Corporate Structure and Operations - BGM Group Ltd operates as a Cayman Islands holding company with no direct business operations, relying on Gansu Qilianshan Pharmaceutical Co., Ltd. (the VIE) for its business activities in China[30]. - The financial results of Gansu QLS and its subsidiaries are consolidated in BGM's financial statements under U.S. GAAP, despite BGM not owning any equity in these entities[31]. - BGM's corporate structure is subject to legal and operational risks, particularly regarding the enforceability of VIE Agreements, which could lead to significant penalties or loss of operational control if PRC regulations change[32]. - The majority of BGM's revenue is generated by the VIE, and any deconsolidation of the VIE could materially affect the company's operations and share value[32]. - The company does not conduct business directly but operates through the VIE and its subsidiaries under contractual arrangements[71]. - BGM relies on contractual arrangements with the VIE and its shareholders to operate its business in China, which may not provide effective control or economic benefits compared to ownership of equity interests[77]. Financial Performance - For the year ended September 30, 2024, total revenues amounted to $25,097,951, with service fee revenue from the VIE contributing $698,585[51]. - The net income for the year ended September 30, 2024, was a loss of $1,517,161, compared to a net loss of $8,122,070 for the year ended September 30, 2023[53]. - For the year ended September 30, 2023, total revenues were $46,471,478, with a significant loss attributed to service fee revenue from the VIE[53]. - As of September 30, 2024, total assets were reported at $53,003,728, with total liabilities of $8,910,379 and total shareholders' equity of $44,093,349[53]. - Total liabilities stood at $6,906,593 as of September 30, 2023, with total shareholders' equity at $44,351,401[54]. - The company anticipates an increase in intercompany balances to $4,012,005 by September 30, 2024[60]. Regulatory and Compliance Risks - BGM faces uncertainties from the PRC government that could adversely impact its business, including regulatory approvals for overseas offerings and compliance with data security laws[35]. - The PCAOB reported it cannot fully inspect PCAOB-registered public accounting firms in China and Hong Kong, impacting future audit compliance[65]. - The PRC government has significant authority to influence offshore holding companies, which could materially affect business operations and share value[65]. - The CAC issued revised cybersecurity review measures effective February 15, 2022, requiring online platform operators with over one million users to apply for a cybersecurity review before foreign listings[65]. - The company is not currently required to obtain approval from Chinese authorities to operate and list on U.S. exchanges, but future regulations may impose restrictions[49]. - The PRC government has indicated an intent to exert more control over overseas listings, which could hinder the ability to offer securities and adversely affect business operations[110]. Dividend and Funding Policies - BGM is permitted to provide funding to its Hong Kong subsidiary without restrictions, allowing for flexibility in capital management[41]. - The company’s dividend policy will be determined by its board of directors based on financial conditions and other relevant factors, with no restrictions on the amount of funds that may be distributed[41]. - BGM's ability to pay dividends is contingent upon receiving funds from its VIE and subsidiaries, which are subject to PRC taxes including enterprise income taxes and VAT[45]. - Current PRC regulations require WFOE to pay dividends to the Hong Kong subsidiary only from accumulated after-tax profits, with a mandatory reserve of at least 10% of after-tax profits until it reaches 50% of registered capital[43]. - Cash dividends, if any, will be paid in U.S. dollars and may be subject to PRC withholding tax at a rate of up to 10.0%[45]. Market and Economic Risks - A severe downturn in the Chinese or global economy could materially affect BGM's business and financial condition, especially given the ongoing uncertainties in the macroeconomic environment[135]. - The trading price of the company's Ordinary Shares is likely to be volatile, potentially resulting in substantial losses for investors[73]. - The company may face adverse effects from new PRC laws or regulations that could decrease demand for its products and increase operational costs[133]. - The company faces significant competition in the pharmaceutical and chemical industries, with competitors potentially having greater financial resources and expertise[182]. Legal and Taxation Risks - If the PRC authorities invalidate these contractual arrangements, BGM's business operations in China would be materially and adversely affected, potentially leading to a substantial decrease in the value of BGM's shares[78]. - The legal environment in the PRC presents uncertainties that could limit BGM's ability to enforce its contractual arrangements, impacting its operational control and financial condition[81]. - If classified as a "Resident Enterprise" under the EIT Law, BGM could face a 25% enterprise income tax on worldwide income, affecting its financial performance[138]. - The company is exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, which could negatively impact its operations[142]. Operational Challenges - The company does not carry product liability insurance, exposing it to substantial financial risks from product liability claims[187]. - Limited sources of working capital may hinder the company's ability to implement its business plan and expand production capacity[188]. - The company may experience disruptions in operations due to natural disasters, health epidemics, or other catastrophic incidents, which could adversely affect financial results[211]. - The company faces intense competition for qualified personnel, which could adversely affect its ability to grow and improve products[192]. Intellectual Property and Compliance - The company owns 31 valid patents and has filed two additional patent applications, but there is no assurance that these patents will be upheld or that they will not infringe on third-party patents[199]. - The company’s ability to protect its intellectual property may be challenged, and enforcement of these rights can be difficult and costly[204]. - The company must maintain various permits and licenses to operate, and any failure to do so could materially affect its business operations[207].
Qilian International(QLI) - 2024 Q4 - Annual Report