BIMI International Medical (BIMI) 10-Q2023 Q1 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 March 31, 2023

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

BIMI International Medical Inc.

(Exact name of registrant as specified in its charter)

212 542 0028

(Registrant’s telephone number, including area code)

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

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 files). ☒ 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.

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 April 26, 2023, the registrant had 4,384,780 shares of common stock, par value $0.001 per share, issued and shares outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

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

BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)

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

BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)

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

BIMI INTERNATIONAL MEDICAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

BIMI INTERNATIONAL MEDICAL INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BIMI International Medical, Inc. (the “Company” or “BIMI”) was incorporated in the State of Delaware as Galli Process, Inc. on October 31, 2000. On February 7, 2002, the Company changed its name to Global Broadcast Group, Inc. On November 12, 2004, the Company changed its name to Diagnostic Corporation of America. On March 15, 2007, the Company changed its name to NF Energy Saving Corporation of America, and on August 24, 2009, the Company changed its name to NF Energy Saving Corporation. On December 16, 2019, the Company changed its name to BOQI International Medical Inc., to reflect the Company’s refocus of its business from the energy saving industry to the health care industry and on June 21, 2021, we changed our name to BIMI International Medical Inc. Since March 7, 2012, the common stock of the Company (the “Common Stock”) has been traded on the Nasdaq Capital Market.

Until October 14, 2019, the Company, through NF Energy Saving Investment Limited and its subsidiaries (the “NF Group”), operated in the energy saving enhancement technology industry in the People’s Republic of China (the “PRC”). The NF Group focused on providing services relating to energy saving technology, optimization design, energy saving reconstruction of pipeline networks and contractual energy management for the electric power, petrochemical, coal, metallurgy, construction, and municipal infrastructure development industries in the PRC and the manufacture and sales of energy-saving flow control equipment. In late 2019, the Company committed to a plan to dispose of all its equity interests in the NF Group and on March 31, 2020, the Company entered into a stock purchase agreement (the “NF SPA”) to sell the NF Group. The sale of the NF Group closed on June 23, 2020.

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”). Boqi Zhengji operated 16 retail pharmacy stores in China at the time of the acquisition. Lasting, Pukung, Xinrongxin and Boqi Zhengji are hereinafter collectively referred to as the “Boqi Zhengji Group”. Xinrongxin also owns 100% equity interests in Dalian Boyi Technology Co., Ltd. (“Dalian Boyi”), a subsidiary established in January 2020 and responsible for the Company’s R&D and other technology related functions.

On June 24, 2020, the Company established a wholly owned subsidiary Boyi (Liaoning) Technology Co.,Ltd (“Liaoning Boyi”), in order to be qualified to participate in local healthcare projects. On December 22, 2020, the Company established another subsidiary Bimai Pharmaceutical (Chongqing) Co., Ltd., replace Xinronxin as the holding company owing all the retail, wholesale and hospital operations in China.

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. (“Shude”, collectively with Guanzan, the “Guanzan Group”). Guanzan also owns 100% equity interest in Chongqing Lijiantang Pharmaceutical Co. Ltd., a subsidiary established in May 2020. Lijiantang operates 4 retail pharmacy stores in China (collectively, the “Lijiantang Pharmacy Group”).

On December 11, 2020, the Company entered into a stock purchase agreement to sell Boqi Zhengji. The sale of the Boqi Zhengji was closed by the end of 2020, although the government record was not updated until February 2, 2021 due to the Chinese government’s alternative working schedule and other delays caused by COVID-19.

On December 9, 2020, the Company entered into an agreement to acquire 100% of the equity interests in Chongqing Guoyitang Hospital (“Guoyitang”), the owner and operator of a private general hospital in Chongqing City, a city in Southwest China. The transaction closed on February 2, 2021. 

On December 15, 2020, the Company entered into a stock purchase agreement to acquire Chaohu Zhongshan Minimally Invasive Hospital (“Zhongshan”), a private hospital in the Southeast region of China. The transaction closed on February 5, 2021.

On April 9, 2021, the Company entered into a stock purchase agreement to acquire three private hospitals in the PRC, Wuzhou Qiangsheng Hospital (“Qiangsheng”), Suzhou Eurasia Hospital(“Eurasia”) and Yunnan Yuxi MinKang hospital (“Minkang”). The transaction closed on May 6, 2021.

On April 21, 2021, Bimai Hospital Management (Chongqing) Co. Ltd. was incorporated in the PRC by the Company to manage the operations of the Company’s medical devices segment.

On April 21, 2021, Pusheng Pharmaceutical Co., Ltd. was incorporated in the PRC by the Company to manage its wholesale distribution of generic drugs.

On September 10, 2021, the Company entered into a stock purchase agreement to acquire 100% of the equity interests in Chongqing Zhuoda Pharmaceutical Co., LTD (“Zhuoda”). The transaction closed on October 8, 2021.

On December 20, 2021, the Company entered into a stock purchase agreement to acquire Bengbu Mali OB-GYN Hospital Co., Ltd. (“Mali Hospital”). We agreed to purchase all the issued and outstanding equity interests in Mali Hospital in consideration of $16,750,000. On January 4, 2022, we paid RMB7,227,000 to the seller as partial consideration. The transaction did not close and on December 15, 2022, we entered into a termination agreement with respect to the purchase. Pursuant to the termination agreement, the original agreement will terminate effective as of the date of the return of the 60,000 shares of the Company’s Common Stock previously issued to the sellers and certain third-party beneficiaries. The Company did not incur any penalties as a result of the termination of the agreement. As of the date of this report, we have not received the 60,000 shares.

As of March 31, 2023, the Company has four operating segments: retail pharmacy, wholesale pharmaceuticals, wholesale medical devices and healthcare products. The retail pharmacy segment sells prescription and OTC medicines, TCM, healthcare supplies and sundry items to retail customers through its directly-owned pharmacies and authorized retail stores. The wholesale pharmaceuticals segment includes supplying prescription and OTC medicines, TCM, healthcare supplies and sundry items to clinics, third party pharmacies, hospitals and other drug wholesalers. There were no inter-segment revenues between our retail pharmacy and wholesale pharmaceuticals segments. The wholesale medical device segment distributes medical devices, including medical consumables to private clinics, hospitals, third party pharmacies and other medical device dealers. Healthcare products includes cardiovascular product, anti-insomnia and depression product, male aphrodisiac product, women’s menopausal syndrome product, gout product and immune enhancer/ vaccine sequelae product.

As of March 31,2022, the Company had four operating segments: wholesale medical devices, wholesale pharmaceuticals, medical services and retail pharmacies. The Pharmacy Group engages in the retail sale of medicine and other healthcare products in the PRC. The Pharmacy Group sells its medicine and other healthcare products to customers through its directly-owned stores. The Pharmacy Group offers a wide range of products, including prescription and over-the-counter (“OTC”) drugs, nutritional supplements, traditional Chinese medicines, personal and family care products and medical devices, as well as miscellaneous items.

The Company’s wholesale segments are engaged in the distribution of medical devices and pharmaceuticals. The wholesale medical devices segment distributes medical devices, including medical consumables to drug stores, private clinics, pharmaceutical dealers and hospitals. The wholesale pharmaceuticals segment includes supplying prescription and OTC medicines, TCM, healthcare supplies and sundry items to clinics, third party pharmacies, hospitals and other drug vendors.

The Company’s medical services segment was engaged in providing medical services in its hospitals, of which the Zhongshan, Qiangsheng, Eurasia and Minkang hospitals were held for sale as of the date of this report.

As of March 31,2023, the details of the Company’s subsidiaries are as follows:

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 significant net losses of $883,764 and $2,975,642 during the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the Company had an accumulated deficit of $71.03 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 its ability to obtain external financing, and (2) further implementation of management’s business plan to expand its operations and generate sufficient revenues to meet its obligations. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be neither any assurances to that effect, nor any assurance that the Company will be successful in securing sufficient funds to sustain the operations.

These 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.

We have restated our financial statements for year ended December 31, 2021 to correct errors identified in our prior financial statements. In FY2021, we recorded amortization of convertible note in G&A expense account, it has been revised to record amortization of convertible note in other income(expense) account. The restatement was necessary to address the misstatement. The impact of the restatement on our financial statement is reclassification of other expense in financial statements. We have concluded that the restatement does not materially affect our liquidity or our compliance with debt covenants or other financial obligations.

We previously erroneously recorded amortization of our convertible note as G&A expense in the financial statements for the year ended December 31, 2021 and 2020. We now record the amortization of the convertible notes in other income expense account, consistent with our statement of cash flow. The amortization of convertible notes for the years ended December 31, 2022 and 2021 was $2,252,401 and $2,091,927, respectively.

We have taken steps to address the cause of the restatement and to improve our internal controls over financial reporting. We hired a consulting firm to assist our accounting department on internal controls and financial reporting. We are committed to maintaining the integrity of our financial statements and to providing accurate and transparent financial information to our investors.

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 condensed consolidated financial information as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 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 thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on May 4, 2023.

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 March 31, 2023 and its unaudited condensed consolidated results of operations for the three months ended March 31, 2023 and 2022, and its unaudited condensed consolidated cash flows for the three months ended March 31, 2023 and 2022, as applicable, have been made. The results of operations are not necessarily indicative of the operating results for the fiscal year or any future periods.

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 for inventory obsolescence, 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.

The Company accounts for its business combinations using the acquisition method of accounting in accordance with ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date fair values of the assets transferred and liabilities incurred by the Company to the sellers and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the acquisition date amounts of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated income statements. During the measurement period, which can be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Subsequent to the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any further adjustments are recorded in the consolidated income statements.

In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.

When there is a change in ownership interests or a change in contractual arrangements that results in a loss of control of a subsidiary, the Company deconsolidates the subsidiary from the date control is lost. Any retained non-controlling investment in the former subsidiary is measured at fair value and is included in the calculation of the gain or loss upon deconsolidation of the subsidiary.

Cash and cash equivalents consist 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.

Accounts receivable are recorded at the invoiced amount and do not bear interest, which are due within contractual payment terms, generally 30 to 90 days from delivery. Credit is extended based on evaluation of a customer’s financial condition, the customer credit-worthiness and their payment history. Accounts receivable outstanding longer than the contractual payment terms are considered past due. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. At the end of each period, the Company specifically evaluates individual customer’s financial condition, credit history, and the current economic conditions to monitor the progress of the collection of accounts receivables. For the receivables that are past due or not being paid according to payment terms, the appropriate actions are taken to exhaust all means of collection, including seeking legal resolution in a court of law. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to its customers.

Advances to suppliers consist of prepayments to the Company’s vendors, such as pharmaceutical manufacturers and medicine suppliers. The Company typically prepays for the purchase of our merchandise, especially for those salable, scarce, personalized medicine or medical devices. The Company typically receive products from vendors within three to nine months after making prepayments. The Company continuously monitor delivery from, and payments to, the vendors while maintaining a provision for estimated credit losses based upon historical experience and any specific supplier issues, such as discontinuing of inventory supply, that have been identified. If the Company has difficulty receiving products from a vendor, the Company would cease purchasing products from such vendor, request return of our prepayment promptly, and if necessary, take legal action. The Company has not taken such type of legal action during the reporting periods. If none of these steps are successful, management will then determine whether the prepayments should be reserved or written off. As of March 31, 2023 and December 31, 2022, the allowance for doubtful accounts was Nil.

In late 2022, we committed to a plan to dispose of the Zhongshan, Minkang and Qiangsheng hospitals.

On December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the prior owner. As consideration for the transfer, the seller agreed to return the 40,037 shares of Common Stock, that were previously issued as part of the closing consideration. The transaction is expected to close in the second quarter of 2023.

On December 28, 2022, we entered into an agreement to transfer 90% of the equity interests in Qiangshen, Minkang and Eurasia to the previous owners. As consideration for the transfer, the sellers agreed to return the 80,000 shares of Common Stock which were previously issued upon the acquisition of the three hospitals. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.

The Company determined that the plan and the subsequent actions taken to dispose of the four hospitals qualified as a held for sale operations under the criteria set forth in the ASC 205-20 Presentation of Financial Statements – Discontinued Operation.

The carrying amount of the major classes of assets and liabilities of the business held for sale as of March 31, 2023 and December 31,2022 consist of the following:

The summarized operating results of the business held for sale included in the Company’s consolidated statements of operations consist of the following:

Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method, and market value is the middle (the second highest) value among an inventory item’s replacement cost, market celling and market floor. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location. The Company reviews historical sales activity quarterly to determine excess, slow-moving items and potentially obsolete items. The Company provides inventory reserve based on the excess quantities on hand equal to the difference, if any, between the cost of the inventory and its estimated market value, or obsolescence of inventories determined principally by customer demand. As of March 31, 2023 and December 31, 2022, the Company recorded an allowance for obsolete inventories, which mainly consists of expired medicine, of $27,975 and $59,567, respectively.

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:

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.

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-02. For all leases that were entered into prior to the effective date of ASC 842, we elected to apply the package of practical expedients. Based on this guidance, the Company did not reassess the following: (1) whether any expired or existing contracts are or contain leases; (2) the lease classification for any expired or existing leases; and (3) initial direct costs for any existing leases.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of obligations under operating leases, and obligations under operating leases, non-current on the Company’s consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of obligations under capital leases, and obligations under capital leases, non-current on our consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date, adjusted by the deferred rent liabilities at the adoption date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. The Company’s terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is not amortized, and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.

The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the opinion to assess qualitative factors to determine whether it is necessary to perform the two-step in accordance with ASC 350-20. If the Company believes, as a result of the qualitative carrying amount, the two-step quantities impairment test described below is required.

The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required.

If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business acquisition with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit. over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. The fair value of discounted cash flow was determined using management’s estimates and assumptions.

Management evaluated the recoverability of goodwill by performing a qualitative assessment before using a two-step impairment test approach at the reporting unit level. If the Company reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill will be reassigned based on the relative fair value of each of the affected reporting units. As of March 31, 2023 and December 31, 2022, the Company recorded impairments for goodwill of $5,385,811 and $5,385,811, respectively.

At the date of the most recent annual goodwill impairment test, all the reporting units’ fair value were either equal to or slightly higher than their carrying values. None of the reporting units’ fair values were substantially in excess of their carrying values. The fair value of the goodwill associated with each of the Guanzan Group (which covers the wholesale pharmaceutical, wholesale medical devices and the Lijiantang Pharmacies segments) and the medical services segment (consisting of Guoyitang, Zhongshan and the Qiangsheng, Eurasia and Minkang hospitals), were equal to their carrying value after their last impairment test and the fair value of the goodwill for Zhuoda exceeded its carrying value by approximately 5.62%. Zhuoda was sold as of October 31, 2022, so there was no remaining goodwill of Zhuoda for impairment assessment in 2022. Accordingly, the goodwill associated with Guanzan Group, Zhongshan, Qiangsheng, Eurasia and Minkang are considered at risk for impairment in future periods.

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.

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:

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

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.

The Company evaluates the conversion feature of its convertible promissory notes to determine whether it was beneficial as described in ASC 470-20. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible notes payable and may not be settled in cash upon conversion, is treated as a discount to the convertible notes payable. This discount is amortized over the period from the date of issuance to the date the notes is due using the effective interest method. If the notes payable are retired prior to the end of their contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.

Income taxes 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 three months ended March 31, 2023 and 2022, the Company did not incur any interest or penalties associated with the tax positions it has taken. As of March 31, 2023, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts the majority of its businesses in the PRC and is subject to tax in this jurisdiction. As a result, the Company files tax returns that are subject to examination by the PRC.

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 13%, 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.

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.

The Company may record debt issuance costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense through the maturity of the debt. If a conversion of the underlying debt occurs prior to maturity a proportionate share of the unamortized amounts is immediately expensed.

In accordance with ASC 205-20, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, a disposal of a component of an entity or a group of components of an entity is required to be reported as a discontinued operation if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the components of an entity meets the criteria in paragraph 205-20-45-1E to be classified as held for sale. When all of the criteria to be classified as held for sale are met, including management, having the authority to approve the action, commits to a plan to sell the entity, the major current assets, other assets, current liabilities, and non-current liabilities shall be reported as components of total assets and liabilities separate from those balances of the continuing operations. At the same time, the results of all discontinued operations, less applicable income taxes (benefit), shall be reported as components of net income (loss) separate from the net income (loss) of continuing operations in accordance with ASC 205-20-45.

On December 28, 2022, the Company entered into an agreement to transfer 87% of the equity interests in Zhongshan, to its former owner who previously sold Zhongshan to the Company pursuant to a stock purchase agreement.

Pursuant to the Agreement, the Company will transfer 87% of the equity interests in Zhongshan to the former owner and will continue to own 13% of the equity interests in Zhongshan. As consideration for the sale of the 87% interest in Zhongshan, the former owner will return to the Company the 40,037 shares of the Company’s common stock, which were previously issued to him. Subsequent to their issuance, such shares were consolidated into 40,037shares as a result of a 1-for-5 reverse stock split on February 3, 2022 and a 1-for-10 reverse stock split on December 9, 2022. The former owner will release the Company from any and all claims relating to two earn out payments that were payable under the original purchase agreement. The Company will receive a put option to sell part or all of its 13% interest in Zhongshan before December 31, 2032, based on a valuation determined by a reputable third-party appraisal firm jointly chosen by the Parties. The transaction is expected to close in the second quarter of 2023.

On December 28, 2022, the Company entered into an agreement to transfer 90% of the equity interests in the Qiangsheng, Eurasia and Minkang hospitals- to their former owners. Pursuant to the agreement, the Company will transfer 90% of the equity interests in each of the three hospitals and continue to own 10% of the equity interests in each hospital. . As consideration for the transfer, one of the former owners will return to the Company the 4,000,000 shares of the Company’s common stock, which were previously issued upon the acquisition of the three hospitals. Subsequent to their issuance, such shares were as consolidated into 80,000 shares as a result of a 1-for-5 reverse stock split on February 3, 2022 and a 1-for-10 reverse stock split on December 9, 2022. The Company will also receive a put option to sell part or all of its 10% interest in each of the three hospitals to the former owner before December 31, 2032, based on a valuation determined by a reputable third-party appraisal firm jointly chosen by the Company and the former owner. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.

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.

The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our Common Stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimate and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Common Stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Common Stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income. 

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.

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 its subsidiaries whose functional currency is not the US$ are translated into US$, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.

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

Parties, which can be a corporation or an 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.

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about the type of products and services, geographical areas, business strategies and major customers in business components. For the three months ended March 31, 2023, and 2022, the Company operated in four reportable segments in the PRC.

As of March 31, 2023, the Company four operating segments consisted of retail pharmacy, wholesale pharmaceuticals, wholesale medical devices and healthcare products.

As of March 31, 2022, the Company four reportable segments consisted of wholesale medical devices, wholesale pharmaceuticals, medical services and retail pharmacies.

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.

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:

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.

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of a smaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company will adopt ASU 2020-06 effective January 1, 2024. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.

In October 2021, the FASB issued ASU No. 2021-08, “‘Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”). This ASU requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for the Company beginning after December 15, 2023, and are applied prospectively to business combinations that occur after the effective date. The Company does not expect the adoption of ASU 2021-04 will have a material effect on the consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.

On February 1, 2020, the Company entered into a stock purchase agreement to purchase the Guanzan Group (the “Guanzan SPA”). Guanzan is a distributor of medical devices whose customers are primarily drug stores, private clinics, pharmaceutical dealers and hospitals in the Southwest of China (the “Guanzan Acquisition”). Guanzan holds business licenses in the PRC such as a Business Permit for Medical Devices and a Recordation Certificate for Business Activities Involving Class II Medical Devices, etc., which qualify Guanzan to engage in the distribution of medical devices in the PRC. Pursuant to the Guanzan SPA, we agreed to purchase all the issued and outstanding shares of the Guanzan Group (the “Guanzan Shares”) for RMB 100,000,000 (approximately $14,285,714) to be paid by the issuance of 190,000 shares of Common Stock and the payment of RMB 80,000,000 (approximately $11,428,571) in cash. The stock consideration was payable at closing and the cash consideration, which was subject to post-closing adjustments based on the performance of the Guanzan Group in the years ending December 31, 2020 and 2021, respectively, was to be paid pursuant to a post-closing payment schedule. The transaction closed on March 18, 2020. Upon the closing, 100% of the Guanzan Shares were transferred to the Company and the stock consideration was issued to the seller.

On November 20, 2020, the parties to the Guanzan SPA entered into a Prepayment and Amendment Agreement (the “Prepayment Agreement”) for the prepayment of a portion of the Guanzan Cash consideration in the amount of RMB 20,000,000 (the “Prepayment”), in the form of shares of Common Stock valued at $15.00 per share, in light of Guanzan’s performance during the period from March 18, 2020 to September 30, 2020. On November 30, 2020, 200,000 shares (after two reverse splits was 4,000 shares) of our Common Stock were issued to the designated assignees of the seller as the prepayment. Upon the approval of the Company’s shareholders, on August 27, 2021, the Company issued 920,000 shares (after two reverse splits was 18,400 shares) of Common Stock as payment in full for the balance of the post-closing consideration for the acquisition of Guanzan.

The following reconciles the identified assets acquired and liabilities assumed pursuant to the Guanzan Acquisition and the Prepayment and Amendment Agreement made on November 20, 2020:

The fair value of all assets acquired and liabilities assumed is the estimated book value of Guanzan Group. Goodwill represent the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Guanzan Group at the acquisition date. Upon the Guanzan Acquisition, the Company recognized its non-controlling interest in Shude in the amount of $46,295, representing the 20% non-controlling equity interest in Shude. Shude is a pharmaceuticals distributor. Shude’s customers include a wide range of clinics, private and public hospitals and pharmacies in the PRC.  On April 9, 2021, the Company increased its equity interest in Shude from 80% to 95.2% by making a direct capital investment of $4,892,293 in Shude.

On December 9, 2020, the Company entered into an agreement to acquire all of the outstanding equity of Guoyitang, the owner and operator of a private general hospital in Chongqing City, a southwest city of China, with 100 hospital beds. The aggregate purchase price for Guoyitang was $15,251,807 (RMB 100,000,000). Upon signing the agreement, 400,000 shares of Common Stock and approximately $3,096,119 (RMB 20,000,000) was paid as partial consideration for the purchase of Guoyitang. The transaction closed on February 2, 2021. The balance of the purchase price of approximately $6,100,723 (RMB 40,000,000) was subject to post-closing adjustments based on the performance of Guoyitang in 2021 and 2022. As a result of the performance failure of Guoyitang in 2021, the sellers are not eligible to receive any contingent payments.

The following summarizes the identified assets acquired and liabilities assumed pursuant to the Guoyitang Acquisition as of February 2, 2021:

The fair value of all assets acquired and liabilities assumed is the estimated book value of the Guoyitang. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Guoyitang at the acquisition date.

On December 15, 2020, the Company entered into an agreement to acquire Zhongshan Hospital, a private hospital in the east region of China with 65 hospital beds. Zhongshan Hospital is a general hospital known for its complex minimally invasive surgeries. Pursuant to the agreement, the Company agreed to purchase all the issued and outstanding equity interests in Zhongshan Hospital in consideration of approximately $18,515,661 (RMB 120,000,000). As partial consideration, approximately $6,100,723 (RMB 40,000,000) was paid in cash at the closing and 400,000 shares of Common Stock were issued on February 2021. The balance of the purchase price of approximately $6,100,723 (RMB 40,000,000) was subject to post-closing adjustments based on the performance of Zhongshan Hospital in 2021 and 2022. The transaction closed on February 5, 2021. As a result of the performance failure of Zhongshan in the year ended December 31, 2021, the seller is not eligible to receive any contingent payments.

The following summarizes the identified assets acquired and liabilities assumed pursuant to the Zhongshan Acquisition as of February 5, 2021:

The fair value of all assets acquired and liabilities assumed is the estimated book value of the Zhongshan. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Zhongshan Hospital at the acquisition date.

On December 28, 2022, we entered into an agreement to transfer 87% of the equity interests in Zhongshan to the prior owner. As consideration for the transfer, the seller agreed to return to us the 40,037 shares of Common Stock, that were previously issued as part of the closing consideration. The transaction is expected to close in the second quarter of 2023.

On April 9, 2021, the Company and Chongqing Bimai entered into a stock purchase agreement to acquire three private hospitals in the PRC, Qiangsheng, Eurasia and Minkang. Pursuant to the agreement, the Company agreed to purchase all the issued and outstanding equity interests in Qiangsheng, Eurasia and Minkang in consideration of approximately $25,023,555 (RMB162,000,000) to paid by the issuance of 800,000 shares of Common Stock (the “April Stock Consideration”), the value of which was agreed to be RMB 78 million or $12 million and the payment of RMB 84,000,000 (approximately $13,008,734) in cash (the “Cash Consideration”). The first payment of the Cash Consideration was RMB 20,000,000 (approximately $3,097,317). The second and third payments of the Cash Consideration of RMB 64,000,000 (approximately $9,911,416) were subject to post-closing adjustments based on the performance of Qiangsheng, Eurasia and Minkang in 2021 and 2022. The sellers had the choice to receive the second and third payments in the form of the shares of Common Stock valued at $15.00 per share or in cash. The transaction closed on May 6, 2021, at which time the April Stock Consideration was issued. As a result of the performance failure by the three hospitals for the year ended December 31, 2021, the sellers are not eligible to receive any contingent payments.

The following summarizes the identified assets acquired and liabilities assumed pursuant to the Qiangsheng, Eurasia and Minkang acquisitions as of May 6, 2021:

The fair value of all assets acquired and liabilities assumed is the estimated book value of the Qiangsheng, Eurasia and Minkang hospitals. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Qiangsheng, Eurasia and Minkang Hospitals at the acquisition date.

On December 28, 2022, we entered into an agreement to transfer 90% of the equity interests in Qiangsheng, Minkang and Eurasia to the previous owners. As consideration for the transfer, the sellers agreed to return to us the 80,000 shares of Common Stock which were previously issued upon the acquisition of the three hospitals. The sales of Qiangsheng, Minkang and Eurasia are expected to close in the second quarter of 2023.

On September 10, 2021, Guanzan entered into an agreement to acquire Zhuoda. Pursuant to the agreement, Guanzan agreed to purchase all the issued and outstanding equity interests in Zhuoda in consideration of $11,400,000 (RMB 75,240,000). The entire purchase consideration was payable in shares of Common Stock. At the closing on September 22, 2021, 440,000 shares of Common Stock valued at RMB 43,560,000, or $150.00 per share (approximately $6,600,000) was issued as partial consideration for the purchase. The remainder of the purchase price of approximately $4,800,000 (RMB 31,680,000), was subject to post-closing adjustments based on the performance of Zhuoda in 2022 and 2023. The transaction closed on October 8, 2021. As the future performance of Zhuoda in 2022 and 2023 was uncertain, the total acquired consideration at the acquisition date and at December 31, 2021 was calculated based on the value of the closing payment without taking into consideration of potential payments based on future performance.

The following summarizes the identified assets acquired and liabilities assumed pursuant to Zhuoda acquisition as of October 8, 2021:

The fair value of all assets acquired and liabilities assumed is the estimated book value of the Zhuoda. Goodwill represents the excess of the fair value of purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of Zhuoda at the acquisition date.

On October 19, 2022, the Company entered into an agreement to sell Zhuoda to its former owners.

Pursuant to the agreement, the Company will sell 100% of the equity interests in Zhuoda that it previously purchased for 44,000 shares of its common stock. The shares will be returned to the Company as the full consideration of the sale of the interests in Zhouda. In connection with the execution of the agreement, the parties also agreed to terminate the original agreement, and that none of the parties or any of their related parties will have any debt, obligation or liability to the original sellers in connection with or resulting from the earnout payment under the original agreement. The Company closed this transaction in November 2022. 

The Company’s wholly-owned Guanzan subsidiary agreed to sell its 100% equity interest in Zhuoda and Zhuoda’s wholly-owned subsidiary, Qianmei, to the former owner. Guanzan had previously purchased Zhuoda for 44,000 shares of the Company’s Common Stock. As consideration for the sale, the buyer will return the 44,000 shares to the Company. The transaction closed.effective November 23, 2022, when 100% of the equity interests in Zhuoda were transferred to the former owners and the 44,000 shares of Common Stock were returned to us.

The summarized operating results of the Zhuoda and its subsidiary in the Company’s condensed consolidated statements of operations for the year ended December 31, 2022 consisted of the following:

The assets and liabilities for the discontinued operations of Zhuoda consisted of the following items as of December 31, 2022 and December 31, 2021:

The majority of the Company’s pharmacy retail revenues are derived from cash sales, except for sales to the government social security bureaus or commercial health insurance programs, which typically settle once a month. The Company routinely evaluates the need for allowance for doubtful accounts based on specifically identified amounts that the management believes to be uncollectible. If the actual collection experience changes, revisions to the allowance may be required. As of March 31, 2023 and December 31,2022, accounts receivable consisted of the following:

Due to subsequent collections, the Company reversed an allowance for doubtful accounts of $584 for the three months ended, March 31, 2022.

Advances to suppliers represent the amount the Company prepaid to its suppliers for merchandises for sale in the ordinary course of business. As of March 31, 2023 and December 31, 2022, the Company reported advances to suppliers as follow:

No bad debt expenses were accrued for doubtful accounts relating to advances to suppliers for the three months ended March 31, 2023 and 2022, respectively.

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

For the three months ended March 31, 2023 and 2022, respectively, the Company accrued allowances of $27,975 and $30,282 for obsolete and expired items.

Prepayments and other receivables represent the amount that the Company prepaid as rent deposits for its retail stores, hospitals and office space, special medical device purchase deposits, prepaid rental fee and professional services, advances to employees in the ordinary course of business, VAT deductibles and other miscellaneous receivables. The table below sets forth the balances as of March 31, 2023 and December 31, 2022.

Management evaluates the recoverable value of these balances periodically according to the Company’s policy of credit and allowance for doubtful accounts. For the three months ended March 31, 2023 and 2022, the Company recorded bad debt expenses of $24,198 and $26,193, respectively.

Property, plant and equipment consisted of the following:

Depreciation expense for the three months ended March 31, 2023 and 2022 were $46,091 and $85,322, respectively.

Amortization expense for the three months ended March 31, 2023 and 2022 were $7,709 and $3,837, respectively.

On July 5, 2022, we entered into a stock purchase agreement (as amended on February 27, 2023) with Mr. Fnu Oudom, the Chairman of our board of directors, whereby we agreed to acquire 100% of the equity interests in Phenix Bio Inc. (“Phenix”), a distributor of healthcare products in consideration of $1,800,000. The transaction closed effective March 15, 2023. The aggregate purchase price for the equity interests in Phenix was $180,000 in cash, which has been paid, plus 5,270,000 shares of the Company’s common stock, of which 270,000 shares will be issued upon the approval of the issuance by the Company’s shareholders and the balance of 5,000,000 shares will be issued if the aggregate net profit generated by Phenix is at least $2,500,000 in calendar year 2023 or in any fiscal quarter of 2023.

Balance sheet information related to the Company’s operating leases was as follows:

Lease liability maturities as of March 31, 2023, are as follows:

Changes in the carrying amount of goodwill consisted of the following:

The goodwill associated with the acquisitions of: (i) Guanzan of $6,914,232; (ii) Guoyitang of $7,154,393; (iii) Zhongshan of $10,443,494, (iv) Minkang, Qiangsheng and Eurasia of $9,067,529, were initially recognized at the acquisition closing dates. Zhuoda was sold in 2022.

As of March 31, 2023 and December 31, 2022, goodwill was $2,065,666 and $2,065,666, respectively. No impairment losses were recognized for the three months ended March 31, 2023 and 2022. 

Short-term loans

For the three months ended March 31, 2023 and 2022, interest expense on short-term loans amounted to $6,351 and $21,269, respectively.

Long-term loans

For the three months ended March 31, 2023 and 2022, interest expense on long-term loans amounted to $14,058 and $22,319, respectively.

On May 18, 2020, we entered into a securities purchase agreement (the “May SPA”) with two institutional investors (the “Institutional Investors”) to sell convertible notes having a face amount of $6,550,000 at an aggregate original issue discount of 19.85% (the “2020 Notes”) and ranking senior to all outstanding and future indebtedness of the Company. The 2020 Notes do not bear interest except upon the occurrence of an event of default. Each Institutional Investor also received a warrant (the “Institutional Investor 2020 Warrant”) to purchase 325,000 shares of Common Stock at an initial exercise price of $14.225 per share (post-Split price (as defined below) and subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant (the “Placement Agent 2020 Warrant”, together with the Institutional Investor 2020 Warrant, the “2020 Warrants”) to purchase up to 10% of the aggregate number of shares of Common Stock at an initial exercise price of $14.225 per share (post-Split price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares Common Stock issued pursuant to the 2020 Notes.

Pursuant to the May SPA, two 2020 Notes each in the face amount of $2,225,000 were issued to the Institutional Investors in consideration of the payment of $1,750,000 in cash for each 2020 Note.

The May SPA, the 2020 Notes and the warrants provided that each and every reference to share prices, shares of Common Stock and any other numbers therein that relate to the Common Stock will be automatically adjusted for any stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions that occur with respect to the Common Stock (each, a “Stock Combination Event”, and such date thereof, the “Stock Combination Event Date”) thereafter. The May SPA, the 2020 Notes and the 2020 Warrants further provided if after a Stock Combination Event, the Event Market Price is less than the conversion price (in the case of the Convertible Notes) or the exercise price (in the case of the warrants) then in effect (after giving effect to the above adjustments), then on the sixteenth (16th) trading day immediately following such Stock Combination Event Date, the conversion price or exercise then in effect on such sixteenth (16th) trading day (after giving effect to the above adjustments) will be reduced (but in no event increased) to the Event Market Price. “Event Market Price” means, with respect to any Stock Combination Event Date, the quotient determined by dividing (x) the sum of the dollar volume-weighted average price of the Common Stock for each of the five (5) trading days with the lowest dollar volume-weighted average price of the Common Stock during the fifteen (15) consecutive trading day period ending and including the trading day immediately preceding the sixteenth (16th) trading day after such Stock Combination Event Date, divided by (y) five (5). The price adjustment described in this paragraph is hereinafter referred to as the “Event Market Price Adjustment.”

The 2020 Notes, which matured on the eighteen-month anniversary of the issuance date, were payable in installments and were convertible at the election of the investors at the conversion price of $12.95 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to adjustment in the event of default. Each investor also received a warrant to purchase 130,000 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant to purchase up to 34,369 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares of Common Stock issued pursuant to the 2020 Notes. Pursuant to the May SPA, additional convertible notes in an aggregate original face amount not to exceed $2,100,000 (the “Additional Notes”) could also be issued to the Institutional Investors under certain circumstances.

On February 24, 2021, we entered into an amendment to the May SPA with the Institutional Investors to increase the amount of the Additional Notes by $3,300,000 to $5,400,000. On February 26, 2021, Additional Notes in an aggregate original principal amount of $5,400,000 were issued to the Institutional Investors, together with the issuance of warrants to acquire an aggregate of 152,000 shares of Common Stock at an initial exercise price of $14.23 per share (post-Split Price and subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant to purchase up to 34,749 shares of our Common Stock at an initial exercise price of $14.23 per share post-Split Price and (subject to the Event Market Price Adjustment), subject to increase based on the number of shares of Common Stock issued pursuant to the Additional Notes.

On November 18, 2021, we entered into a securities purchase agreement (the “November SPA”) with the same two Institutional Investors to sell them a series of senior convertible notes (the “2021 Notes”) with an original issue discount of 20% and ranking senior to all outstanding and future indebtedness of the Company in a private placement. Each Institutional Investor paid $3,250,000 in cash for a 2021 Note in the face amount of $3,900,000. The November SPA also provided for the issuance of additional 2021 Notes in an aggregate original principal amount not to exceed $3,900,000 under certain circumstances. The November SPA also contains provisions about the Market Event Price. The 2021 Notes, which were issued on November 22, 2021, mature on the eighteen-month anniversary of the issuance date, are payable by the Company in installments and are convertible at the election of the Institutional Investors at the conversion price of $3.25 (post-Split Price and subject to the Event Market Price Adjustment), which is subject to adjustment in the event of default. Each Institutional Investor also received a warrant (the “Institutional Investor 2021 Warrant”) to purchase 180,000 shares of Common Stock at an initial exercise price of $3.55 per share (subject to the Event Market Price Adjustment). The placement agent for the private placement received a warrant (the “Placement Agent 2021 Warrant”, together with the Institutional Investor 2021 Warrant, the “2021 Warrants”) to purchase up to 8% of the aggregate number of shares of Common Stock at an initial exercise price of $3.55 per share (post-Split Price and subject to the Event Market Price Adjustment), subject to increase based on the number of shares Common Stock issued pursuant to the 2021 Notes.

The Company implemented a reverse stock split (the “Split”) on February 2, 2022 at the ratio of 5 to 1. The 2020 Notes were fully converted before the Split, and therefore no price adjustment was actually implemented at the conversion, although the price information provided above about the 2020 Notes was post-split price. The conversion price of the 2021 Notes and the exercise price of the 2020 Warrants and the 2021 Warrants will be adjusted pursuant to the Event Market Price formula upon conversion or exercise. There has been no conversion of the 2021 Notes or exercise of the 2020 Warrants or the 2021 Warrants as of the date of this report.

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

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

The value of the conversion option liability underlying the Notes and Convertible Notes as of March 31, 2023 and December 31,2022 were nil. The Company recognized a loss from the increase in the fair value of the conversion option liability in the amount of nil for the three months ended March 31, 2023 and 2022.

Other payables and accrued liabilities consisted of the following:

Amounts due to related parties and mid-level management personnel

As of March 31, 2023 and December 31,2022, the total amounts payable to related parties and mid-level management was $2,519,803 and $4,600,441, respectively, which included:

The Company is authorized to issue 200,000,000 shares of Common Stock, $0.001 par value. As of March 31, 2023 and December 31,2022, there were 10,359,264 shares and 34,255,000 shares outstanding, respectively.

On April 20, 2019 and October 7, 2019, the Company issued an aggregate of 300,000 shares of Common Stock as a part of the consideration for the acquisition of Boqi Zhengji.

On March 12, 2020, the Company issued 190,000 shares of Common Stock as the Guanzan Stock Consideration.

From April 6, 2020 through October 20, 2020, Power Up Lending Group Ltd., Crown Bridge Partners, LLC, Labrys Fund, LP, Morningview Financial, LLC,TFK Investments LLC, BHP Capital NY Inc., Firstfire Global Opportunities Fund, LLC and Platinum Point Capital LLC converted $1,534,250 of convertible notes plus interest into an aggregate of 331,643 shares of Common Stock.

On November 30, 2020, the Company issued 200,000 shares of Common Stock as the prepayment of the outstanding cash consideration for the Guanzan acquisition.

On December 2, 2020, Hudson Bay Master Fund Ltd (“Hudson Bay”), an institutional investor, converted $ 173,154 of a 2020 Note into an aggregate of 25,125 shares of Common Stock.

From December 2, 2020 until March 31, 2023, the Institutional Investor, CVI Investments, Inc.(“CVI”), converted $609,615 of a 2020 Note into 89,492 shares of Common Stock.

From January 4, 2021 to February 9, 2021, Hudson Bay converted 2020 Notes in the aggregate principal amount of $ 2,150,000 into 276,943 shares of Common Stock.

From January 4, 2021 to March 1, 2021, CVI converted 2020 Notes in the aggregate principal amount of $ 2,150,000 into 227,731 shares of the Common Stock.

On February 2, 2021, the Company issued 40,000 shares of Common Stock in connection with the purchase of Guoyitang Hospital. 

On February 3, 2021, a holder of a convertible note issued on December 16, 2019 converted a part of the note in the aggregate principal amount of $ 74,473 plus interest into 20,706 shares of Common Stock.

On February 11, 2021, the Company issued 5,000 shares of Common Stock to Real Miracle Investments Limited in consideration for consulting services.

On March 26, 2021, the Company issued 40,000 shares of Common Stock as part of the Zhongshan acquisition.

On April 20, 2021, the Company issued 80,000 shares of Common Stock as partial consideration for the acquisition of the Minkang, Qiangsheng and Eurasia hospitals.

On April 29, 2021, the Company issued 10,000 shares of Common Stock as payment for improvements to offices located in Chongqing.

On June 18, 2021, 32,500 shares of Common Stock were issued to CVI with respect to its cashless exercise of 650,000 warrants that were issued in 2020.

On July 23, 2021, the Company issued 30,000 shares of Common Stock as payment for salary to three employees.

From August 26, 2021 to November 30, 2021, Hudson Bay converted 2020 Notes in the aggregate principal amount of $2,400,000 into 970,173 shares of Common Stock.

From August 26, 2021 to November 30, 2021, CVI converted 2020 Notes in the aggregate principal amount of $3,000,000 into 1,183,251 shares of Common Stock.

On August 27, 2021, the Company issued 92,000 shares of Common Stock in full payment of the balance of the post-closing consideration for the acquisition of Guanzan.

On September 22, 2021, the Company issued 44,000 shares of Common Stock as the initial consideration for the acquisition of Zhuoda.

On January 7, 2022, the Company issued 600,000 shares of Common Stock as the initial consideration for the acquisition of Mali Hospital.

On January 24, 2022, the Company issued 1,000,000 shares of Common Stock as salary for Mr. Tiewei Song.

On January 27, 2022, the Company entered into an employment agreement with Mr. Xiaping Wang for a term of one (1) year, effective January 1, 2022. Under the agreement, Mr. Wang’s compensation will consist of an annual salary of $500,000 in cash and stock compensation of 500,000 shares of the Company’s common stock. The Company issued 500,000 shares of our common stock to Mr. Wang on February 1,2022.

On February 1, 2022, the Company issued 50,000 shares of Common Stock to Chongqing Jinmujinyang (Jiulongpo) Law Firm (a/k/a in English: Chongqing Kingmoon & Kingyang (Jiulongpo) Law Firm) as payment for services under a legal consulting agreement dated January 1, 2022.

On February 2, 2022, the Company issued a press release announcing a 1-for-5 reverse stock split of its common stock would become effective on February 3, 2022.

On July 18, 2022, 12,500,000 shares of Common Stock were issued to Mr. Fnu Oudom in consideration of $5 million after obtaining the approval of stockholders at the Company’s 2022 annual meeting of shareholders.

On December 8, 2022, the Company issued a press release announcing that a 1-for-10 reverse stock split of its common stock would become effective on December 9, 2022.

On November 23, 2022, the Zhouda sale transaction closed, when 100% of the equity interests in Zhuoda were transferred to the buyers and the 44,000 shares of the Company’s common stock were returned to the Company as the full consideration.

From the legal perspective, the Reverse Split applied to the issued shares of the Company on the date of the Reverse Split and does not have any retroactive effect on the Company’s shares prior that date. However, for accounting purposes only, references to our ordinary shares in this annual report are stated as having been retroactively adjusted and restated to give effect to the Reverse Split, as if the Reverse Split had occurred by the relevant earlier date.

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 three months ended March 31, 2023 and 2022: