10-Q 1 f10q0620_boqiinternational.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to ____________

 

Commission File Number: 000-50155

 

BOQI International Medical Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   02-0563302
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
Room 3601, Building A, Harbour View Place, No. 2
Wuwu Road,  Zhongshan District, Dalian,
Liaoning Province, P. R. China, 116000
  116000
(Address of Principal Executive Offices)   (Zip Code)

 

(+86) 0411-8220-9211

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on
Which Registered
Common stock, $0.001 par value   BIMI   The NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such fi les). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of October 16, 2020, the registrant had 10,384,433 shares of common stock, par value $.001 per share, issued and shares outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I FINANCIAL INFORMATION 1
Item 1 Financial Statements 1
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3 Quantitative and Qualitative Disclosures About Market Risk 40
Item 4 Controls and Procedures 40
PART II OTHER INFORMATION 42
Item 1 Legal Proceedings 42
Item 1A Risk Factors 43
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3 Defaults Upon Senior Securities 43
Item 4 Mine Safety Disclosures 43
Item 5 Other Information. 43
Item 6 Exhibits. 44
Signatures   45

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BOQI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2020   2019 
   (Unaudited)     
ASSETS        
CURRENT ASSETS        
Cash  $96,312   $36,363 
Restricted cash   13,090    311 
Accounts receivable, net   3,118,402    24,840 
Advances to suppliers   2,197,249    1,252 
Amount due from related parties   49,776    1,350 
Inventories, net   2,523,075    707,526 
Prepayments and other receivables   14,407,373    59,333 
Assets from discontinued operations   -    21,218,983 
Total current assets   22,405,277    22,049,958 
           
NON-CURRENT ASSETS          
Deferred tax assets   244,351    - 
Property, plant and equipment, net   756,712    38,641 
Intangible assets, net   7,458,486    7,973,179 
Goodwill   6,443,170    - 
Total non-current assets   14,902,719    8,011,820 
           
TOTAL ASSETS  $37,307,996   $30,061,778 
           
LIABILITIES AND EQUITY          
CURRENT LIABILITIES          
Short-term loans  $834,028   $- 
Long-term loans due within one year   219,554    - 
Convertible promissory notes, net   3,852,890    107,383 
Derivative liability   1,329,842    1,272,871 
Accounts payable, trade   3,757,567    641,927 
Advances from customers   828,939    67,975 
Amount due to related parties   649,059    305,760 
Taxes payable   317,010    861 
Other payables and accrued liabilities   11,208,548    6,044,378 
Liabilities from discontinued operations   -    13,108,038 
Total current liabilities   22,997,437    21,549,193 
           
Long-term loans - noncurrent portion   163,920    - 
           
TOTAL LIABILITIES   23,161,357    21,549,193 
           
COMMITMENTS AND CONTINGENCIES          
           
EQUITY          
Common stock, $0.001 par value; 50,000,000 shares authorized; 10,384,433 and 9,073,289 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively   10,384    9,073 
Additional paid-in capital   22,626,434    15,643,825 
Statutory reserves   -    2,227,634 
Accumulated deficit   (8,436,279)   (10,881,667)
Accumulated other comprehensive income (loss)   (128,737)   1,683,770 
Total BOQI International Medical Inc.’s equity   14,071,802    8,682,635 
           
NON-CONTROLLING INTERESTS   74,837    (170,050)
           
Total equity   14,146,639    8,512,585 
           
Total liabilities and equity  $37,307,996   $30,061,778 

 

The accompanying notes are an integral part of the condensed consolidated financial statements

1

 

 

BOQI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (GAIN)/LOSS

(UNAUDITED)

 

   For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
 
   2020   2019   2020   2019 
                 
REVENUES   3,790,847    336,690    4,226,378    912,402 
                     
COST OF REVENUES   2,941,955    319,172    3,407,169    749,848 
                     

GROSS PROFIT

   848,892    14,518    819,209    162,554 
                     
OPERATING EXPENSES:                    
Sales and marketing   531,923    48,851    650,769    86,724 
General and administrative   2,390,945    678,089    4,242,954    1,161,732 
Total operating expenses   2,922,868    726,940    4,893,723    1,248,456 
                     
LOSS FROM OPERATIONS   (2,073,976)   (712,422)   (4,074,514)   (1,085,902)
                     
OTHER INCOME (EXPENSE)                    
Interest expense   (195,486)   (173,526)   (377,446)   (292,094)
Other income (expense)   6,986,587    2,703    6,968,162    (47,697)
Total other income (expense), net   6,791,101    (170,823)   6,590,716    (339,791)
                     
INCOME (LOSS) BEFORE INCOME TAXES   4,717,125    (883,245)   2,516,202    (1,425,693)
                     
PROVISION FOR INCOME TAXES   43,271        44,539     
                     
NET INCOME (LOSS)   4,673,854    (883,245)   2,471,663    (1,425,693)
Less: net income (loss) attributable to  non-controlling interest   33,590    (21,149)   26,274    3,997 
NET INCOME (LOSS) ATTRIBUTE TO BOQI INTERATIONAL MEDICAL INC.  $4,640,264   $(862,096)  $2,445,389   $(1,429,690)
OTHER COMPREHENSIVE INCOME(LOSS)                    
Foreign currency translation adjustment   263,239    (205,602)   143,038    26,325 
TOTAL COMPREHENSIVE INCOME(LOSS)   4,937,093    (1,088,847)   2,614,701    (1,339,368)
Less: comprehensive income (loss) attributable to non-controlling interests   2,334    (8,831)   (2,601)   4,546 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO BOQI INTERNATIONAL MEDICAL INC.  $4,934,759   $(1,080,016)  $2,617,302   $(1,403,914)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES                    
Basic and diluted   10,203,861    7,831,531    9,728,861    7,703,123 
                     
INCOME (LOSS) PER SHARE                    
Basic and diluted  $0.46   $(0.11)  $0.25   $(0.19)

 

The accompanying notes are an integral part of the condensed consolidated financial statements

2

 

 

BOQI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES

(CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the Six Months Ended
June 30,
 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net Income (Loss )  $2,471,663   $(1,425,693)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation and amortization   512,460    497,476 
(Profit) on disposal of NF Group   (6,944,469)   - 
Allowance for doubtful accounts   79,061    157,310 
Amortization of discount of convertible promissory notes   1,075,171    - 
Change in derivative liabilities   107,340    - 
Impairment loss from construction in progress   -    25,071 
Allowance for inventory provision   187,942    - 
           
Change in operating assets and liabilities          
Accounts receivable   (1,301,929)   942,687 
Advances to suppliers   (958,804)   - 
Inventories   (1,012,881)   (214,739)
Prepayments and other receivables   930,314    (74,919)
Accounts payable, trade   1,760,102    (318,384)
Advances from customers   (602,416)     
Taxes payable   (80,818)   19,339 
Other payables and accrued liabilities   347,751    365,443 
Net cash provided by (used in) operating activities   (3,429,513)   (26,409)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash received from acquisition of Guanzan Group   95,220    - 
Net cash provided by investing activities   95,220    - 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Issuance of common stock        126,841 
Net proceeds from issuance of convertible promissory notes   3,457,325    - 
Proceeds from short-term loans        5,899,009 
Repayment of short-term loans   (34,100)   (5,900,484)
Repayment of long-term loans   (21,497)     
Amount financed by related parties   598,803      
Net cash provided by financing activities   4,000,531    125,366 
           
EFFECT OF EXCHANGE RATE ON CASH   (593,510)   20,569 
           
INCREASE IN CASH   72,728    78,388 
           
CASH AND CASH EQUIVALENTS, beginning of period   36,674    197,356 
           
CASH AND CASH EQUIVALENTS, end of period  $109,402   $275,744 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for income tax  $56,396   $- 
Cash paid for interest expense, net of capitalized interest  $34,902   $284,092 
           
NON-CASH TRANSACTIONS OF INVESTING AND FINANCING ACTIVITIES          
Issuance of common shares for the equity acquisition of Chongqing Guanzan Technology Co., Ltd.  $2,717,000   $- 
Goodwill recognized from the equity acquisition of the Boqi Group  $6,443,170   $- 
Outstanding payment for the equity acquisition of Chongqing Guanzan Technology Co., Ltd.  $4,414,119   $- 
Outstanding receivable for disposal of NF Group  $10,000,000   $- 
Issuance of common shares upon conversion of convertible notes  $1,008,067   $- 

 

The accompanying notes are an integral part of the condensed consolidated financial statements

3

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND BUSINESS BACKGROUND

 

BOQI International Medical, Inc. (the “Company” or “BIMI”) was incorporated in the State of Delaware as Galli Process, Inc. on October 31, 2000. On February 7, 2002, the Company changed its name to Global Broadcast Group, Inc. On November 12, 2004, the Company changed its name to Diagnostic Corporation of America. On March 15, 2007, we changed our name to NF Energy Saving Corporation of America, and on August 24, 2009, the Company changed its name to NF Energy Saving Corporation. On December 16, 2019, the Company changed its name to BOQI International Medical Inc., to reflect the Company’s refocus of its business from the energy saving industry to the health care industry. Since March 7, 2012, the common stock of the Company has been traded on the Nasdaq Capital Market.

 

Until October 14, 2019, the Company, through NF Energy Saving Investment Limited and its subsidiaries (the “NF Group”), operated in the energy saving enhancement technology industry in the People’s Republic of China (“the PRC”). The NF Group focused on providing services relating to energy saving technology, optimization design, energy saving reconstruction of pipeline networks and contractual energy management for the electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries in the PRC and the manufacture and sales of energy-saving flow control equipment. In late 2019, the Company committed to a plan to dispose of all its equity interests in the NF Group and on March 23, 2020, the Company entered into a stock purchase agreement (the “NF SPA”) to sell the NF Group (the “NF Group Disposition”). The NF Group Disposition was closed on June 23, 2020. Please refer to NOTE 5 for more information related to the NF Group Disposition.

 

On October 14, 2019, the Company acquired 100% of the equity interests in Lasting Wisdom Holdings Limited (“Lasting”), a limited company incorporated under the laws of the British Virgin Islands (“BVI”). Lasting has limited operating activities since incorporation except for holding the ownership interest in Pukung Limited (“Pukung”), a company organized under the laws of Hong Kong. Pukung owns 100% of the equity interest in Beijing Xinrongxin Industrial Development Co., Ltd. (“Xinrongxin”), a company organized under the laws of the PRC. Xinrongxin owns all the ownership interest of Dalian Boqi Zhengji Pharmacy Chain Co., Ltd. (“Boqi Zhengji”) and Dalian Boyi Technology Co., Ltd (“Boyi”), a subsidiary established in January 2020. On March 18, 2020, the Company, through its wholly owned subsidiary, Xinrongxin, acquired 100% of the equity interests in Chongqing Guanzan Technology Co., Ltd. (“Guanzan”). Guanzan holds an 80% equity interest in Chongqing Shude Pharmaceutical Co., Ltd. and 100% equity interest in Chongqing Lijiantang Pharmaceutical Co. Ltd., a subsidiary established in May 2020 (“Shude” and “Lijiantang ” collectively with Guanzan, the “Guanzan Group”). Lasting, Pukung, Xinrongxin, Boqi Zhengji and the Guanzan Group are hereinafter collectively referred to as the “Pharmacy Group”.

 

The Pharmacy Group engages in both the retail and wholesale distribution of pharmaceutical and other healthcare products in the PRC. The Pharmacy Group sells its pharmaceutical and other healthcare products to customers through its directly-owned stores and authorized retail stores. The retail segment of the Pharmacy Group offers a wide range of products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, traditional Chinese medicines, personal and family care products and medical devices, as well as miscellaneous items. All of the Pharmacy Group’s retail pharmacies are located in Dalian City, Liaoning Province, PRC. The wholesale segments of the Pharmacy Group operates under the umbrella of the Guanzan Group and are engaged in the distribution of medical devices and generic drugs.

 

4

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Description of subsidiaries

 

Name  Place of incorporation and kind of legal entity  Principal activities and place of operation  Effective
interest
held
 
           
Lasting Wisdom Holdings Limited (“Lasting”)  British Virgin Island, a limited liability company  Investment holding   100%
            
Pukung Limited (“Pukung”)  Hong Kong, a limited liability company  Investment holding   100%
            
Beijing Xinrongxin Industrial Development Co., Ltd. (“Xinrongxin”)  The PRC, a limited liability company  Investment holding   100%
            
Boqi Zhengji Pharmacy Chain Co., Ltd. (“Boqi Zhengji”)  The PRC, a limited liability company  Retail and wholesale distribution of pharmaceutical and other healthcare products in the PRC   100%
            
Dalian Boyi Technology Co., Ltd.  The PRC, a limited liability company  IT Technology service research and development   100%
            
Chongqing Guanzan Technology Co., Ltd. (“Guanzan”)  The PRC, a limited liability company  Wholesale distribution of medical devices in the PRC   100%
            
Chongqing Shude Pharmaceutical Co., Ltd.  The PRC, a limited liability company  Wholesale distribution of generic drugs in the PRC   80%
            
Chongqing Lijiantang Pharmaceutical Co., Ltd.  The PRC, a limited liability company  Wholesale distribution of generic drugs in the PRC   100%

 

5

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. GOING CONCERN UNCERTAINTIES

 

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 operating losses of $4,074,514 and $1,085,902, and the outflow of $3,429,513 and $26,409 from operating activities for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the Company had an accumulated deficit of $8.4 million and negative working capital of $0.59 million. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

 

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 implementation of management’s business plan to extend its operations and generate sufficient revenues and cash flow to meet its obligations. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurance that the Company will be successful in increasing its sales or securing sufficient funds to sustain its operations.

 

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.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and consolidation

 

These accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). These unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

 

The unaudited interim condensed consolidated financial information as of June 30, 2020 and for the six months ended June 30, 2020 and 2019 have been prepared, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in annual consolidated financial statements prepared in accordance with US GAAP, have been omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial information should be read in conjunction with the consolidated financial statements and the notes.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s unaudited condensed consolidated financial position as of June 30, 2020 and its unaudited condensed consolidated results of operations for the six months ended June 30, 2020 and 2019, and its unaudited condensed consolidated cash flows for the three months ended June 30, 2020 and 2019, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the 2020 fiscal year or any future periods.

 

6

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Use of estimates

 

The preparation of these condensed consolidated financial statements in conformity with the US GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities on the date of these condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates and judgments on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions made by management include, among others, useful lives and impairment of long-lived assets, collectability of accounts receivable, advances to suppliers allowance for doubtful accounts, reserve of inventory, fair value of goodwill and valuation of derivative liabilities. While the Company believes that the estimates and assumptions used in the preparation of these condensed consolidated financial statements are appropriate, actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

 

Cash

 

Cash consists primarily of cash on hand and cash in banks which is readily available in checking and saving accounts. The Company maintains cash with various financial institutions in the PRC, where its accounts are uninsured. The Company has not experienced any losses from funds held in bank accounts and believes it is not exposed to any risk on its bank accounts.

 

Restricted cash

 

Cash that is restricted as to withdrawal or use under the terms of certain contractual agreements or orders are recorded in a restricted cash account in the Company’s unaudited interim condensed consolidated balance sheet. The Company’s restricted cash balance is the amount of cash deposited in the Company’s bank account that was subject to an attachment order by a local court of Dalian City due to a dispute with a supplier. As of June 30, 2020 and December 31, 2019, the balances of restricted cash were $13,090 and $311 respectively.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable are recorded at the invoiced amount and do not bear interest, which 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 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. The Company will consider the allowance for doubtful accounts for any estimated losses resulting from the inability of its customers to make required payments. For those 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 June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was $997,227 and $53,182 respectively.

 

7

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Advances to suppliers

 

Advances to suppliers consist of prepayments to the Company’s vendors, such as pharmaceutical manufacturers and medicine suppliers. We typically prepay for the purchase of our merchandise, especially for those salable, scarce, personalized medicine or medical devices. We typically receive products from vendors within three to nine months after making prepayments. We continuously monitor delivery from, and payments to, our 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 we have difficulty receiving products from a vendor, we would cease purchasing products from such vendor, request return of our prepayment promptly, and if necessary, take legal action. We have 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 June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was $15,169 and $11,716, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined on a weighted average method. The Company carries out physical inventory counts on a monthly basis at each store directly-owned and those warehouses for temporary storage of our selling merchandises. The Company reviews historical sales activity quarterly to identify if any 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 net realizable value, or obsolescence of inventories determined principally by customer demand and the maturity period of the merchandises. As of June 30, 2020 and December 31, 2019, the Company recorded an allowance for obsolete inventories, which mainly consists of expired medicine, of $367,233 and $182,258, respectively.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

 

    Expected useful lives   Residual value
Building   20 years   5%
Office equipment   3 years   5%
Furniture   5 years   5%
Vehicles   4 years   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 pharmacy store club members, which was recognized at the acquisition of the Pharmacy Group, and software of management systems. 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
Pharmacy club members   8 years

 

8

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Goodwill

 

Goodwill represents 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, Goodwill and 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.

 

Goodwill is 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 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.

 

Management evaluated the recoverability of goodwill by performing a qualitative assessment before using a two-step impairment test approach at the reporting unit level. If the Company reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill will be reassigned based on the relative fair value of each of the affected reporting units.

 

Impairment of long-lived assets and intangibles

 

In accordance with the provisions of ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to its estimated future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.

 

Revenue recognition

 

We adopted Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contract with Customers (“ASC 606”) for all periods presented. Under ASC 606, revenue is recognized when control of the promised goods and services is transferred to the Company’s customers, in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods and services, net of value-added tax. The Company determines revenue recognition through the following steps:

 

  Identify the contract with a customer;

 

  Identify the performance obligations in the contract;

 

  Determine the transaction price;

 

  Allocate the transaction price to the performance obligations in the contract; and

 

  Recognize revenue when (or as) the entity satisfies a performance obligation.

 

9

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied by the control of the promised goods and services is transferred to the customers, which at a point in time or over time as appropriate.

 

The Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect to the sales of products. 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

 

Cost of revenue

 

Cost of revenue consists primarily of cost of goods purchased from suppliers plus direct material costs for packaging and storage, direct labor, which are directly attributable to the acquisition and maintaining of products for sales. Cost of revenues also include impairment loss of our products which are obsolete or expired for sale, if any. Shipping and handling costs, associated with the distribution of products to customers, are borne by the customers.

 

Comprehensive income

 

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

 

Income taxes

 

Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the six months ended June 30, 2020 and 2019, the Company did not incur any interest or penalties associated with tax positions. As of June 30, 2020, the Company did not have any significant unrecognized uncertain tax positions.

 

The Company conducts all of its business in the PRC and is subject to tax in this jurisdiction. As a result of its corporate structure the Company files tax returns that are subject to examination by a foreign tax authority.

 

10

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Value added tax

 

Sales revenue represents the invoiced value of goods sold, net of VAT. All of the Company’s products that are sold in the PRC are subject to a VAT on the gross sales price. The VAT rates range up to 17%, depending on the type of products sold. The VAT may be offset by VAT paid by the Company on its purchase activities of merchandises, raw materials, utilities, and other materials which cost was included in the cost of producing or acquiring its products for sales. The Company records a VAT payable net of payments if the VAT payable on the gross sales is larger than VAT paid by the Company on purchase of finished goods; on the other hand, the Company records a VAT deductible in the accompanying financial statements net of any VAT payable at the end of reporting period.

 

Convertible promissory notes

 

The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the FASB Accounting Standards Codification. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.

 

Derivative instruments

 

The Company has entered into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with Accounting Standards Codification Topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.

 

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.

 

Net loss per share

 

The Company calculates net loss per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

 

11

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Foreign currencies translation

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the statement of operations.

 

The reporting currency of the Company is the United States Dollar (“US$”). The Company’s subsidiaries in the PRC maintain their books and records in their local currency, the Renminbi Yuan (“RMB”), which is the functional currency as being the primary currency of the economic environment in which these entities operate.

 

In general, for consolidation purposes, assets and liabilities of the Company’s 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.

 

Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective period:

 

   June 30,
2020
   June 30,
2019
 
Period-end RMB:US$1 exchange rate   7.0741    6.8747 
Six months end average RMB:US$1 exchange rate   7.0574    6.7808 

 

Related parties

 

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

 

Segment reporting

 

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about the type of products and services, geographical areas, business strategies and major customers in business components. Beginning in first quarter of 2020, the Company operates in three reportable segments: retail pharmacy, wholesale medicine and wholesale medical devices in the PRC.

 

Fair value of financial instruments

 

The carrying value of the Company’s financial instruments (excluding short-term bank borrowing and convertible promissory notes): cash and cash equivalents, accounts and retention receivable, prepayments and other receivables, accounts payable, income tax payable, amounts due to related parties other payables and accrued liabilities approximate their fair values because of the short-term nature of these financial instruments.

 

Management believes, based on the current market prices or interest rates for similar debt instruments, the fair value of its obligation under its finance lease and short-term bank borrowing approximate the carrying amount.

 

12

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company also follows the guidance of the ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;

 

Level 2: Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. Black-Scholes Option-Pricing model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs; and

 

Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.

 

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

The carrying amount of cash, restricted cash, accounts receivable, other receivable, bank credit, accounts payable and other accounts payable approximate their fair value due to the short-term maturity of these instruments.

 

Recent accounting pronouncements

  

In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 is a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. This standard will become effective and be adopted by companies of which a new fiscal year starts after July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems. 

 

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 is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. 

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

13

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. THE ACQUISITION OF THE GUANZAN GROUP

 

On February 1, 2020, the Company, Xinrongxin, Ms. Li Zhou (“Ms. Zhou”) and Guanzan entered into a stock purchase agreement (the “Guanzan SPA”). Pursuant to the Guanzan SPA, the Company agreed to purchase all the issued and outstanding shares of Guanzan (the “Guanzan Shares”) from Ms. Zhou for RMB 100,000,000 (approximately $14,285,714), to be paid by the issuance of 950,000 shares of the Company’s common stock (the “Guanzan Stock Consideration”) and the payment of RMB 80,000,000 in cash (the “Guanzan Cash Consideration”) (the “Guanzan Acquisition”). The Guanzan Stock Consideration was payable at closing and the Guanzan Cash Consideration, which is subject to post-closing adjustments based on the performance of Guanzan in the years ending December 31, 2020 and 2021, will be paid pursuant to a post-closing payment schedule.

 

The transaction closed on March 18, 2020. Upon the closing, the Guanzan Shares were transferred to and recorded under the name of Xinrongxin and the Guanzan Stock Consideration was paid to Ms. Zhou. The Guanzan Cash Consideration has not been paid as of the date of this report.

 

The following summarizes the identified assets acquired and liabilities assumed pursuant to the Guanzan Acquisition as of March 18, 2020:

 

Items  Amount 
Assets    
Cash  $95,220 
Accounts receivable   1,835,981 
Advances to suppliers   1,222,986 
Amount due from related parties   410,943 
Inventories   950,225 
Prepayments and other receivables   90,256 
Property, plant and equipment   707,289 
Intangible assets   254,737 
Goodwill   6,443,170 
Liabilities     
Short-term bank borrowings   (838,926)
Long-term loans due within one year   (250,663)
Accounts payable, trade   (1,303,399)
Advances from customers   (1,350,126)
Amount due to related parties   (106,720)
Taxes payable   (406,169)
Other payables and accrued liabilities   (390,594)
Long-term loans – noncurrent portion   (186,796)
Non-controlling interests   (46,295)
Total-net assets  $7,131,119 

 

The fair value of all assets acquired and liabilities assumed is the estimated book value of the Guanzan Group. Goodwill represent the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Guanzan Group at the acquisition date. Upon the Guanzan Acquisition, the Company recognized its non-controlling interest in Shude in the amount of $46,295, representing the 20% non-controlling equity interest in Shude.

 

Guanzan is a distributor of medical devices whose customers are primarily drug stores, private clinics, pharmaceutical dealers and hospitals in the Southwest of China. Guanzan holds business licenses in the PRC such as a Business Permit for Medical Devices and a Recordation Certificate for Business Activities Involving Class II Medical Devices, etc., which qualify Guanzan to engage in the distribution of medical devices in the PRC.

 

Shude is a pharmaceutical distributor that markets generic drugs. Shude’s customers include a wide range of clinics, private and public hospitals and pharmacies in the PRC. Shude holds Chinese business licenses such as a Business Permit for Medical Devices and a Drug Wholesale Distribution License, which qualify Shude to engage in the distribution of medicines and medical devices in China.

 

14

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

5. THE DISPOSAL OF NF GROUP

 

In late 2019, the Company committed to a plan to dispose of all the NF Group and on March 31, 2020 entered into the NF SPA with respect to the NF Group Disposition. Pursuant to the NF SPA, the aggregate sale price for the NF Group is $10,000,000. The closing of the NF SPA was subject to the satisfaction of certain conditions, including that the representations and warranties of the parties contained in the NF SPA were true and correct in all material respects on the closing date and that applicable consents and approvals required to be obtained by the parties have been obtained and not withdrawn.

 The NF Group Disposition closed on June 23, 2020, at which time the Company received banker’s acceptance bills (Chinese bank instruments that are payable by a bank and transferrable by endorsement) in an aggregate amount $10 million, from the buyer. Upon closing, the Company ceased to be involved in the energy efficiency enhancement business.

 

The consolidated NF Group balance sheet on disposal date and December 31, 2019, respectively, consisted of the following: 

 

   June 30,
2020
   December 31,
2019
 
Current assets:        
Cash  $21,825   $23,645 
Restricted cash   180,494    183,027 
Accounts and retention receivable, net   44,087    130,456 
Advances to suppliers   50,165    81,140 
Inventories   1,360,746    1,383,226 
Prepayments and other receivables   103,120    112,818 
Total current assets   1,760,437    1,914,312 
           
Non-current assets:          
Property, plant and equipment, net   16,694,212    16,928,488 
Intangible assets, net   2,343,299    2,376,183 
Total assets   $20,797,948   $21,218,983 
           
           
Liabilities          
Current liabilities:          
Short-term loans  $5,651,602   $5,730,914 
Accounts payable, trade   2,318,939    2,351,481 
Advances from customers   383,728    391,464 
Amount due to related parties   5,665,983    1,542,988 
Taxes payable   1,260,280    1,176,721 
Other payables and accrued liabilities   2,461,780    1,914,470 
Total current liabilities   17,742,312    13,108,038 
Total liabilities  $17,742,312   $13,108,038 

 

The summarized operating results of the NF Group in the Company’s unaudited interim condensed consolidated statements of operations consist of the following:

 

   For the Six Months ended
June 30,
 
   2020   2019 
         
Revenues  $8,537   $578,712 
Cost of revenues   3,394    430,676 
Gross profit   5,143    148,036 
           
Operating expenses   498,212    398,902 
Other expense   307,536    168,968 
Loss before income taxes   (800,605)   (419,834)
           
Income taxes   -    - 
Net loss  $(800,605)  $(419,834)

15

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. ACCOUNTS RECEIVABLE

 

The majority of the Company’s retail pharmacy revenues are derived from cash sales, except for sales to PRC social security bureaus or commercial health insurance programs, which typically settle once a month. We offer several credit terms to our wholesale customers and also to our authorized retail stores. Accounts receivable consist of the following:

 

   June 30,
2020
   December 31,
2019
 
Accounts receivable, cost  $4,115,629   $78,022 
Less: allowance for doubtful accounts   (997,227)   (53,182)
Accounts receivable, net  $3,118,402   $24,840 

 

The Company routinely evaluates the need for allowance for doubtful accounts based on specifically identified amounts that the management believes to be uncollectible. If the actual collection experience changes, revisions to the allowance may be required.

 

7. ADVANCES TO SUPPLIERS

 

Advances to suppliers represent the amount the Company prepaid to its suppliers for merchandise for sale in the ordinary course of business. As of June 30, 2020 and December 31, 2019, the Company reported advances to suppliers as follow:

 

   June 30,
2020
   December 31,
2019
 
Advances to suppliers, cost  $2,212,418   $12,968 
Less: allowance for doubtful accounts   (15,169)   (11,716)
Advances to suppliers, net  $2,197,249   $1,252 

 

(1)The remaining balance includes a pre-payment for medical equipment of $1.135 million to Sheng Yi Trading Co., Ltd. (“Sheng Yi”) for the purchase of ventilators in June 2020. Since the ventilators became out of stock, such purchase was subsequently cancelled. The pre-payment is expected to be refunded in October 2020.

 

8. INVENTORIES

 

The Pharmacy Group’s inventories consist of medicine and medical devices that were purchased from third parties for resale in our retail pharmacy stores and wholesale sales to third party pharmacies, clinics, hospitals, etc. Inventories consisted of the following:

 

   June 30,
2020
   December 31,
2019
 
Medicine  $2,713,858   $889,784 
Medical devices   176,450    - 
Sub-total   2,890,308    889,784 
Less: allowance for obsolete and expired inventory   (367,233)   (182,258)
   $2,523,075   $707,526 

 

For the six months ended June 30, 2020 and 2019, the Company accrued allowances of $187,942 and $0, respectively for obsolete and expired items.

16

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

9. PREPAYMENTS AND OTHER RECEIVABLES

 

Prepayments and other receivables represent the amount that the Company prepaid as rent deposits for both retail stores and office space premises, special medical device purchase deposits, prepaid rental fee and professional services, advances to employees in the ordinary course of business, VAT deductibles and other miscellaneous receivables. The table below sets forth the balances as of June 30, 2020 and December 31, 2019, respectively.

 

      June 30,
2020
   December 31,
2019
 
Deposit for rental     $26,909   $26,938 
Prepaid rental fee      19,915    48,490 
Deposit for purchase of medical devices  (1)   1,034,129    - 
Receivables from disposal of NF Group  (2)   10,000,000    - 
Receivables from convertible bonds      2,100,000    - 
Deferred offering cost      1,156,737    - 
VAT deductible      53,311    - 
Others      29,509    10,906 
Less: allowance for doubtful accounts      (13,137)   (27,001)
Prepayments and other receivables, net     $14,407,373    59,333 

 

(1)The Company made a pre-payment of $1.135 million to Sheng Yi for the purchase of ventilators in June 2020. Since the ventilators became out of stock, such purchase was subsequently cancelled. The pre-payment is expected to be refunded in October 2020.

 

(2)The NF Group Disposition closed on June 23, 2020, at which time the Company received banker’s acceptance bills (Chinese bank instruments that are payable by a bank and transferrable by endorsement) in the aggregate amount of $10 million, from the buyer. The full proceeds from the banker’s acceptance bills were credited into the Company’s account in July 2020.

 

Management evaluates the recoverable value of these balances periodically in accordance with the Company’s policies. For the six months ended June 30, 2020 and 2019, the Company reversed an allowance for doubtful accounts of $22,110 and $0, respectively.

 

10. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

   June 30,
2020
   December 31,
2019
 
Building  $737,924   $- 
Office equipment   86,102    41,127 
Furniture   17,286    17,529 
Vehicle   27,422    10,536 
    868,734    69,192 
Less: accumulated depreciation   (112,022)   (30,551)
Property, plant and equipment, net  $756,712   $38,641 

 

Depreciation expense for the six months ended June 30, 2020 and 2019 were $2,707 and $0, respectively.

 

17

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. INTANGIBLE ASSETS

 

Intangible assets consisted of the following:

 

   June 30,
2020
   December 31,
2019
 
Pharmacy store club members *  $8,208,349   $8,208,349 
Sales management system   22,618    22,936 
Financial management system   4,265    4,326 
    8,235,232    8,235,611 
Less: accumulated amortization   (776,746)   (262,432)
Intangible assets, net  $7,458,486   $7,973,179 

 

*Pharmacy store club members, which represented the aggregate fair value of the total number of customers who are pharmacy club members, was recognized in the acquisition of Boqi Zhengji which closed on October 14, 2019. The Company estimated and determined that the intangible assets of the pharmacy store club members would generate revenues in the next 8 years and would be amortized using the straight line method over 8 years. The intangible assets of the pharmacy store club members are subject to impairment testing according to the Company’s accounting policy and information available for the Company. No impairment was reserved for such assets for the six months ended June 30, 2020.

 

Amortization expenses for the six months ended June 30, 2020 and 2019 were $513,022 and $0, respectively.

 

The estimated amortization expense for these intangible assets in the next five years and thereafter is as follows:

 

Year ending December 31:  Amount 
2020  $514,425 
2021   1,028,789 
2022   1,028,789 
2023   1,028,789 
2024   1,028,789 
Thereafter   2,828,905 
Total:  $7,458,486 

  

12. GOODWILL

 

The goodwill associated with the Guanzan Acquisition of $6,443,170 was initially recognized at the acquisition closing date of March 18, 2020. Based on an assessment of the qualitative factors, management determined that it is more-likely-than-not that the fair value of the reporting unit is in excess of its carrying amount. Therefore, management concluded that it was not necessary to proceed to the two-step goodwill impairment test. No impairment loss was recorded for the six months ended June 30, 2020.

 

18

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. LOANS

 

The following loans were assumed upon the acquisition of the Guanzan Group on March 18, 2020.

 

Short-term loans

 

   June 30,
2020
   December 31,
2019
 
In March 2020, Guanzan entered in a loan agreement with Chongqing Nan'an Zhongyin Fuden Village Bank Co. LTD to borrow RMB 1,000,000, at a fixed annual interest rate of 8.0 % and due on March 1, 2021. The loan was jointly guaranteed by Shude, Mr. Xiaoping Wang, Guanzan’s CEO and the Company’s COO, and Ms. Zhou, the former record owner of Guanzan. Mr. Wang and Ms. Zhou are husband and wife.  $141,361   $                   - 
           
In December 2019, Guanzan entered into a loan agreement with Postal Savings Bank of China to borrow RMB 4,900,000, at a fixed annual interest rate of 5.7% and due on December 22, 2020. The loan was guaranteed by Mr. Wang and Ms. Zhou.  Guanzan also pledged its office building as a collateral.   692,667    - 
           
Total  $834,028   $- 

 

For the six months ended June 30, 2020 and 2019, interest expense on short-term loans amounted to $12,698 and $0, respectively.

 

Long-term loans

 

   June 30,
2020
   December 31,
2019
 
In March 2018, Guanzan entered into a loan agreement with Standard Chartered Bank ("SCB") to borrow RMB 1,660,000 at a fixed monthly interest rate of 1.33% and due on May 4, 2021.  $76,022   $                 - 
           
In October 2017, Guanzan entered into a loan agreement with Chongqing Gaoxinlong Micro-credit Co., Ltd. to borrow RMB 1,000,000 at a fixed monthly interest rate of 1.55% and due on November 2, 2020.   20,829    - 
           
In November 2019, Shude entered into a loan agreement with SCB for to borrow RMB 1,220,000 at a fixed monthly interest rate of 1.38% and due on December 3, 2022.   148,556    - 
           
In January 2020, Shude entered into a loan agreement with We Bank to borrow RMB 1,060,000 at a fixed monthly nominal interest rate of 1.02% and due on January 2, 2022.   138,067    - 
Subtotal of long-term loans   383,474    - 
Less: current portion   (219,554)   - 
Long-term loans – noncurrent portion  $163,920   $- 

 

For the six months ended June 30, 2020 and 2019, interest expense on long-term loans amounted to $27,661 and $0, respectively.

19

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14. CONVERTIBLE PROMISSORY NOTES AND EMBEDDED DERIVATIVE INSTRUCTIONS

 

On and after September 27, 2019, the Company entered into a series of identical security purchase agreements (the “Agreements”) with a number of lenders (the “Holders”) to sell convertible promissory notes (each a “ Note” and collectively the “Notes”) of the Company to the Holders. Each of these Notes was issued with a term of 12 months, carrying 6% annual interest rate and convertible into the Company’s common stock. According to the Agreements, each Holder has the right during the period beginning on the date which is one hundred eighty (180) calendar days following the date of issuance of the Note and ending on the maturity date of the Note, to convert all or any part of the outstanding and unpaid principal amount of the Note into fully paid and non-assessable shares of common stock. During the period that these Notes are outstanding, the Company will reserve from its authorized and unissued shares of common stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of the common stock upon the full conversion of the Notes issued pursuant to these Agreements.

 

On May 19, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with two institutional investors to sell in a private placement a new series of senior secured convertible notes having an original issue amount of $6,550,000, with a discount of 19.85%, and ranking senior to all outstanding and future indebtedness of the Company ( the “ Convertible Notes”. Each Institutional Investor paid $1,750,000 in cash for a note in the face amount of $2,225,000. Additional Convertible Note in an aggregate original principal amount not to exceed $2,100,000 may also be issued to the Institutional Investors under the SPA at a later date under certain circumstances. The Convertible Notes mature on the eighteen-month anniversary of the issuance date, are payable by the Company in installments and are convertible at the election of the Institutional Investors at the convertible price of $2.59, which is subject to adjustment in the event of default. Each Institutional Investor also received a warrant to purchase 650,000 shares of the Company’s common stock at an initial exercise price of $2.845. The placement agent for the private placement received a warrant to purchase up to 171,845 shares of the Company’s common stock at an initial exercise price of $2.845 per share, subject to increase based on the number of shares of common stock issued pursuant to the Convertible Notes.

 

The following table summarizes the key terms of Notes as of June 30, 2020:

 

   Lenders/Holders  Principal   Annual
Interest
Rate
   Maturity
Dates
  Shares
reserved
   Convertible
Rate
 
1  CROWN BRIDGE PARTNERS, LLC   74,473    6%  11/15/2020   250,000    65%
2  TFK INVESTMENTS, LLC,   101,500    6%  11/15/2020   250,000    65%
3  MORNINGVIEW FINANCIAL, LLC   156,750    6%  12/18/2020   500,000    65%
4  CROWN BRIDGE PARTNERS, LLC   50,750    6%  12/16/2020   250,000    65%
5  BHP Capital NY Inc.   183,750    6%  02/13/2021   450,000    65%
6  FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC   200,000    6%  02/13/2021   500,000    65%
7  Platinum Point Capital LLC   250,000    6%  02/27/2021   1,061,232    65%
   Total  $1,017,223            3,261,232      

 

Upon evaluation, the Company determined that the Agreements contained embedded beneficial conversion features which met the definition of Debt with Conversion and Other Options covered under the Accounting Standards Codification topic 470 (“ASC 470”). According to ASC 470, an embedded beneficial conversion feature present in a convertible instrument shall be recognized separately at issuance by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital.

 

An aggregate amount of $7,567,223 was reported as discount on the Notes and the Convertible Notes at their issuance dates and are being amortized over the life of the Notes and Convertible Notes. During the six months ended June 30, 2020 the Company amortized $1,075,171 of discount on the Notes and Convertible Notes. The principal balance of the Notes and Convertible Notes was presented as following:

 

   June 30,
2020
   December 31,
2019
 
Convertible note – principal  $7,567,223   $900,500 
Convertible note – discount   (3,714,333)   (793,117)
   $3,852,890   $107,383 

 

20

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Additionally, the Company accounted for the embedded conversion option liability in accordance with the Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with these standards, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument. The fair value of the embedded conversion option liability associated with each Note was valued using the Black-Scholes model. The key assumptions used in the Black-Scholes option pricing model are as follows:

 

   June 30,
2020
   December 31,
2019
 
Dividend yield  $0%  $0%
Expected volatility   217.31% ~ 226.75%   219.43% ~ 219.71%
Risk free interest rate   0.18% ~ 0.29%   1.54% ~ 1.57%
Expected life (year)   0.29 ~3.86    0.74 ~ 0.96 

 

The value of the conversion option liability underlying the Notes as of June 30, 2020 and December 31, 2019 was $1,329,842 and $1,272,871, respectively. The Company recognized a loss from the increase in the fair value of the conversion option liability in the amount of $107,340 and $0 for the six months ended June 30, 2020 and 2019, respectively.

 

15. OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities consisted of the following:

 

   June 30,
2020
   December 31,
2019
 
Salary payable  $411,046   $121,296 
Salary payable – related party   -    95,862 
Sales commission payable   449,370    - 
Accrued interest expense   32,045    4,829 
Accrued operating expenses   140,892    104,278 
Social security payable   72,780    58,183 
Acquisition payable (1)   10,069,828    5,655,709 
Other payables   32,587    4,221 
   $11,208,548   $6,044,378 

 

(1)Acquisition payable included:

 

a. In October 2019, the Company completed the acquisition of the Boqi Zhengji. In addition to the issuance of 1,500,000 shares of the Company’s common stock, the Company is obligated to pay approximately $5,655,709 (or RMB 40,000,000) in cash, which is subject to post-closing adjustments based on the performance of Boqi Zhengji. The fair value of the cash consideration payable has been calculated in conformance with FASB ASC 805-10.

 

 

b. In March 2020, the Company completed the Guanzan Acquisition. In addition to the issuance of 950,000 shares of the Company’s common stock, the Company is obligated to pay approximately $4,414,119, which is subject to post-closing adjustments based on the performance of the Guanzan Group in 2020 and 2021. The fair value of the cash consideration payable has been calculated in conformance with FASB ASC 805-10.

 

21

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16. RELATED PARTIES AND RELATED PARTIES TRANSACTIONS

 

Amounts due from related parties

 

As of December 31 2019, $ 1,350 was due from Xi’An Ronghao Medical Co.,Ltd (“Xi’An Ronghao”), a company directly controlled by Ms. Lijun Wang, who is the former CEO of Boqi Zhengji. The amount due from Xi’An Ronghao is free of interest and due on demand, and was incurred before the acquisition of the Pharmacy Group to help Xi’An Ronghao cover its operational costs in early 2019. This amount was repaid during the first quarter of 2020.

 

Amounts payable to related parties

 

As of June 30, 2020 and December 31, 2019, the total amounts payable to related parties was $649,059 and $305,760, respectively, which included:

 

1.Amount payable to Mr. Yongquan Bi, the former Chief Executive Officer and current Chairman of the Board of directors of the Company, of $413,018 and $300,362, respectively, free of interest and due on demand. The amount represents the remaining balance that Mr. Yongquan Bi advanced for third party services on behalf of the Company during the ordinary course of business of the Company since the beginning of 2018.

 

2.Mr. Xiaoping Wang, Guanzan’s CEO and the Company’s COO, loaned the Company $136,382 (RMB 964,780 ) with an interest rate of 12.24% per year to Shude as of June 30, 2020. The loan is due in January 2023.

 

3.Amount payable to Mr. Fuqing Zhang, the Chief Executive Officer of Xinrongxin of $99,659 and $27,271, respectively, free of interest and due on demand. The amount due to Mr. Fuqing Zhang relates to reimbursable operating expenses that the Company owned to Mr. Fuqing Zhang during and before the acquisition the Pharmacy Group.

 

17. STOCKHOLDERS’ EQUITY

 

The Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value. As of June 30, 2020 and December 31, 2019, it had 10,384,433 shares and 9,073,289 shares outstanding, respectively. As of June 30, 2020, the Company reserved a total of 4,696,137 shares of common stock for future issuance pursuant to the requirements of the Notes and Convertible Notes.

 

On April 20, 2019 and October 7, 2019, respectively, the Company issued an aggregate of 1,500,000 shares of its common stock as a part of the consideration for the acquisition of Boqi Zhengji.

 

On March 12, 2020, the Company issued 950,000 shares of its common stock as the Guanzan Stock Consideration.

 

On April 6 and April 7, 2020, Power Up Lending Group Ltd. (“Power Up”) converted the full amount of a Note in the principal amount of $153,000 plus interest into 113,775 shares of the Company’s common stock.

 

On April 21, 2020, Power Up converted the full amount of another Note in the principal amount of $83,000 plus interest into 55,144 shares of the Company’s common stock.

 

On June 18, 2020, CROWN BRIDGE PARTNERS, LLC converted $27,027 of a Note in the principal amount of $101,500 plus interest into 18,000 shares of the Company’s common stock.

 

On June 19, 2020, LABRYS FUND, LP converted the full amount of a Note in the principal amount $254,000 plus interest into 174,225 shares of the Company’s common stock.

 

22

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18. NET LOSS PER SHARE

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the year. The dilutive effect of potential common shares outstanding is included in diluted net loss per share. Due to the Company’s net loss from its continuing operations, all potential common share issuances had anti-dilutive effect on net loss per share. The following table sets forth the computation of basic and diluted net loss per share for the six months ended June 30, 2020 and 2019:

 

   For the Six Months ended
June 30,
 
   2020   2019 
Total net gain/(loss) attributable to common shareholders  $2,445,388   $(1,429,690)
           
Weighted average common shares outstanding – Basic and diluted   9,728,861    7,703,123 
           
Gian/(Loss) per shares – basic and diluted:  $0.25   $(0.19)

 

19. LITIGATION

 

On May 17, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 482,771.87. On June 19, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 482,771.87 in total. 

 

On June 26, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payable of RMB 184,490.77. On Sep.12, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 184,490.77 in total. 

 

On July 8, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 64,535. On August 1, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 64,535.00 in total. 

 

On July 10, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 122,360.20. On August 9, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 101,253.40 in total. 

 

On July 18, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 288,440.00. On September 4, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 288,440.00 in total. 

 

On August 25, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 137,449.90. On October 23, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 137,449.90 in total. 

 

On August 25, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 230,281.55. On October 2, 2019, Shenyang Heping District People’s Court ruled that Boqi Zhengji had to pay the outstanding balance RMB 230,281.55 to the supplier within 10 days. 

 

On September 10, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 395,378.90. On October 18, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 395,378.90 plus interest.

 

On April 1, 2020, the Guizhou Province Xiuwen County People’s Court ordered the attachment of two of Shude’s bank accounts pursuant to a pre-litigation attachment application filed by one of Shude’s suppliers in connection with unpaid outstanding payables of approximately RMB 365,200 (approximately $51,437). The total amount of cash in the two accounts subject to the attachment is RMB 570,902 (approximately $80,409). The attachment order has a term of one (1) year, renewable upon fifteen days’ notice. No lawsuit has been filed by the supplier as of the date of this report. In the event Shude will be unable to resolve the dispute on a reasonable basis, it will seek to contest the attachment and protect its interests.

 

None of the above settlement or judgment amounts has been paid as of the date of this report. 

23

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

20. SEGMENTS

 

General Information of Reportable Segments:

 

The Company operates in three reportable segments: retail pharmacy, wholesale medicine and wholesale medical devices. The retail pharmacy segment sells prescription and OTC medicines, traditional Chinese medicines (“TCM”), healthcare supplies, and sundry items to retail customers through its directly-owned pharmacies and authorized retail stores. The wholesale medicine segment includes supplying prescription and OTC medicines, TCM, healthcare supplies and sundry items to clinics, third party pharmacies, hospitals and other drug vendors. To date, there were no inter-segment revenues between our retail pharmacy and wholesale medicine segments. The wholesale medical devices segment distributes medical devices, including medical consumables to private clinics, hospitals, third party pharmacies and other medical devices dealers.

 

The segments’ accounting policies are the same as those described in the summary of significant accounting policies. The Company’s chief operating decision maker (“CODM”), who is the CEO of the Company, evaluates performance of each of the segments based on profit or loss from continuing operations net of income tax.

 

The Company’s reportable business segments are strategic business units that offer different products. Each segment is managed independently because they require different operations and markets to distinct classes of customers.

 

Information about Reported Segment Profit or Loss and Segment Assets

 

BIMI, as the holding company, incurred a significant amount of general operating expenses, such as financing costs, that the Company’s CODM did not allocate to segments to evaluate the segments performance and allocate recourses of the Company. In addition, except for depreciation and amortization of long-lived assets, the Company does not allocate the change in fair value of derivative liabilities and the amortization of discount of convertible notes to reporting segments in its reported profit or loss. The following amounts were used by the chief operating decision maker.

 

For six months ended June 30, 2020  Retail
pharmacy
   Medical
device
wholesale
   Drugs
wholesale
   All other   Total 
Revenues from external customers  $13,797   $1,896,733   $2,307,311   $8,537   $4,226,378 
Cost of revenues  $198,410   $1,464,624   $1,726,760   $17,375   $3,407,169 
Depreciation, depletion, and amortization expense  $513,022   $-   $-   $-   $513,022 
Profit (loss)  $(346,799)  $353,809   $75,558   $-   $82,568 
Total assets  $640,888   $3,210,958   $5,599,998   $-   $9,451,844 

24

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Reconciliations of Reportable Segment Revenues, Profit or Loss, and Assets, to the Consolidated Totals as of June 30, 2020 and for the Six Months ended June 30, 2020.

 

Revenues  Six Months ended
June 30,
2020
 
Total revenues from reportable segments  $4,241,750 
Other revenues   8,537 
Elimination of intersegments revenues   23,909 
Total consolidated revenues  $4,226,378 
      
Profit or loss     
Total loss from reportable segments  $82,568 
Elimination of intersegments profit or loss   (4,220)
Unallocated amount:   6,944,469 
Investment income:     
Amortization of discount of convertible notes   (614,581)
Depreciation and amortization   (513,022)
Other corporation expense   (3,423,551)
Total net income  $2,471,663 

 

Assets    
Total assets from reportable segments  $21,875,543 
Elimination of intersegments receivables   (151,364)
Unallocated amount:     
Other unallocated assets – Boyi Technology   26,255 
Other unallocated assets – Xinrongxin   126,891 
Other unallocated assets – BIMI   15,430,671 
Total consolidated assets  $37,307,996 

 

21. ENTITY-WIDE INFORMATION AND CONCENTRATIONS OF RISK

 

Entity-Wide Information

 

(a) Revenues from each types of products

 

For the six months ended June 30, 2020 and 2019, respectively, the Company reported revenues for each type of product as follows:

 

   For the six months ended
June 30,
 
   2020   2019 
Medical devices  $1,896,732   $- 
Medicines   2,331,221        -
Pharmacy retail   13,797    - 
Total  $4,241,750   $- 

 

(b) Geographic areas information

 

For the six months ended June 30, 2020 and 2019, respectively, all the Company’s revenues were generated in the PRC. There were no long-lived assets located outside of the PRC as of June 30, 2020 and 2019.

25

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(c) Major customers

 

For the six months ended June 30, 2020, no customer accounted for more than 10% of the Company’s revenues.

 

For the six months ended June 30, 2019, the customers who represented more than 10% of the Company’s revenues and its outstanding accounts receivable as of the balance sheet date are presented as follow:

 

   For the three months ended
June 30,
2019
  As of
June 30,
2019
 
Customers  Revenues   Percentage
of revenues
   Accounts
receivable
 
Customer A  $39,481    12%  $- 
Customer B   62,047    18%   140,364 
Customer C   53,809    16%   59,974 
Customer D   61,275    18%   (9,495)
   $216,612    64%  $190,843 

 

   For the six months ended
June 30,
2019
   As of
June 30,
2019
 
Customers  Revenues   Percentage
of revenues
   Accounts
receivable
 
Customer A  $127,773    14%  $        - 
Customer E   334,978    37%   - 
   $462,751    51%  $- 

 

(d) Major vendors

 

For the six months ended June 30, 2020, one vendor accounted for more than 10% of the Company’s purchases and its outstanding balances as at balance sheet dates:

 

      For the six months ended
March 30,
2020
   As of
June 30,
2020
 
Vendors  Segment  Purchases   Percentage of
total purchases
   Advance to
supply
 
Vendor A  devices segment  $1,241,181    49%  $114,773 

 

For the six months ended June 30, 2019, no vendor accounted for 10% of the Company’s purchases.

 

Concentrations of Risk

 

The Company is exposed to the following concentrations of risk:

 

(a) Credit risk

 

Financial instruments that are potentially subject to credit risk consist principally of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require prepayments or deposits from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

 

(b) Interest rate risk

 

The Company has no significant interest-bearing assets and its interest-rate risk arises from its Notes. The Company manages interest rate risk by varying the issuance and maturity dates, fixing interest rate of debt, limiting the amount of debts, and continually monitoring the effects of market changes in interest rates. As of June 30, 2020 and December 31, 2019, respectively, the Notes were at fixed rates.

 

26

 

 

BOQI INTERNATIONAL MEDICAL INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(c) Exchange rate risk

 

Substantially all of the Company’s revenues and a majority of its costs are denominated in RMB and a significant portion of its assets and liabilities are denominated in RMB. As a result, the Company’s results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If the RMB depreciates against the US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

 

(d) Economic and political risks

 

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operation may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy. The outbreak of COVID-19 pandemic has expanded all over the world since the beginning of 2020, which has greatly slowed the growth of the global economy, including in the PRC, and this effect may continue until the pandemic is controlled, or a vaccine or cure is developed. The slowdown of the growth of the PRC’s economy has adversely effected our current business and future success will be adversely affected if we are unable to capitalize on the opportunities arising from the increasing demand for medicine and medical devices in the markets in which we operate. We established a new subsidiary Lijiantang in May 2020 to conduct a retail pharmacy business in Chongqing. One retail pharmacy store was opened at the end of June 2020 and five more retail pharmacies will open in the coming quarter.

 

The Company’s operations in the PRC are subject to special considerations. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.

 

(e) Enforcement risks

 

The PRC People’s Supreme Court adopted rules in 2010 which restrict parties who are subject to effective court enforcement orders for monetary judgements from extravagant spending until the monetary judgments have been satisfied. According to those rules, if a company becomes subject to a court enforcement order due to failure to satisfy a monetary judgement, the company’s name will appear on a defaulters’ list published by the Chinese courts and the company together with its legal representative and responsible person will be prohibited from using the company property for extravagant spending such as buying real property, vacationing and paying for children’s private school education, until, among other conditions, the monetary judgment has been satisfied. Boqi Zhengji and Nengfa Energy are currently on the defaulters’ list due to their failure to pay off several monetary judgments.

 

27

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes to those financial statements appearing 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, BOQI International Medical, Inc., a Delaware corporation and its subsidiaries.

 

OVERVIEW

 

From 2007 until October 2019, we, through the NF Group, were engaged in the energy efficiency enhancement business, focusing on two fields: (1) manufacturing large diameter energy efficient intelligent flow control systems for thermal and nuclear power generation plants, major national and regional water supply projects and municipal water, gas and heat supply pipeline networks; and (2) energy saving technology consulting, optimization design services, energy saving reconstruction of pipeline networks and contractual energy management services for China’s electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure industries. With the decline in the constructions of power generation plants and municipal water, gas, heat and energy pipelines in China due to a policy change by the PRC government, the demand for our products and services declined markedly.

 

Our energy efficiency enhancement business incurred operating losses in each of the seven years ending December 31, 2019, especially in 2018, when the PRC government adopted a series of policies to favor more environmentally friendly projects and products. As of December 31, 2019, the NF Group had an accumulated deficit of $4,231,623. We explored many different alternatives in an effort to revive this business, including attempts to expand into the international markets, before we determined this business was not sustainable for us. In late 2019, we committed to a plan to dispose of the NF Group and on March 31, 2020, we entered into the NF SPA with respect to the sale of the NF Group. Pursuant to the NF SPA, the aggregate sale price for the NF Group was $10,000,000, determined based on the value of the total assets of the NF Group as shown on the Company’s financial statements as of September 30, 2019, payable at the closing. The NF Group Disposition was closed on June 23, 2020.

 

28

 

  

We are currently focused on the development of our recently acquired businesses that are engaged in the operation of pharmacies and the wholesale distribution of medicine and medical devices (the “Pharmacy Group”).

 

On October 14, 2019, we acquired Boqi Zhengji, which operates pharmacies in the PRC, by purchasing 100% of the equity interests of Lasting, Boqi Zhengji’s parent company. This was the first step of our shift of focus to the healthcare business.

 

The Company, through Boqi Zhengji and its recently established Lijiantang subsidiary, sells medicines and other health-related products. Boqi Zhegnji currently has sixteen directly-owned stores, operating under the brand name “Boqi Pharmacy”, in the city of Dalian in the Liaoning Province of the PRC. . We began our expansion into Chongqing at the end of the second quarter with the opening of our first retail pharmacy at the end of June 2020. The Lijiantang retail pharmacy store will rely on the Guanzan Group’s large number of existing suppliers, with whom the Guanzan Group has long term relationships, for its inventory..

 

Following our plans to become a more cost-efficient and technology-focused company, we closed about 10 retail pharmacies in 2019 to reduce the rent and overhead costs, which had been the major fixed cost items for Boqi Zhegnji and kept sixteen stores. We also developed an online platform and made it available to our club member customers. Our club member customers may browse our products online, confirm availability of a specific product, make an online reservation and pick up the products at a conveniently located store. Although we suffered customer losses during the transition from our reliance on physical stores, we were able to maintain the number of our club members at a stable level. As of June 30, 2020, we had approximately 40,000 club member customers, similar to the annualized average of 39,000 club members in 2019. The total number of club member customers and the total revenue generated from these club member customers as of December 31, 2020 will be used to measure the performance of the pharmacy business and to determine if, and how much of the cash portion of the consideration for the acquisition of Boqi Zhengji will need to be paid.

 

To improve our capability of serving customers online, we plan to apply for a license that will allow our club member customers to pay for our products directly online and receive deliveries to their homes. Online sales are highly regulated in China, and therefore we cannot be certain that we will receive such a license. To support our physical stores and future online sales capabilities, we currently maintain a warehouse for our pharmacy business.

  

We plan to focus the business of Boqi Zhengji on sales of prescription drugs, explore new retail opportunities and improve our online capabilities. Through the opening of pharmacy stores in Chongqing and acquisitions of businesses in the pharmacy industry, we intend to build core competencies such as specialized services. We are committed to the retail pharmacy industry and to transforming the Company into a technology-driven health service platform.

 

29

 

 

On March 18, 2020, we closed the Guanzan Acquisition. The Guanzan Group is a distributor of medical devices and generic drugs based in Chongqing, the largest city in the Southwest region of the PRC. The Guanzan Group has a strong regional brand in the local area of Chongqing and good commodity procurement resources. The rationale for the Guanzan Acquisition is for us to further expand our healthcare operation by acquiring a pharmaceutical and medical devices distributor and is in line with the Company’s expansion strategy, which focuses on deeper penetration of the healthcare market in the Southwest region of China and gaining a wider footprint in the PRC. We believe that the opening of our first pharmacy store in Chongqing in June 2020 and the planned opening of additional stores in Chongqing will further strengthen our ability to serve customers in the Southwest region of China.

  

BUSINESS SEGMENTS

 

The Company currently operates in three reportable segments: retail pharmacy, wholesale medicine and wholesale medical devices. 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 medicine 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 medicine segments. The wholesale medical device segment distributes medical devices, including medical consumables to private clinics, hospitals, third party pharmacies and other medical device dealers.

 

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 reportable 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 operating net losses of $4,074,514 and $1,085,902, and cash outflow of $3,429,513 and $26,409 from operating activities for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, the Company had an accumulated deficit of $8.4 million and negative working capital of $0.59 million. Management believes these factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

 

30

 

 

The continuation of the Company as a going concern through the next twelve months is dependent upon the continued financial support from its stockholders or external financing and further implementation of management’s business plan to expand operations and generate sufficient revenues and cash flows to meet its obligations.

 

On May 18, 2020, the Company entered into a securities purchase agreement (the “May SPA”) with two institutional investors to sell a new series of senior secured convertible notes in the aggregate face amount of $6,550,000 (the “Convertible Notes”) of the Company in a private placement, having an aggregate original issue discount of 19.85%, and ranking senior to all outstanding and future indebtedness of the Company. On June 2, 2020, two Convertible Notes in an aggregate original principal amount of $4,450,000 (having a face amount of $6,550,000) were issued to the two institutional investors. See “LIQUIDITY AND CAPITAL RESOURCES.”

 

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. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be neither any assurance to that effect, nor any assurance that the Company will be successful in securing sufficient funds to sustain its operations.

  

CRITICAL ACCOUNTING POLICIES AND 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. GAAP. In preparing our financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of net revenues and expenses during the reporting period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

 

The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements can be found in our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 10-K”). For additional information, see Note 3 to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report. There were no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 10-K.

 

31

 

 

Recent accounting pronouncements

 

In November 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 is issued a new standard to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The standard will be adopted upon the effective date for us beginning July 1, 2020. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems. 

 

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 is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. 

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

Recent Developments

 

An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 has spread globally in 2020. This outbreak has resulted in travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, cancellations, supply chain disruptions, and lower consumer demand, layoffs, defaults and other significant economic impacts, as well as general concern and uncertainty. The current severity of the pandemic and the uncertainty regarding future outbreaks and the length of its effects have had and may continue to have negative consequences for our company.  

 

Since the outbreak of the pandemic, our operations have been materially impacted. At the beginning of February 2020, the Chinese government issued a quarantine order, which lasted for more than two months in many parts of the country, where everyone had to stay at home. During February and March, all of our administrative functions had to be performed remotely. Not until the beginning of April did we start to maintain a small skeleton crew in our office to perform those functions that cannot be handled remotely.

 

32

 

 

Because of the pandemic, we also suffered a significant reduction.in sales during the first quarter in 2020. As a result of the Chinese government’s lockdown order, our customer traffic plummeted. Certain of our popular and high profit margin products could not be sold due to the governmental restrictive orders, which also resulted in the expiration of a large quantity of our inventory of medicines that are otherwise in high demand in the winter season. During the second quarter, we experienced significant difficulty in obtaining products including prescription drugs, OTC drugs, TCM, nutritional supplements, sundry products and medical consumables from our suppliers for resale, pending the settlement of several large court judgements against Boqi Zhengji in favor of such suppliers. As a result, our retail pharmacy business had minimum sales in the second quarter.

 

RESULTS OF OPERATIONS

 

Comparison of the three months ended June 30, 2020 and 2019

 

       For the Three
Months Ended
June 30
2020,
   Comparison 
   2020   % of
Revenues
   2019   Amount
increase
(decrease)
   Percentage
increase
(decrease)
 
                     
Revenues  $3,790,847    100%  $336,690   $3,454,157    1026%
Cost of revenues   2,941,955    78%   319,172    2,622,783    822%
Gross profit   848,892    22%   17,518    831,374    4747%
Operating expenses   2,922,868    77%   726,940    2,195,928    302%
Other income (expenses), net   6,791,101    179%   (170,823)   6,961,924    4076%
Profit (Loss) before income tax   4,717,125    124%   (883,245)   5,600,370    6341%
Income tax expense   43,271    1.1%        43,271    100%
Net Income attributable to BOQI International Medical Inc.  $4,673,854    123%  $(883,245)  $5,557,009    629%

 

Comparison of the six months ended June 30, 2020 and 2019

 

       For the Six Months Ended
June 30,
2020,
   Comparison 
   2020   % of
Revenues
   2019   Amount
increase
(decrease)
   Percentage
increase
(decrease)
 
                     
Revenues  $4,226,378    100%  $912,402   $3,313,976    363%
Cost of revenues   3,407,169    81%   749,848    2,657,321    354%
Gross profit   819,209    19%   162,554    656,655    404%
Operating expenses   4,893,723    116%   1,248,456    3,645,267    292%
Other income (expenses), net   6,590,716    156%   (339,791)   6,930,507    2040%
Profit (Loss) before income tax   2,516,202    60%   (1,425,693)   3,941,894    276%
Income tax expense   44,539    1.1%   -    44,539    100%
Net Income attributable to BOQI International Medical Inc.  $2,471,663    58%  $(1,425,693)  $3,897,356    273%

 

33

 

 

Revenues

 

Revenues for the three months ended June 30, 2020 and 2019 were $3,790,847 and $336,690, respectively. The Company’s revenues for the three months ended June 30, 2020 were principally attributable to our newly acquired Guanzan Group’s wholesale sales of medical devices and generic drugs.

 

The Company’s revenues for the three months ended June 30, 2019 were attributable to the sales of products manufactured by the NF Group and from energy saving technical services and product collaboration processing services performed by the NF Group, which we sold in June 2020.

 

Revenues from the wholesale medical devices segment and the wholesale medicine segment for the three months ended June 30, 2020 were $2,059,189 and $1,730,175, respectively. During the second quarter of 2020, the Guanzan Group benefitted from the recovery from COVID-19.

 

Revenues from the retail pharmacy segment for the three months ended June 30, 2020 were $1,483. During the second quarter, we experienced significant difficulty in obtaining products including, prescription drugs, OTC drugs, TCM, nutritional supplements, sundry products and medical consumables from our suppliers for resale, pending the settlement of several large court judgements against Boqi Zhengji in favor of such suppliers. As a result, our retail pharmacy business had minimal sales in the second quarter.

 

Revenues for the six months ended June 30, 2020 and 2019 were $4,226,378 and $912,402, respectively. The 363% increase in revenues is attributable to the acquisition of the Guanzan Group in late March 2020. Revenues from the wholesale medicine segment for the six months ended June 30, 2020 were $2,307,311 and revenues from the wholesale medical device segment for the six months ended June 30, 2020 were $1,896,733. Revenues from the retail pharmacy segment for the six months ended June 30, 2020 were $13,797. The local lockdown policy due to COVID-2019 had an adverse effect on our retail pharmacy business in which almost none of our retail pharmacy stores generated any business during the first quarter in 2020. During the second quarter, we experienced significant difficulty in obtaining products including, prescription drugs, OTC drugs, TCM, nutritional supplements, sundry products and medical consumables from our suppliers for resale, pending the settlement of several large court judgements against Boqi Zhengji in favor of such suppliers. As a result, our retail pharmacy business had minimal sales in the six months ended June 30, 2020.

 

The Company’s revenue for the six months ended June 30, 2019 were attributable to the sales of products manufactured by the NF Group and from energy saving technical services and product collaboration processing services performed by the NF Group.

 

34

 

 

Cost of revenues

 

Cost of revenues for the three months ended June 30, 2020 and 2019 were $2,941,955 and $319,172, respectively, reflecting the impact of the acquisition of the Guanzan Group.

 

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 June 30, 2020, the cost of revenues of our wholesale medical devices segment was $1,279,640.

 

Cost of revenues of our wholesale medicine segment consists primarily of the cost of medicine, medical consumables and costs related directly to contracts with customers. For the three months ended June 30, 2020, the cost of revenues of our wholesale medicine segment was $1,543,301.

 

Cost of revenues of our retail pharmacy segment consists primarily of the cost of the products that we sell to retail customers. For the three months ended June 30, 2020, the cost of revenues for retail pharmacy segment was $68,927, which included an inventory impairment charge of $68,600.

 

Cost of revenues for the three months ended June 30, 2019 consisted primarily of material costs, direct labor, depreciation, and manufacturing overhead, which were directly attributable to the manufacturing of products and the rendering of services by the NF Group.

 

Cost of revenues for the six months ended June 30, 2020 and 2019 were $3,407,169 and $749,848, respectively. For the six months ended June 30, 2020, the cost of revenues of our wholesale medical devices segment was $1,464,624. For the six months ended June 30, 2020, the cost of revenues of our wholesale medicine segment was $1,726,760. For the six months ended June 30, 2020, cost of revenues of our retail pharmacy segment was $198,410, which included an inventory write-off of $187,942.

 

Cost of revenues for the six months ended June 30, 2019 consisted primarily of material costs, direct labor, depreciation, and manufacturing overhead, which costs were directly attributable to the manufacturing of products and the rendering of services by the NF Group.

 

Gross profit

 

For the three months ended June 30, 2020, we had a gross profit margin of 22.77% compared with a negative gross profit margin of 8.17% in the first quarter of 2020 and 4.35% in the quarter ended June 30, 2019. The improvement in our gross profit margin in the three months ended June 30, 2020 is mainly due to the inclusion of a full quarter of revenues from our wholesale medical devices and wholesale medicine segments.

 

35

 

 

The gross profit margin of our wholesale medical devices and wholesale medicine segments for three months ended June 30, 2020 were 23.22% and 25.56%, respectively. Our retail pharmacy segment’s cost of revenues exceeded its revenues by $67,444 in the quarter. The gross profit for the Company in the three months ended June 30, 2019 was related to the operations of the NF Group.

 

For the six months ended June 30, 2020, we had a gross profit margin of 19.38% compared with a gross profit margin of 17.82% in the first six months of 2019. The improvement in our gross profit margin in the six months ended June 30, 2020 is mainly due to the inclusion of the revenues from our wholesale medical devices and wholesale medicine segments since their acquisition in March 2020.

 

The gross profit margin of our wholesale medical devices and wholesale medicine segments for six months ended June 30, 2020 were 22.78% and 25.16%, respectively. Our retail pharmacy segment’s cost of revenues exceeded its revenues by $184,613 in the six month period ended June 30, 2020. The gross profit for the Company in the six months ended June 30, 2019 was related to the operations of the NF Group.

 

Operating expenses

 

Operating expenses were $2,922,868 for the three months ended June 30, 2020 compared to $726,940 for the same period in 2019, an increase of $2,195,928. The increase is mainly due to the additional amortization of the discounted convertible notes, meeting and promotional expenses, pharmaceutical and medical device industry compliance management expenses and professional expenses. The Company’s operating expenses for the three months ended June 30, 2019 consisted primarily of general and administrative expenses, and selling and marketing expenses of the NF Group.

 

For the three months ended June 30, 2020 operating expenses of $ 2,464,157 were allocated to the parent company. Operating expenses of the wholesale medical devices segment for the three months ended June 30, 2020 were $2,108, which amount reflects the recovery of funds previously written off as bad debts. Operating expenses of the wholesale medicine segment for the three months ended June 30, 2020 were $495,761. Operating expenses of the retail pharmacy segment for the three months ended June 30, 2020 were $306,097, which included $256,511 of amortization of the intangible assets recognized in the acquisition of Boqi Zhengji.

 

Operating expenses were $4,893,723 for the six months ended June 30, 2020 compared to $1,248,456 for the same period in 2019, an increase of $3,645,267, or 292%. Operating expenses for the six months ended June 30, 2020 consist mainly of amortization of the discounted convertible notes in the amount of $1,075,000, amortization of intangible assets in the amount of $513,022, meeting and promotional expenses in the amount of $650,769, pharmaceutical and medical device industry compliance management expense of $590,000, legal fees of $272,575, convertible notes issuance-related costs in the amount of $211,425 and other professional service fees in the amount of $302,013.

 

36

 

 

For the six months ended June 30, 2020 operating expenses of $3,591,504 were allocated to the parent company. Operating expenses of the wholesale medical devices segment for the six months ended June 30, 2020 were $14,858. Operating expenses of the wholesale medicine segment for the six months ended June 30, 2020 were $530,522. Operating expenses of the retail pharmacy segment for the six months ended June 30, 2020 were $651,528, which included $513,022 of amortization of the intangible assets recognized in the acquisition of Boqi Zhengji.

 

The Company’s operating expenses for the six months ended June 30, 2019 consisted primarily of general and administrative expenses, and selling and marketing expenses of the NF Group.

 

Other income 

 

For the three months ended June 30, 2020, we reported other income of $6,986,587 and other interest expense of $195,486. For the six months ended June 30, 2020, we reported other income of $6,944,469 and other interest expense of $377,466.  Other income in both periods includes the gain generated from the disposal of the NF Group. Other expense in both periods consisted of interest expense.

 

Net profit (loss) 

 

For the three months ended June 30, 2020, we reported a net profit of $4,673,854 compared to a net loss of $883,245 for the same period of 2019.For the six months ended June 30, 2020 reported a net profit of $2,471,663 compared to a net loss of $1,425,693 for the same period of 2019. Our net profit in both periods is attributable to the gain generated from the disposal of the NF Group.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At June 30, 2020, we had cash of $109,402 and negative working capital of $0.59 million as compared to cash of $36,674 and negative working capital of $500,765 at December 31, 2019. The payment from the June 23, 2020 disposition of the NF Group was received in the form of bank instruments that were payable by a bank and transferrable by endorsement in an aggregate amount of RMB 70,741,000 (approximately $10 million). The bank instruments were recorded under “prepayments and other receivables” in our balance sheet as of June 30, 2020.

 

Beginning on September 27, 2019, the Company sold $1,534,250 of convertible notes to various investors that mature during the period beginning September 27, 2020 and ending on March 13, 2021. Each of these notes was issued for a term of 12 months, carrying 6% annual interest rate and convertible into the Company’s common stock. According to the applicable agreements, each holder of such notes has the right during the period beginning one hundred eighty (180) calendar days following the date of their issuance and ending on the maturity date, to convert all or any part of the outstanding and unpaid principal into fully paid and non-assessable shares of common stock. During the period that these notes are outstanding, the Company will reserve from its authorized and unissued shares of common stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of the common stock upon the full conversion of the notes. During the six months ended June 30, 2020, $517,027 of notes were converted into shares of our common stock. The principal amount of $1,017,223 remains outstanding.

 

37

 

 

The following table summarizes the key terms of the outstanding notes:

 

    Lenders/Holders   Principal     Annual
Interest
Rate
    Maturity
Dates
  Shares
reserved
    Convertible
Rate
 
1   CROWN BRIDGE PARTNERS, LLC     74,473       6 %   11/15/2020     250,000       65 %
2   TFK INVESTMENTS, LLC,     101,500       6 %   11/15/2020     250,000       65 %
3   MORNINGVIEW FINANCIAL, LLC     156,750       6 %   12/18/2020     500,000       65 %
4   CROWN BRIDGE PARTNERS, LLC     50,750       6 %   12/16/2020     250,000       65 %
5   BHP Capital NY Inc.     183,750       6 %   02/13/2021     450,000       65 %
6   FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC     200,000       6 %   02/13/2021     500,000       65 %
7   Platinum Point Capital LLC     250,000       6 %   02/27/2021     1,061,232       65 %
    Total   $ 1,017,223                   3,261,232          

 

On May 18, 2020, the Company entered into the May SPA with two institutional investors to sell Convertible Notes having a face amount of $6,550,000 at an aggregate original issue discount of 19.85%, and ranking senior to all outstanding and future indebtedness of the Company. The Convertible Notes do not bear interest except upon the occurrence of an event of default.

 

On June 2, 2020, two Convertible Notes in an aggregate original face amount of $4,450,000 were issued to the two investors. Each of the Convertible Notes has a face amount of $2,225,000 for which each Institutional Investor paid $1,750,000 in cash. The Convertible Notes 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 investors at the conversion price of $2.59, subject to adjustment in the event of default. Each investor also received a warrant to purchase 650,000 shares of the Company’s common stock at an initial exercise price of $2.845. The placement agent for the private placement received a warrant to purchase up to 171,845 shares of the Company’s common stock at an initial exercise price of $2.845 per share, subject to increase based on the number of shares of common stock issued pursuant to the Convertible Notes. Additional Convertible Notes in an aggregate original face amount not to exceed $2,100,000 may also be issued to the two investors under the SPA under certain circumstances.

 

On June 23, 2020, we completed the disposition of the NF Group, at which time the Company received banker’s acceptance bills (Chinese bank instruments) in the aggregate amount of RMB 70,741,000 (approximately $10 million) from the buyer. In July, banker’s acceptance bills aggregating $10 million were deposited into the Company’s bank account.

 

The Company made a pre-payment of $1.135 million to a vendor for the purchase of ventilators in June 2020. Since the ventilators became out of stock, such purchase was subsequently cancelled. The re-payment is expected to be refunded in October 2020.

 

As a result of the receipt of the proceeds of the sale of the NF Group and the proceeds from the issuance of the Convertible Notes, management believes we have sufficient financial resources to fund our operations for at least the next twelve months.

 

38

 

 

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2020 and 2019, respectively.

 

   For the six months ended
June 30,
 
   2020   2019 
Net cash provided by (used in) operating activities  $(3,429,513)  $(26,409)
Net cash provided by investing activities   95,220    - 
Net cash provided by (used in) financing activities   4,000,513    125,336 
Exchange rate effect on cash   (593,510)   (20,569)
Net cash inflow  $72,728   $78,388 

 

Operating Activities

 

Cash used in operating activities for the six months ended June 30, 2020 was 3,429,513 compared to $26,409 used in operating activities for the six months ended June 30, 2019. The increase in the amount of cash used in operating activities was primarily attributable to increases in accounts receivable, inventories and advances to suppliers as the result of our acquisition of the Guanzan Group. During the six months ended June 30, 2020, adjustments for non-cash items primarily included the gain recorded on the disposal of the NF Group in the amount of $6.94 million, amortization of convertible notes of $1.075 million and depreciation of intangible assets of $512,460.

 

Investing Activities

 

Cash provided by investing activities was $95,220 for the six months ended June 30, 2020 compared to $0 provided by investing activities for the same period of 2019. Cash provided by investing activities for the three six ended June 30, 2020 relates to cash obtained as a result of the acquisition of the Guanzan Group.

 

Financing Activities

 

Cash provided by our financing activities was $4 million for the six months ended June 30, 2020 compared to $0.125 million used in financing activities for the same period in 2019. During the six months ended June 30, 2020, we raised $3.45 million through the issuance of convertible promissory notes and $0.6 million from related party loans. The proceeds from the sale of the NF Group were not included in cash flows during the period.

 

39

 

 

Contractual Obligations

 

As of June 30, 2020, the Company had a $5,655,709 contractual obligation, which is the maximum amount of the cash portion of the consideration payable for the acquisition of Boqi Zhengji, which amount is subject to post-closing adjustments. In addition, the Company accrued a $4,414,119 contractual obligation, which is the estimated fair value of the Guanzan Cash Consideration, which is subject to post-closing adjustments.

 

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 do not have any material off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

Item 4. Controls and Procedures

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), under the supervision of and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation and the identification of a material weakness in internal control over financial reporting described below, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of March 31, 2020, and during the period prior were not effective.

 

40

 

 

Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with management authorization; and

 

  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2020. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Based on this assessment, our management concluded that, as of June 30, 2020, our internal control over financial reporting is not effective.

 

Management identified the following control deficiencies that represent material weaknesses at December 31, 2019:

 

  Due to the Company’s limited resources, the Company does not have accounting personnel with extensive experience in maintaining books and records and preparing financial statements in accordance with US GAAP which could lead to untimely identification and resolution of accounting matters inherent in the Company’s financial transactions in accordance with US GAAP.

 

  A continuing lack of sufficient resources and an insufficient level of monitoring and oversight, which may restrict our ability to gather, analyze and report information relative to the financial statements, including but not limited to accounting estimates, reserves, allowances, and income tax matters, in a timely manner.

 

To date, we have been unable to remediate these weaknesses, which stem from our small number of accounting personnel consisting of seven persons at June 30, 2020.

 

Management’s Remediation Plan

 

While management believes that the Company’s financial have been properly recorded and disclosed in accordance with US GAAP, based on the control deficiencies identified above, management is currently seeking to engage an outside consultant with public company reporting experience and breadth of knowledge of US GAAP to provide additional training to its accounting personnel in connection with the preparation and review of the Company’s financial statements. As the first step of our remediation plan, we replaced our Chief Financial Officer (“CFO”) in September. Our new CFO, Mr. Jun Jia, has been in the financial management business for 15 years and has worked for several large Chinese public companies. He holds advanced degrees in finance and has conducted a financial data analysis project at the London Metal Exchange. Mr. Jia’s knowledge and experience in finance and public companies will help the company correct some of the control deficiencies.

 

Changes in Internal Control over Financial Reporting

 

Subject to the foregoing disclosure, there were no changes in our internal control over financial reporting during the three months ended June 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

41

 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On May 17, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 482,771.87. On June 19, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 482,771.87 in total. 

 

On June 26, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payable of RMB 184,490.77. On Sep.12, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 184,490.77 in total. 

 

On July 8, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 64,535. On August 1, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 64,535.00 in total. 

 

On July 10, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 122,360.20. On August 9, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 101,253.40 in total. 

 

On July 18, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 288,440.00. On September 4, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 288,440.00 in total. 

 

On August 25, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 137,449.90. On October 23, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 137,449.90 in total. 

 

On August 25, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 230,281.55. On October 2, 2019, Shenyang Heping District People’s Court ruled that Boqi Zhengji had to pay the outstanding balance RMB 230,281.55 to the supplier within 10 days.

 

On September 10, 2019, one of Boqi Zhengji’s suppliers filed a lawsuit against Boqi Zhengji for unpaid outstanding payables of RMB 395,378.90. On October 18, 2019, the parties entered into a court-supervised settlement where Boqi Zhengji agreed to pay the supplier RMB 395,378.90 plus interest.

 

On April 1, 2020, the Guizhou Province Xiuwen County People’s Court ordered the attachment of two of Shude’s bank accounts pursuant to a pre-litigation attachment application filed by one of Shude’s suppliers in connection with unpaid outstanding payables of approximately RMB 365,200 (approximately $51,437). The total amount of cash in the two accounts subject to the attachment is RMB 570,902 (approximately $80,409). The attachment order has a term of one (1) year, renewable upon fifteen days’ notice. No lawsuit has been filed by the supplier as of the date of this report. In the event Shude will be unable to resolve the dispute on a reasonable basis, it will seek to contest the attachment and protect its interests.

 

None of the above settlement or judgment amounts has been paid as of the date of this report. 

 

42

 

 

Item 1A. Risk Factors

 

As of the date of this filing, there have been no material changes from the risk factors disclosed in Part I, Item 1A (Risk Factors) contained in our Annual Report on Form 10-K for the year ended December 31, 2019. We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect out operations. The risks, uncertainties and other factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, including the risks arising from the spread of COVID-19, may cause our actual results, performances and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occurs, our business, financial condition or results of operations may be adversely affected.

 

During the second quarter, we experienced significant difficulty in obtaining products including prescription drugs, OTC drugs, TCM, nutritional supplements, sundry products and medical consumables from Boqi Zhengji’s suppliers for resale, pending the settlement of several large court judgements against Boqi Zhengji in favor of such suppliers. As a result, our retail pharmacy business had minimum sales in the second quarter. If our inability to purchase inventory for Boqi Zhengji’s retail pharmacy stores continues, our business, financial condition or results of operations may be adversely affected.

 

The impact of the COVID-19 pandemic and the outstanding court judgments against Boqi Zhengji continue to have an adverse effect on us. These matters may also result in uncertainties in relation to the assumptions and estimations associated with the measurement of various assets and liabilities in the financial statements that we may not have previously recognized or disclosed, the financial effects of which cannot be reasonably estimated at this time.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On and after September 27, 2019, the Company entered into a series of identical security purchase agreements (the “Agreements”) with eight accredited investors (the “Holders”), to sell convertible promissory notes (the “Notes”) of the Company to the Holders, pursuant to an exemption from registration under the Securities Act of 1933. .

 

On May 19, 2020, the Company entered into a Securities Purchase Agreement (the “SPA”) with two institutional investors to sell a new series of senior secured convertible notes with an original issue amount of $6,550,000, discount of 19.85%, and ranking senior to all outstanding and future indebtedness of the Company in a private placement to the Institutional Investors. The sales were made pursuant to an exemption from registration under the Securities Act of 1933.

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

43

 

 

Item 6. Exhibits.

 

The list of Exhibits required by Item 601 of Regulation S-K to be filed as a part of this Form 10-Q are set forth on the Exhibit Index immediately preceding such Exhibits and is incorporated herein by this reference.

 

Exhibit
Number
  Description   Incorporated by
Reference to
         
31.1   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer    
         
31.2   Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial officer    
         
32.1   Section 1350 Certification of principal executive officer    
         
32.2   Section 1350 Certification of principal financial officer    
         
101   XBRL data files of Financial Statements and Notes contained in this Quarterly Report on Form 10-Q.    

 

44

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.

 

  BOQI International Medical Inc.
  (Registrant)
   
Date: October 19, 2020 By: /s/ Tiewei Song
    Tiewei Song
    Chief Executive Officer
     
Date: October 19, 2020 By: /s/ Jun Jia
    Jun Jia
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

45