BIMI INTERNATIONAL MEDICAL INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to those financial statements contained elsewhere in this report.
Certain statements in this Report constitute forward-looking statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plan," "potential," "project," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend," or the negative of these words or other variations on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
As used herein, the terms “we”, “us”, “our”, “BIMI” and the “Company” mean,
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. 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. On 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 has strong sales capabilities and procurement resources in the local area of Chongqing, the largest city in Southwest region of the PRC. The acquisition was is 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 enabled us to serve more individuals with medical needs and was the first step in our efforts to build a hospital chain specializing in obstetrics and gynecology. 35 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 was the second step in our effort to establish a nationwide hospital chain specializing in obstetrics and gynecology. On May 6, 2021, we acquired three private hospitals operating in China, Wuzhou Qiangsheng Hospital Co.,Ltd.("Qiangsheng") in the southeast region of the PRC, Suzhou Eurasia Hospital Co.,Ltd. ("Eurasia") in the central region of the PRC and Yunan Yuxi Minkang Hospital Co.,Ltd.("Minkang") in the southwest region of the PRC. Qiangsheng, Eurasia and Minkang were owned by the same owners. Qiangsheng has 20 hospital beds and is a general hospital locally known for its OB/GYN and Chinese traditional medicine specialties. Eurasia has 30 hospital beds. Minkang has 120 hospital beds and is a general hospital locally known for its OB/GYN and Chinese traditional medicine specialties. On October 8, 2021, we acquired Chongqing Zhuoda Pharmaceutical Co., Ltd.("Zhuoda"), a company engaged in the distribution of medical devices and pharmaceuticals, based in Chongqing, the largest city in Southwest region of the PRC. Zhuodaprimarily distributes pharmaceuticals. Zhuodacurrently distributes approximately 100 products, including antibiotics and their preparations, proprietary Chinese herbal medicine, biochemical drugs and Chinese medicine, etc. The majority of its customers are private pharmaceutical manufacturers and pharmaceutical wholesale companies in the PRC. On December 20, 2021, we entered into a stock purchase agreement to acquire Bengbu Mali OB-GYN Hospital Co., Ltd.(" Mali Hospital"), a private OB-GYN specialty hospital with 199 beds located in Bengbu city in the southeast region of the People's Republic of China. Mali Hospitalhas 148 employees, including 26 doctors, 52 nurses, 11 other medical staff members and 59 non-medical staff members. The acquisition of Mali Hospitalhas not closed as of the date of
this report. BUSINESS SEGMENTS The Company currently four operating segments: retail pharmacy, wholesale pharmaceuticals, wholesale medical devices and medical services. The retail pharmacy segment sells prescription and OTC medicines, TCM, healthcare supplies and sundry items to retail customers through its directly-owned pharmacies and authorized retail stores. The wholesale pharmaceuticals segment includes supplying prescription and OTC medicines, TCM, healthcare supplies and sundry items to clinics, third party pharmacies, hospitals and other drug wholesalers. There were no inter-segment revenues between our retail pharmacy and wholesale pharmaceuticals segments. The wholesale medical device segment distributes medical devices, including medical consumables to private clinics, hospitals, third party pharmacies and other medical device dealers. Medical services includes private comprehensive hospitals operating in
China. The segments' accounting policies are the same as those described in the summary of significant accounting policies. The Company's chief operating decision maker ("CODM"), who is the CEO of the Company, evaluates performance of each segment based on profit or loss from continuing operations net of income tax. The Company's operating business segments are strategic business units that offer different products and services. Each segment is managed independently because they require different operations and markets to distinct classes of customers. GOING CONCERN
The accompanying unaudited condensed 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 unaudited condensed consolidated financial statements, the Company incurred net losses of
$2,740,480and $3,290,627and cash outflows of $2,150,706and $1,729,711, from operating activities for the three months ended March 31, 2022and 2021, respectively. As of March 31, 2022, the Company had an accumulated deficit of $50.64 million. In addition, the Company continues to generate operating losses and has limited cash flow from its operations. Primarily as a result of it operating loss in the quarter, the Company's cash position declined by $2.15 millionin the three months ended March 31, 2022. Management believes these factors raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months. 36
The continuation of the Company as a going concern through the next twelve months is dependent upon (1) the continued financial support from its stockholders or external financing, and (2) further implement management's business plan to extend its operations and generate sufficient revenues and cash flow to meet its obligations. On
November 18, 2021, the Company entered into a securities purchase agreement (the "November SPA") with two institutional investors (each an "Institutional Investor" and collectively the " Institutional Investors") to sell a new series of senior secured convertible notes (the "Convertible Notes") of the Company in a private placement (the "Private Placement"), in the aggregate principal amount of $7,800,000having an aggregate original issue discount of 20%, and ranking senior to all outstanding and future indebtedness of the Company. See "LIQUIDITY AND CAPITAL RESOURCES." While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurance that the Company will succeed in either respect. These conditions raise substantial doubt about the Company's ability to continue as a going concern. These unaudited condensed financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Management believes that the actions presently being taken to obtain additional funding and implement its strategic plan provides the opportunity for the Company to continue as a going concern.
CRITICAL ACCOUNTING ESTIMATES
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.
? 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, the Company specifically evaluates individual customer's financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. 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. The Company does not have any off-balance-sheet credit exposure related to its customers. As of
March 31, 2022and December 31, 2021, the allowance for doubtful accounts was $322,956and $322,145, respectively. 37 ? Advances to suppliers
Advances to suppliers consist of prepayments to the Company's vendors, such as pharmaceutical manufacturers and medicine suppliers. The Company typically prepays for the purchase of our merchandise, especially for those salable, scarce, personalized medicine or medical devices. The Company typically receive products from vendors within three to nine months after making prepayments. The Company continuously monitor delivery from, and payments to, the vendors while maintaining a provision for estimated credit losses based upon historical experience and any specific supplier issues, such as discontinuing of inventory supply, that have been identified. If the Company has difficulty receiving products from a vendor, the Company would cease purchasing products from such vendor, request return of our prepayment promptly, and if necessary, take legal action. The Company has not taken such type of legal action during the reporting periods. If none of these steps are successful, management will then determine whether the prepayments should be reserved or written off. As of
March 31, 2022and December 31, 2021, the allowance for doubtful accounts were $Nil.
Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method, and market value is the middle (the second highest) value among an inventory item's replacement cost, market celling and market floor. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. The Company reviews historical sales activity quarterly to determine excess, slow moving items and potentially obsolete items. The Company provides inventory reserve based on the excess quantities on hand equal to the difference, if any, between the cost of the inventory and its estimated market value, or obsolescence of inventories determined principally by customer demand. As of
March 31, 2022and December 31, 2021, the Company recorded an allowance for obsolete inventories, which mainly consists of expired medicine, of $103,625and $103,178, respectively.
? Fixed assets
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: Expected Residual Items useful lives value Building 20 years 5 % Office equipment 3 years 5 % Electronic equipment 3 years 5 % Furniture 5 years 5 % Medical equipment 10 years 5 % Vehicles 4 years 5 % Leasehold Improvement Shorter of lease term or useful life 5 % 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. ? Intangible assets Intangible assets consist primarily of management system software. Intangible assets are stated at cost less accumulated amortization and impairment, if any. Intangible assets are amortized using the straight line method with the following estimated useful lives: Expected useful lives Software 10 years 38 ? Goodwill
Goodwillrepresents the excess of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of an acquired business. In accordance with ASC 350, Goodwilland Other Intangible Assets, recorded goodwill amounts are not amortized, but rather are tested for impairment annually or more frequently if there are indicators of impairment present. Goodwillis tested for impairment at the reporting unit level on at least an annual basis or when an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. These events or circumstances include a significant change in stock prices, business environment, legal factors, financial performances, competition, or events affecting the reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The estimation of fair value of a reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Company's business, estimation of the useful life over which cash flows will occur, and determination of the Company's weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit. The Company identified reporting units at the lowest level within the entity at which goodwill is monitored for internal management purposes. 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 is reassigned based on the relative fair value of each of the affected reporting units. As of March 31, 2022and December 31, 2021, the Company recorded impairments for goodwill of $Nil and $26,128,171, respectively.
? 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 performance obligations in the contract;
? Determine the price of the transaction;
? 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 39
? 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. ? Derivative instruments We enter into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities ("ASC 815") as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument. 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 Company's 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 company's common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
? Foreign Currency Conversion
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 ("US$"). 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 US$ are translated into US$, 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.
? Sector reports
ASC Topic 280, "Segment Reporting" establishes standards for reporting information about operating segments on a basis consistent with the Company's internal organization structure as well as information about the type of products and services, geographical areas, business strategies and major customers in business components. For the three months ended
March 31, 2022the Company operated in four reportable segments: retail pharmacy, wholesale medical devices, wholesale pharmaceuticals and medical services in the PRC. 40
? Recent accounting statements
June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments (Topic 326)", which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life, instead of when incurred. In November 2018, the FASB issued ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses", which amends Subtopic 326-20 (created by ASU No.2016-13) to explicitly state that operating lease receivables are not in the scope of Subtopic 326-20. Additionally, in April 2019, the FASB issued ASU No.2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", in May 2019, the FASB issued ASU No. 2019-05, "Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief", and in November 2019, the FASB issued ASU No. 2019-10, "Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates", and ASU No. 2019-11, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses", to provide further clarifications on certain aspects of ASU No. 2016-13 and to extend the nonpublic entity effective date of ASU No. 2016-13. The changes (as amended) are effective for the Company for annual and interim periods in fiscal years beginning after December 15, 2022, and the Company is in the process of evaluating the potential effect on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwilland Other (Topic 350): Simplifying the Test for Goodwill Impairment," which simplifies how an entity is required to test goodwill for impairment by eliminating step two from the goodwill impairment test. Step two of the goodwill impairment test measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with its carrying amount. As amended by ASU 2019-10, annual or interim goodwill impairment tests are performed in fiscal years beginning after December 15, 2022. We do not expect that the adoption of this guidance will have a material impact on our financial position, results of operations and cash flows. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance effective January 1, 2021, which adoption did not have a material impact on the consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06 ("ASU 2020-06") "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity." ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
Other accounting standards issued or proposed by the FASB or other standard setters that do not require adoption until a later date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
January 27, 2022, we entered into an employment agreement with Mr. Xiaoping 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, which were not subject to the reverse split.
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, 2022on a split adjusted basis. All share numbers in this discussion have been revised to reflect the reverse split.
RESULTS OF OPERATIONS
Comparison of the three months ended
For the Three Months Ended March 31, Comparison Amount Percentage % of increase increase 2022 Revenues 2022 (decrease) (decrease) Revenues
$ 5,019,748100 % $ 2,168,004 $ 2,851,744132 % Cost of revenues 3,561,278 71 % 1,575,743 1,985,535 126 % Gross profit 1,458,470 29 % 592,261 866,209 146 % Operating expenses 4,015,169 80 % 3,832,650 182,519 5 % Other expenses, net (161,200 ) (3 )% (31,490 ) (129,710 ) 412 % Loss before income tax (2,717,899 ) (54 )% (3,271,879 ) 553,980 (17 )% Income tax expense 22,581 0 % 18,748 3,833 20 % Net loss (2,740,480 ) (55 )% (3,290,627 ) 550,147 (17 )%
Less: non-controlling interest (1,082 ) 0 % 42,615 (43,697 ) (103 )% Net Loss attributable to BIMI International Medical Inc.
$ (2,739,398 )(55 )% $ (3,333,242 ) $ 593,844(18 )% Revenues
Revenues for the three months ended
March 31, 2022and 2021 were $5,019,748and $2,168,004, respectively. The revenues for the three months ended March 31, 2022were primarily attributable to the revenues from the wholesale sales of generic drugs and medical devices and from medical services provided by hospitals purchased during the first quarter in 2022. Compared with the same period in 2021, revenue increased by $2,851,744, mainly due to the $2,073,608increase in sales of medical devices and $880,202increase in medical services revenues. The increase in medical device sales is mainly due to higher demand during the first quarter of 2022. The 2022 medical services revenues reflect the revenues generated by three hospitals, which were acquired in May 2021. 42 Cost of revenues
Cost of revenue for the three months ended
Cost of revenues of our wholesale medical devices segment consists primarily of cost of medical devices, medical consumables and costs related directly to contracts with customers. For the three months ended
March 31, 2022and 2021, the cost of revenues of our wholesale medical devices segment were $1,835,885and $30,462, respectively. The increase is mainly due to the increase in sales. Cost of revenues of our wholesale pharmaceuticals segment consists primarily of the cost of medicines, medical consumables and costs related directly to contracts with customers. For the three months ended March 31, 2022and 2021, the cost of revenues of our wholesale pharmaceuticals segment were $1,075,422and $806,856, respectively.
The cost of products in our medical services segment mainly consists of the salaries of doctors and nurses and the cost of drugs. For the three months ended
Cost of revenues of our retail pharmacy segment consists primarily of the cost of the pharmaceuticals, medical devices and other products that we sell to customers. For the three months ended
March 31, 2022and March 31, 2021, the cost of revenues of our retail pharmacy segment were $40,192and $99,495, respectively.
Loss of gross profit
For the three months ended
March 31, 2022and 2021, we had a gross margin of 29% and 27%, respectively. For the three months ended March 31, 2022and 2021, the gross profit margin of our: (i) retail pharmacy segment were 38.31% and 17.17%, respectively; (ii) wholesale medical devices segment were 14.13% and 52.73%, respectively; (iii) wholesale pharmaceuticals segment were 12.70% and 36.21%, respectively; and (iv) medical services segment were 61.52% and 9.32%, respectively.
Operating expenses primarily include audit and legal fees, other professional service fees, directors’ and officers’ compensation expenses, meeting and promotion expenses, changes in the fair value of liabilities derivatives, depreciation and amortization of non-production related items, office rental costs and utilities.
Operating expenses were
$4,015,169for the three months ended March 31, 2022as compared to $3,832,650for the same period in 2021, an increase of $182,519or 5%. The increase is primarily due to the salaries of the Company's Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of $1,400,500for the three months ended March 31, 2022.During the 2021 period the Company's operating expenses included a $771,000expense related to the amortization of the discount relating to the convertible notes issued in 2021.
Wholesale medical devices segment operating expenses for the three months ended
Pharmaceutical wholesale segment operating expenses for the three months ended
Medical Services segment operating expenses for the three months ended
Retail pharmacy operating expenses for the three months ended
43 Other income (expense) For the three months ended
March 31, 2022and 2021, we reported other expenses of $161,200and $31,490,respectively. Other expenses mainly consisted of interest expense relating to the bank loans of the Guanzan Group, Zhuodaand Zhongshan. Net loss As a result of the foregoing our net loss decreased by $ 550,147to $2,740,480in the three months ended March 31, 2022from $3,290,627for the three months ended March 31, 2021.
CASH AND CAPITAL RESOURCES
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 provided 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." 44 The 2020 Notes, which matured on the eighteen-month anniversary of the issuance date, WERE payable in installments and WERE convertible at the election of the investors at the conversion price of $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. All the convertible promissory notes with a principal amount of $5,400,000were converted into 2,153,424 common shares prior to November 30, 2021. 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 were adjusted to $1.30pursuant to the Event Market Price formula upon conversion or exercise. With exception of a cashless exercise of 650,000 warrants by one Institutional Investor on June 18, 2021, through which the Company delivered 162,500 shares of Common Stock to such Institutional Investor, 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. On 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. 45 The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2022and 2021, respectively. For the three months ended March 31, 2022 2021 Net cash used in operating activities $ (2,150,706 ) $ (1,729,711 )Net cash provided by investing activities -
Net cash provided by (used in) financing activities (578,498 ) 4,392,017 Exchange rate effect on cash (462,431 ) (1,295 ) Net cash inflow/(outflow)
$ (3,191,635 ) $ 2,700,116Operating Activities
Net loss from our operation (before non-cash adjustments) was
$1.44 millionfor the three months ended March 31, 2022, a decrease of $1.86 million, compared to the net loss of $3.29 millionincurred in the same period in 2021. The decrease of net loss is attributable to: (1) the decrease in fees paid for our external professional services as a result of decreased auditing and legal services of approximately $0.585 million; and (2) decrease of amortization of discount on the convertible notes of $1.05 million;
Cash provided by investing activities was Nil for the three months ended
March 31, 2022, as compared to $39,105for the same period ended March 31, 2021. Cash provided by investing activities for the three months ended March 31, 2021was from the acquisition of the Guoyitang and Zhongshan, which offset the purchase of $75,205of fixed assets. Financing Activities Cash used in our financing activities was $578,498for the three months ended March 31, 2022, as compared to $4,392,017provided by financing activities for the three months ended March 31, 2021. For the three months ended March 31, 2022, we repaid $199,393OF bank loans and $379,105OF related party loans. During the three months ended March 31, 2021, we received $4,065,500by the issuance of convertible promissory notes, net proceeds of $162,950from bank loans and $164,067from related party loans.
March 31, 2022, we had a $4,800,000contractual obligation, which is the maximum amount of the cash consideration for the Zhuoda Acquisition, which is subject to post-closing adjustments pursuant to the Zhuoda SPA.
Inflation and seasonality
We do not believe that our operating results have been materially affected by inflation 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 due to the rising prices charged by our suppliers. 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.
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