Corporate Structure and Risks - BGM Group Ltd operates as a Cayman Islands holding company with no direct business operations, relying on Gansu Qilianshan Pharmaceutical Co., Ltd. (the VIE) and its subsidiaries for its business activities in China[30]. - The company consolidates the financial results of Gansu QLS and its subsidiaries in accordance with U.S. GAAP, but investors do not own equity in the operating entities in China[31]. - BGM's corporate structure is subject to legal and operational risks, particularly regarding the enforceability of VIE agreements, which have not been tested in PRC courts[32]. - A significant portion of BGM's revenue is generated by the VIE, and any deconsolidation of the VIE could materially affect operations and diminish the value of BGM's ordinary shares[32]. - The company faces uncertainties related to PRC government regulations that could impact its ability to conduct business and accept foreign investments[35]. - The PRC government has significant authority to influence offshore holding companies, which could materially affect business operations and lead to a decline in the value of Ordinary Shares[65]. - The PRC government retains significant control over business operations, which may lead to adverse changes in the company's operations and securities value[116]. - The PRC government may continue to strengthen capital controls, which could limit the ability of the PRC Subsidiary to pay dividends or make distributions, adversely affecting growth and investment opportunities[149]. - If the PRC authorities invalidate these contractual arrangements, BGM's business operations in China would be materially and adversely affected, leading to a substantial decrease in the value of BGM's shares[78]. - The PRC tax authorities may challenge the contractual arrangements, leading to additional tax liabilities that could adversely affect BGM's financial results[89]. 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[51][53]. - The total operating expenses for the year ended September 30, 2024, were $4,678,526, with cost of revenues at $20,983,196[51]. - The company reported cash and cash equivalents of $9,817,254 as of September 30, 2024[53]. - For the year ended September 30, 2024, net cash provided by operating activities was $544,238, a significant increase compared to $(635,467) for the previous year[54]. - The share of income from subsidiaries, the VIE, and the VIE's subsidiaries for the year ended September 30, 2023, was $80,506, reflecting a recovery from a loss of $(1,602,772) in the prior year[56]. - The company reported net cash used in investing activities of $(4,742,445) for the year ended September 30, 2023, compared to $(3,258,952) in 2022[54]. - The company anticipates an increase in investments in subsidiaries, projecting a rise to $11,141,678 by September 30, 2024[56]. Regulatory Environment - Recent legislative changes in the U.S. could lead to the delisting of BGM's ordinary shares if its auditors are not subject to PCAOB inspections for two consecutive years[39]. - The PCAOB reported on December 16, 2021, that it is unable to fully inspect PCAOB-registered public accounting firms in China and Hong Kong, which may affect companies using non-inspected audit firms[65]. - The Holding Foreign Companies Accountable Act (HFCA Act) mandates that if the SEC identifies a company with audit reports from non-inspected firms for two consecutive years, trading of its shares will be prohibited[97]. - The recent Protocol signed by the CSRC, MOF, and PCAOB aims to facilitate PCAOB inspections, but future obstruction by PRC authorities could lead to new determinations[105]. - The revised Measures for Cybersecurity Review require online platform operators with over one million users to apply for a cybersecurity review before listing abroad, effective February 15, 2022[65]. - The PRC government has indicated an intent to increase oversight over overseas offerings and foreign investments in China-based companies, which could materially affect the company's ability to offer securities[129]. - The Measures for Cybersecurity Review require data processors with over one million users to undergo cybersecurity reviews before listing on foreign exchanges, adding compliance complexities[130]. - The company has not faced any investigations or sanctions related to the PRC Data Security Law as of the date of the report, indicating current compliance[127]. Market and Competitive Risks - A significant portion of revenue is concentrated among a few large customers, and the loss of any key customer could adversely impact financial results[67]. - The company does not have long-term agreements with key customers, which poses a risk to its revenue stability[193]. - The WFOE and VIE subsidiaries face significant competition in rapidly changing industries, with potential competitors having greater financial resources and expertise[182]. - The pharmaceutical business is exposed to product liability risks, which could lead to substantial damages and disrupt operations[187]. - Limited sources of working capital may hinder the company's ability to expand production capacity and sustain operations[188]. - The company faces scrutiny and negative publicity similar to other U.S.-listed Chinese companies, which could harm its business operations and reputation[175]. Operational Challenges - The company must maintain various permits and licenses to operate, and any failure to do so could materially impact its business operations[207]. - Disruptions in the supply chain due to local protectionism and environmental risks could significantly impact the company's ability to produce and deliver products[197]. - The company faces intense competition for qualified personnel in the PRC, which could adversely affect its ability to improve products and achieve business objectives[192]. - The company may incur increased costs to comply with new regulations, which could delay development and require significant management resources[126]. - The company's operations could be significantly disrupted by natural disasters, health epidemics, and other catastrophic incidents, adversely affecting financial results[211]. Tax and Dividend Considerations - If BGM is considered a PRC tax resident, dividends paid to overseas shareholders may be subject to a withholding tax of up to 10%[45]. - BGM's ability to pay dividends is contingent upon receiving funds from its Hong Kong subsidiary, which relies on the VIE's profits[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]. - Under PRC regulations, dividends can only be paid out of accumulated after-tax profits, and a minimum of 10% must be set aside for statutory reserves[147]. - The PRC government controls currency conversion, which may affect BGM's ability to remit foreign currency for dividend payments[144]. Economic and External Factors - The COVID-19 pandemic has negatively affected the Chinese and global economy, creating uncertainty for BGM's business operations and financial condition[135]. - Future changes in PRC economic policies could adversely affect BGM's competitive position and demand for its products[137]. - Fluctuations in exchange rates, particularly the RMB against the U.S. dollar, could adversely affect revenues and financial conditions, impacting the value of shares and dividends[164]. - Labor costs in the PRC are expected to continue increasing, which may adversely affect the financial conditions and results of operations unless passed on to customers[167].
Qilian International Holding Group Limited(BGM) - 2024 Q4 - Annual Report