASSETS |
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Property, plant and equipment, net | ||||||
Construction in progress | ||||||
Intangible assets, net |
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Long term investment | — | | ||||
Right-of-use assets |
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Deferred tax assets |
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Prepayments for property and equipment |
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TOTAL ASSETS | | | ||||
CURRENT LIABILITIES: | ||||||
Bank loans |
| — |
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Accounts payable | | | ||||
Contract liabilities |
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Deferred government grants-current | | | ||||
Taxes payable |
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Lease liabilities, current |
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Accrued expenses and other payables |
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TOTAL CURRENT LIABILITIES |
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LONG TERM LIABILITIES |
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Non-current lease liabilities, noncurrent |
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Deferred government grants - noncurrent |
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TOTAL LIABILITIES |
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Commitments and contingencies |
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EQUITY: |
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Ordinary Shares, $ |
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Additional paid-in capital |
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Statutory Reserve |
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
| ( | ||
Total shareholders’ equity attributable to Qilian International |
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Noncontrolling interests |
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TOTAL EQUITY |
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TOTAL LIABILITIES AND EQUITY | |
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The accompanying notes are an integral part of these consolidated financial statements.
F-2
Qilian International Holding Group Limited and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
For the six months ended March 31 | |||||||||
2024 | 2023 | 2022 | |||||||
NET REVENUE | $ | |
| $ | |
| $ | | |
COST OF REVENUE | |
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GROSS PROFIT | |
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SELLING, GENERAL AND ADMINISTRATIVE, RESEARCH AND DEVELOPMENT EXPENSES | |
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INCOME (LOSS) FROM OPERATIONS | ( |
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Interest income (expense), net | |
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Investment income (loss) | | | ( | ||||||
Grant income | | | | ||||||
Other income (expenses) | ( |
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Total Other income (expense) | |
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| ( | ||||
INCOME BEFORE INCOME TAX PROVISION | |
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PROVISION FOR INCOME TAXES | |
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NET INCOME | |
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Less: net income (loss) attributable to non-controlling interest | ( |
| ( |
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NET INCOME (LOSS) ATTRIBUTABLE TO QILIAN INTERNATIONAL HOLDING GROUP LIMITED | $ | | $ | | $ | | |||
OTHER COMPREHENSIVE INCOME |
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Foreign currency translation adjustment | |
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COMPREHENSIVE INCOME | |
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Less: comprehensive income (loss) attributable to non - controlling interests | ( |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO QILIAN INTERNATIONAL HOLDING GROUP LIMITED | | | | ||||||
Earnings per common share - basic and diluted | $ | | $ | | $ | ||||
Weighted average shares - basic and diluted | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
Qilian International Holding Group Limited and Subsidiaries
Condensed Consolidated Statements of Changes in Equity
Accumulated | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
Ordinary Shares | Additional | Comprehensive | Shareholders’ | Non-controlling | Total | |||||||||||||||||||||
| Shares |
| Amount |
| Paid-in Capital |
| Retained Earnings |
| Statutory Reserve |
| Income |
| Equity |
| Interests |
| Equity | |||||||||
Balance as of September 30, 2021 | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Net income for the period | — | — | — | | — | — | | | | |||||||||||||||||
Appropriation for statutory reserve | — | — | — | ( | | — | — | — | — | |||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | | | | | |||||||||||||||||
Balance as of March 31, 2022 | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Balance as of September 30, 2022 | | $ | | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||||
Net income (loss) for the period | — | — | — | | — | — | | ( | | |||||||||||||||||
Acquisition of equity interest from unrelated third party shareholders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||
Appropriation for statutory reserve | — | — | — | ( | | — | — | — | — | |||||||||||||||||
Dividend | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | | | | | |||||||||||||||||
Balance as of March 31, 2023 | | $ | | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||||
Balance as of September 30, 2023 | | $ | | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||||
Net income (loss) for the period | — | — | — | | — | — | | ( | | |||||||||||||||||
Appropriation for statutory reserve | — | — | — | ( | | — | — | — | — | |||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | | | | | |||||||||||||||||
Balance as of March 31, 2024 | | $ | | $ | | $ | | $ | | $ | ( | $ | | $ | | $ | | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
Qilian International Holding Group Limited and Subsidiaries
Condensed Consolidated Statements of Cash flows
For the six months ended March 31 | |||||||||
2024 | 2023 | 2022 | |||||||
Cash flows from operating activities: |
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Net Income | $ | |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Non-cash operating lease expenses |
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Depreciation and amortization |
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Provision of doubtful accounts |
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| ( | |||
Inventory reserve |
| ( |
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| ( | |||
Deferred tax expense | ( | | | ||||||
Unrealized loss (gain) from investment in securities |
| ( |
| ( |
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investment income | | | ( | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
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| ( |
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Bank acceptance notes receivable |
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| ( |
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Bank acceptance notes payable |
| — |
| — |
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Inventories |
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| ( |
| ( | |||
Prepayment to suppliers |
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Other current assets |
| ( |
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Accounts payable |
| ( |
| ( |
| ( | |||
Contract liabilities |
| ( |
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Contract liabilities - related parties |
| — |
| — |
| ( | |||
Deferred government grants |
| ( |
| ( |
| ( | |||
Tax payables |
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Accrued expenses and other payables |
| ( |
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Lease liabilities |
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| ( |
| ( | |||
Net cash provided by (used in) operating activities |
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| ( |
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Cash flows from investing activities: |
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Purchase of property and equipment |
| ( |
| ( |
| ( | |||
Purchase of intangible assets | — | ( | — | ||||||
Cash received from disposal of long term investment |
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| — |
| — | |||
Dividend received |
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| — |
| — | |||
Prepayment for peroty and equipment purchase |
| — |
| — |
| ( | |||
Purchase of non controlling interest | — | ( | — | ||||||
Net cash provided by (used in) investing activities |
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| ( |
| ( | |||
Cash flows from financing activities: |
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Proceeds from bank loans |
| — |
| — |
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Repayment of bank loans |
| ( |
| ( |
| — | |||
Proceeds from (Repayment of) bank notes payable | — | ( | — | ||||||
Dividend paid |
| — |
| ( |
| — | |||
Net cash provided by (used in) financing activities |
| ( | ( | | |||||
Effect of exchange rate change on Cash, cash equivalents and restricted cash |
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Net increase (decrease) in Cash, cash equivalents and restricted cash |
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| ( |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | |
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Supplemental cash flow information |
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Cash paid for interest | $ | — | $ | — | $ | | |||
Cash paid for income taxes | $ | — | $ | | $ | | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5
QILIAN INTERNATIONAL HOLDING GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Qilian International, its subsidiaries, the VIE and VIE’s subsidiaries (the “Company,” “we,” “us,” “our,” and “QLS”) are principally engaged in the development, manufacture, marketing, and sale of licorice products, oxytetracycline products, traditional Chinese medicine derivatives (“TCMD”) product, heparin product, sausage casings, and fertilizers.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company, its subsidiaries, the VIE and VIE’s subsidiaries condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The condensed consolidated financial statements include the financial statements of Qilian International, and its subsidiaries, the VIE and VIE’s subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. See Risks and Uncertainties disclosure for VIE structures in China. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our 2023 Annual Report on Form 20-F. These interim results are not necessarily indicative of results for the full year.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. The reclassification has no impact on the total assets and total liabilities as of September 30, 2023or on the total cash flows and the consolidated statements of operations and comprehensive income (loss) and change in shareholders' equity for the six months ended March 31, 2024, 2023 and 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions 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 period. The Company, its subsidiaries, the VIE and VIE’s subsidiaries’ accounting estimates included, but are not limited to: allowance for estimated uncollectible receivables, inventory valuations, impairment of long-lived assets, useful lives of property and equipment and intangible assets, fair value of investment in trading securities, impairment of intangible assets, realization of deferred tax assets and uncertain tax position, and income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with an original maturity of three months or less from the date of purchase to be cash equivalents. The cash and cash equivalent don’t have withdrawal restrictions.
Short-term Investment
The Company’s short-term investment include a time deposit which has maturity less than 12 months.
Accounts Receivable, net
Accounts receivable are recognized and carried at original invoiced amount less an estimated allowance for uncollectible accounts. The WFOE, the VIE and VIE’s subsidiaries usually grant credit to customers with good credit standing with a maximum of 90 days and determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The
F-6
Company evaluates the creditworthiness of its customers. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable.
Bank acceptance notes receivable
Bank acceptance notes receivable generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company. Bank acceptance notes do not bear interest. From time to time, the Company endorse bank notes receivable to its suppliers as the payment of material purchase. The bank notes receivable is considered sold and derecognized from balance sheets when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the note receivables, and the Company has surrendered control over the transferred note receivable. If the Company does not surrender control, the cash received from the purchaser is account for as a secured borrowing.
As of March 31, 2024 and September 30, 2023, bank acceptance notes receivable from customers were $
Inventories, net
Inventories are stated at the lower of cost or net realizable value. Costs include the cost of raw materials, freight, direct labor and related production overhead. The cost of inventories is calculated using the weighted average method. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. Allowances for obsolescence are also assessed based on expiration dates, as applicable, taking into consideration historical and expected future product sales.
Property, Plant and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairment charge. The straight-line depreciation method is used to compute depreciation over the estimated useful lives of the assets, as follows:
Items |
| Useful life |
Property and buildings |
| |
Leasehold improvement |
| Lesser of useful life and lease term |
Machinery and equipment |
| |
Automobiles |
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Office and electric equipment |
|
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the statements of operations in other income and expenses.
Construction in Progress
Construction in progress is comprised of costs related to the capital projects that are not completed and is not depreciated until such time as the subject asset is ready for its intended use. Construction in progress as of March 31, 2024 and September 30, 2023 represents costs of construction incurred for Chongqing’s new manufacturing facilities for heparin products.
Intangible Assets
Intangible assets consist primarily of land use rights, software and license for drug manufacturing (See Note 7). Under the PRC law, all land in the PRC is owned by the government and cannot be sold to an individual or company. The government grants individuals and
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companies the right to use parcels of land for specified periods of time. Land use rights are stated at cost less accumulated amortization. Intangible assets are amortized using the straight-line method with the following estimated useful lives:
Items |
| Useful life |
Land use rights |
| |
Software |
| |
License for drug manufacturing |
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Leases
On October 1, 2019 the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, . Based on this guidance we will 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 finance leases, and obligations under finance leases, non-current on our consolidated balance sheets.
Operating lease ROU assets and 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. 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.
We have made an accounting policy election to not include leases with an initial term of 12 months or less on the balance sheets and the short term lease expense recognized for the years presented are immaterial.
Investment in Securities
The Company entered into an investment with a iFactors SPC related to shares participating in the Golden Bridge Global Income Opportunities SP (the Fund), an exempted segregated Portfolio Company incorporated in the Cayman Islands and managed by Golden Bridge Capital Management Limited. The Fund primarily invests in bonds offered by private entities (debt securities), globally and also invests in convertible debt securities, publicly traded debt and stock, and governmental fixed income securities. The redemption of such shares for cash can be made with ninety days advance written notice (such written notice period can be extended by the investment manager), except during the lock up period which is initially 24 months and then extended to 36 months, from the initial investment date.
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term on the Balance Sheet, based on contractual maturity date and are stated at amortized cost. Investment securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value. Investment securities not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities.
As of March 31, 2024 and September 30, 2023, the investment consisted of
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Long-Term Investment
Investments in entity in which the Company, its subsidiaries, the VIE and VIE’s subsidiaries can exercise significant influence but does not own a majority equity interest or control are accounted for using the equity method of accounting. Under the equity method, the Company, its subsidiaries, the VIE and VIE’s subsidiaries initially record its investment at cost. The Company’s share of investee earnings or losses is recorded in our Consolidated Statements of Operations within Other income (expense). The Company’s interest in the net assets of the investees is included in the equity method investment on the consolidated balance sheets. The Company, its subsidiaries, the VIE and VIE’s subsidiaries evaluate the equity method investments for impairment under ASC 323. An impairment loss on the equity method investments is recognized in earnings when the decline in value is determined to be other-than-temporary. The Company, its subsidiaries, the VIE and VIE’s subsidiaries subsequently adjust the carrying amount of the investment to recognize their proportionate share of each equity investee’s net income or loss into earnings after the date of investment, the adjustment of basis difference initially recognized and the other comprehensive income allocated to the Company from the investees.
Impairment of Long-lived Assets
The Company, its subsidiaries, the VIE and VIE’s subsidiaries review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated undiscounted cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value. There were
Transactions with Non-controlling Interests of Subsidiaries
The Company, its subsidiaries, the VIE and VIE’s subsidiaries account for a change in ownership interests in its subsidiaries that does not result in a change of control of the subsidiary under the provisions of ASC 810-10-45-23, Consolidation – Other Presentation Matters, which prescribes the accounting for changes in ownership interest that do not result in a change in control of the subsidiary, as defined by GAAP, before and after the transaction. Under this guidance, changes in a controlling shareholder’s ownership interest that do not result in a change of control, as defined by GAAP, in the subsidiary are accounted for as equity transactions. Accordingly, if the controlling shareholder retains control, no gain or loss is recognized in the statements of operations of the controlling shareholder. Similarly, the controlling shareholder will not record any additional acquisition adjustments to reflect its subsequent purchases of additional shares in the subsidiary if there is no change of control. Only a proportional and immediate transfer of carrying value between the controlling and the noncontrolling shareholders occurs based on the respective ownership percentages. For the year ended September 30, 2021, the VIE, Gansu QLS acquired
In the year ended September 30, 2023, the Company made
Non-controlling Interests
Non-controlling interests are recognized to reflect the portion of their equity that is not attributable, directly or indirectly, to the Company as the controlling shareholder. For the Company’s consolidated subsidiaries, VIE and VIE’s subsidiaries, non-controlling interests represent a minority shareholder’s
F-9
The following table summarizes the shareholders’ equity for the non-controlling interest from each subsidiary that is not 100% owned by the Company:
As of | ||||||
March 31 | September 30, | |||||
2024 | 2023 | |||||
Gansu QLS |
| $ | |
| $ | |
Chengdu QLS and subsidiaries |
| |
| | ||
Zhongqiao |
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| | ||
Total | $ | | $ | | ||
Non-controlling interest in the equity of a subsidiary is reported in equity in the consolidated balance sheets. Net income and losses attributable to the non-controlling interest is reported as described above in the consolidated statements of operations and comprehensive income.
Revenue Recognition
The Company, its subsidiaries, the VIE and VIE’s subsidiaries recognize revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To perform revenue recognition for arrangements within the scope of ASC 606, the Company, its subsidiaries, the VIE and VIE’s subsidiaries perform the following five steps:
| (i) | identification of the promised goods or services in the contract; |
| (ii) | determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; |
| (iii) | measurement of the transaction price, including the constraint on variable consideration; |
| (iv) | allocation of the transaction price to the performance obligations based on estimated selling prices; and |
| (v) | recognition of revenue when (or as) we satisfy each performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. |
The majority of the WFOE, the VIE and VIE’s subsidiaries’ contracts have one single performance obligation as the promise to transfer the individual goods is not separately identifiable from other promises in the contracts and are, therefore, not distinct. The revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. The WFOE, the VIE and VIE’s subsidiaries’ products are sold with no right of return and the WFOE, the VIE and VIE’s subsidiaries do not provide other credits or sales incentives, which would be accounted for as variable consideration. Sales taxes invoiced to customers and remitted to government authorities are excluded from net sales.
The contract liabilities of the Company consist of advance payments from customers. The contract liabilities are reported in a net position on a customer-by-customer basis at the end of each reporting period. Contract liabilities were recognized when the Company receives prepayment from customers resulting from sales contracts. Contract liabilities will be recognized as revenue when the products are delivered. As of March 31, 2024 and September 30, 2023, the Company record advance from customers of $
Refer to Note 15 for disaggregated revenue information.
F-10
Government Grants
Government grants are recognized when there is reasonable assurance that the attached conditions will be complied with. When the grant relates to an expense item, it is net against the expense and recognized in the consolidated statements of operations and comprehensive income over the period necessary to match the grant on a systematic basis to the related costs. Where the grant relates to an asset acquisition, it is recognized in the consolidated statements of operations and comprehensive income in proportion to the useful life of the related assets. Government grants received for the six months ended March 31 2024, 2023 and 2022 were $
Selling, General and Administrative, Research and Development Expenses
Selling, general and administrative, research and development expenses primarily consist of salaries and benefits for employees, shipping expense, utilities, maintenance and repairs expenses, insurance expense, depreciation and amortization expenses, research and development expense, selling and marketing expenses, professional fees, and other operating expenses.
The Company, its subsidiaries, the VIE and VIE’s subsidiaries expense all internal research costs as incurred, which primarily comprise employee costs, internal and external costs related to execution of studies, including manufacturing costs, facility costs of the research center, and amortization, depreciation of intangible assets and property, plant and equipment used in the research and development activities. For the six months ended March 31, 2024, 2023 and 2022, total selling, general and administrative, research and development expense were as follows:
For the six months ended | |||||||||
March 31, | |||||||||
2024 | 2023 | 2022 | |||||||
Selling expense |
| $ | |
| $ | |
| $ | |
General and administrative expense |
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Research and development expense |
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| — | |||
Total | $ | | $ | | $ | | |||
Advertising Cost
Advertising costs are expensed when incurred and are included in selling, general and administrative, research and development expense on the accompanying consolidated statements of operations. The Company incurred $
Income Taxes
The Company, its subsidiaries, the VIE and VIE’s subsidiaries account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company, its subsidiaries, the VIE and VIE’s subsidiaries determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company, its subsidiaries, the VIE and VIE’s subsidiaries recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, the Company, its subsidiaries, the VIE and VIE’s subsidiaries consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company, its subsidiaries, the VIE and VIE’s subsidiaries determine that they would be able to realize the deferred tax assets in the future in excess of their net recorded amount, they would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
F-11
The Company, its subsidiaries, the VIE and VIE’s subsidiaries record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company, its subsidiaries, the VIE and VIE’s subsidiaries determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company, its subsidiaries, the VIE and VIE’s subsidiaries recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company does not believe that there were any uncertain tax positions at March 31, 2024 and September 30, 2023.
Earnings per Share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. For the six months ended March 31, 2024, 2023 and 2022,
The following table sets forth the computation of basic and diluted earnings (loss) per share for the six months ended March 31, 2024, 2023 and 2022:
For the six months ended March 31, | |||||||||
| 2024 |
| 2023 |
| 2022 | ||||
Numerator: | |||||||||
Net income attributable to ordinary shareholders | $ | | $ | | $ | | |||
Denominator: |
|
|
|
|
|
| |||
Weighted-average number of ordinary shares outstanding – basic |
| |
| |
| | |||
Weighted-average number of ordinary shares outstanding – diluted |
| |
| |
| | |||
Earnings per share – basic | $ | | $ | | $ | | |||
Earnings per share – diluted | $ | | $ | | $ | | |||
Stock Based Compensation
The Company issued shares for its independent director for the service rendered. Stock-based compensation is estimated at the grant date based on the fair value of the shares and is recognized as expense over the requisite service period of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period of the award, which is generally the award vesting term. The Company has elected to recognize forfeitures as incurred.
Foreign Currency Translation
The Company’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB, the local currency, as the functional currency. Our financial statements are reported using U.S. Dollars. The results of operations and the statement of cash flows denominated in currency other than U.S. Dollars are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in statement of changes in equity. Gains and losses from foreign currency transactions are included in the consolidated statements of operations and comprehensive income.
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of US$
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reporting. The following table outlines the currency exchange rates that were used in creating the condensed consolidated financial statements in this report:
| March 31, 2024 |
| September 30, 2023 | |
Year-end spot rate |
|
| ||
Average rate |
|
|
Fair Value of Financial Instruments
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with U.S GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
For the year ended September 30, 2022, as a practical expedient, the Company uses Net Asset Value (“NAV”) or its equivalent to measure the fair value of its certain fund investment. NAV is primarily determined based on information provided by external fund administrators. The Company’s investments valued at NAV as a practical expedient are private equity funds, which represent the investment in trading securities on the balance sheet. For the year ended September 30, 2023 and six months ended March 31 2024, the Company planned to sell the investment and fair value measurement using NAV as practical expedient is not permitted. The investment is measured using discounted cash flow method and classified as Level 3 in the fair value hierarchy. The discount rate used for the valuation of trading securities was
Cash and cash equivalents, restricted cash, accounts receivable, bank notes receivable, short term investment, advances to suppliers, other current assets, accounts payable, and accrued expenses and other payables approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the bank loans, lease liabilities, bank notes payable and other liabilities, including current maturities, approximated their carrying value as of March 31, 2024 and September 30, 2023, respectively.
The Company noted
The following is a reconciliation of the beginning and ending balance of the investment in securities measured at fair value on a recurring basis for the six months ended March 31, 2024, 2023 and 2022:
| As of |
| As of | As of | |||||
March 31, | March 31, | March 31, | |||||||
2024 | 2023 | 2022 | |||||||
Beginning balance | $ | | $ | | | ||||
Change in fair value |
| | |
| ( | ||||
Ending balance | $ | | $ | | | ||||
Concentrations and Credit Risk
A majority of the Company, its subsidiaries, the VIE and VIE’s subsidiaries’ expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries, the VIE and VIE’s subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in
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currencies other than RMB by the Company, its subsidiaries, the VIE and VIE’s subsidiaries in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
As of March 31, 2024 and September 30, 2023, $
Substantially all of the Company’s sales are made to customers that are located in China. The Company has a concentration of its revenues and receivables with specific customers. For the six months ended March 31, 2024,
For the six months ended March 31, 2023,
For the six months ended March 31, 2022,
A loss of any of these customers or suppliers could adversely affect the operating results or cash flows of the Company.
Recent Accounting Pronouncements
There were no new accounting standards or updates during the three months ended March 31, 2024 that would have a material impact on the Company’s Unaudited Condensed Consolidated Financial Statements.
NOTE 3 – ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Trade accounts receivable | $ | | $ | | ||
Less: allowances for doubtful accounts |
| ( |
| ( | ||
Accounts receivable, net | $ | | $ | | ||
The change of the allowance for doubtful accounts are as follow:
| As of |
| As of | |||
| March 31, 2024 |
| March 31, 2023 | |||
Beginning balance |
| $ | |
| $ | |
Addition | | | ||||
Exchange rate difference | ( | | ||||
Ending balance |
| $ | |
| $ | |
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NOTE 4 – INVENTORY, NET
Inventories consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Raw materials | $ | | $ | | ||
Low value consumables | | | ||||
Work-in-progress |
| |
| | ||
Finished goods |
| |
| | ||
Inventory provision |
| ( |
| ( | ||
Total inventory | $ | | $ | | ||
For the six months ended March 31, 2024, 2023 and 2022, the inventory provision expenses (reversal) were $(
NOTE 5 – OTHER CURRENT ASSETS
Other current assets consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Prepaid expense | $ | | $ | | ||
Other receivables |
| |
| | ||
Total other current assets | $ | | $ | | ||
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Property and Buildings | $ | | $ | | ||
Machinery and equipment |
| |
| | ||
Automobiles |
| |
| | ||
Office and electric equipment |
| |
| | ||
Subtotal |
| |
| | ||
Less: accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | | ||
Depreciation expense was $
As of March 31, 2024 and September, 30, 2023, Qilian Chengdu made advance payments for property and buildings acquisition for $
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NOTE 7 – INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Land use rights | $ | | $ | | ||
Software |
| |
| | ||
License for drug manufacturing |
| |
| | ||
Total |
| |
| | ||
Less: accumulated amortization |
| ( |
| ( | ||
Intangible assets, net | $ | | $ | | ||
Amortization expense was $
Estimated future amortization expense for intangible assets is as follows:
| Amortization | ||
Year ending September 30, | expense | ||
2024 | $ | | |
2025 |
| | |
2026 |
| | |
2027 | | ||
2028 | | ||
Thereafter |
| | |
$ | | ||
NOTE 8 – LONG-TERM INVESTMENT
In July 2017, Moshangfa acquired
Equity method investment consisted of the following:
| As of |
| As of | |||
March 31, 2024 | September 30, 2023 | |||||
Equity method investment: |
|
|
|
| ||
Cost of equity method investment |
| |
| | ||
Profit from equity method investment |
| |
| | ||
Dividend Distribution received | ( | ( | ||||
Investment disposed | ( | — | ||||
Loss recognized from disposal |
| ( |
| — | ||
Total long-term investment | $ | — | $ | | ||
NOTE 9 – BANK LOANS
In June 2023, Chengdu QLS entered into loan agreement with Chengdu Agriculture and Commercial Bank for RMB
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NOTE 10 –TAXES
(a)Corporate Income Taxes
The Company, its subsidiaries, the VIE and VIE’s subsidiaries are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which each entity is domiciled.
Cayman Islands
Under the current tax laws of the Cayman Islands, the Company is not subject to tax on its income or capital gains. In addition, no Cayman Islands withholding tax will be imposed upon the payment of dividends by the Company to its shareholders.
Hong Kong
In accordance with the relevant tax laws and regulations of Hong Kong, a company registered in Hong Kong is subject to income taxes within Hong Kong at the applicable tax rate on taxable income. From year of assessment of 2018/2019 onwards, Hong Kong profit tax rates are
China
The WFOE, the VIE and VIE’s subsidiaries are all incorporated in the PRC and are subject to PRC income tax, which is computed according to the relevant laws and regulations in the PRC. Under the Corporate Income Tax Law of PRC, current corporate income tax rate of
On January 17, 2019, the State Taxation Administration issued the notice on the scope of small-scale and low-profit corporate income tax preferential policies of the Ministry of Finance and the State Administration of Taxation, [2019] No. 13 for small-scale and low-profit enterprises whose annual taxable income is less than RMB
Interim income tax expenses or benefit is recognized based on the Company’s estimated annual effective tax rate, which is based upon the tax rate expected for the full fiscal year applied to the pretax income or loss of the interim period. The Company’s consolidated effective tax rate for the six months ended March 31, 2024 was
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NOTE 11 – RELATED PARTY TRANSACTIONS
During the normal course of business, the VIE and VIE’s subsidiaries may make sales to affiliated companies controlled by its major shareholders or subsidiaries. For the six months ended March 31, 2024, 2023 and 2022, the VIE and VIE’s subsidiaries made sales to affiliated companies in the amount of $
NOTE 12 – LEASE
As of September 30, 2023, the VIE and VIE’s subsidiaries have
| As of | As of |
| ||||
March 31, | September 30, |
| |||||
2024 | 2023 |
| |||||
Operating Lease Assets: |
|
| |||||
Right-of-use asset | $ | | $ | | |||
Total right-of-use asset |
| |
| | |||
Lease obligations: |
|
|
|
| |||
Current lease liabilities |
| |
| | |||
Non-current lease liabilities |
| |
| | |||
Total Lease liabilities | $ | | $ | | |||
|
| ||||||
Remaining Lease Term Operating Lease |
|
| |||||
Discount rate |
| | % |
| | % | |
Lease liability maturities as of March 31, 2024, are as follows:
| Operating, | ||
lease | |||
For the six months ending September 30, 2024 |
| | |
For the year ending March 31, 2025 |
| | |
For the year ending March 31, 2026 |
| | |
Total minimum lease payments | $ | | |
Less: Imputed interest |
| ( | |
Total | $ | | |
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NOTE 13 – SEGMENT REPORTING
The Company, its subsidiaries, the VIE and VIE’s subsidiaries mainly manufactures and distributes active pharmaceutical ingredients and TCMD products as well as other by-products in China. Currently
For the six months ended March 31, 2024 | ||||||||||||
Oxytetracycline | ||||||||||||
& Licorice | Heparin | |||||||||||
products and | products and | |||||||||||
| TCMD |
| Fertilizer |
| Sausage casing |
| Total | |||||
Revenue |
| $ | |
| $ | |
| $ | |
| $ | |
Cost of revenue |
| |
| |
| |
| | ||||
Gross profit | $ | | $ | | $ | | $ | | ||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures | $ | | $ | | $ | | $ | | ||||
For six months ended March 31, 2023 | ||||||||||||
Oxytetracycline | ||||||||||||
& Licorice | Heparin | |||||||||||
products and | products and | |||||||||||
| TCMD |
| Fertilizer |
| Sausage casing |
| Total | |||||
Revenue |
| $ | |
| $ | |
| $ | |
| $ | |
Cost of revenue |
| |
| |
| |
| | ||||
Gross profit | $ | | $ | | $ | | $ | | ||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures | $ | | $ | | $ | | $ | | ||||
For the six months ended March 31, 2022 | ||||||||||||
Oxytetracycline | ||||||||||||
& Licorice | Heparin | |||||||||||
products and | products and | |||||||||||
| TCMD |
| Fertilizer |
| Sausage casing |
| Total | |||||
Revenue |
| $ | |
| $ | |
| $ | |
| $ | |
Cost of revenue |
| |
| |
| |
| | ||||
Gross profit | $ | | $ | | $ | | $ | | ||||
Depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Capital expenditures | $ | | $ | | $ | | $ | | ||||
| March 31, |
| September 30, | |||
2024 | 2023 | |||||
Total Assets |
|
|
|
| ||
Oxytetracycline & Licorice products and TCMD | $ | | $ | | ||
Fertilizer | $ | | $ | | ||
Heparin products and Sausage casing | $ | | $ | | ||
Total | $ | | $ | | ||
NOTE 14 – COMMITMENTS
On July 5, 2021, The Company entered into an investment agreement with Chongqing Jintong Industrial Construction Investment Co., Ltd (“Chongqing Jintong”). The Company agreed to invest for the construction of a factory for manufacturing pig by-products in Chongqing Tongnan High Tech Industrial Zone. As of September 30, 2023, a total of $
As of March 31, 2024, the Company has commitment to pay $
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NOTE 15 – SUBSEQUENT EVENTS
On April 19, 2024 , the Company’s shareholders approved the increase of the Company’s authorized share capital, with effect from such date as the board of directors of the Company may determine in its sole discretion, from US$
(a) |
(b) |
(c) | each of the remaining authorized but unissued Ordinary Shares, which is expected to be |
The Company’s management reviewed all material events that have occurred after the balance sheet date through September 15, 2024 on which these financial statements were available to be issued. Based upon this review, the Company did not identify any subsequent events except disclosed in above that would have required adjustment or disclosure in the condensed consolidated financial statements.
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