Filing Scope and Business Context
This filing is Qilian International Holding Group Limited’s annual Form 20-F for the fiscal year ended September 30, 2022, not a standalone calendar fourth-quarter filing. The request metadata identifies BGM Group Ltd., but the supplied filing names Qilian International Holding Group Limited, ticker QLI. The audited consolidated financial statements cover fiscal years 2022, 2021, and 2020 and are prepared under U.S. GAAP.
Qilian is a Cayman Islands holding company with no material operating business of its own. Operations are conducted in China through Gansu Qilianshan Pharmaceutical Co., Ltd. and subsidiaries under variable-interest-entity contractual arrangements. The company does not own the VIE’s equity interests; investors own shares in the offshore holding company rather than direct interests in the Chinese operating businesses.
The business manufactures and sells oxytetracycline and licorice products, traditional Chinese medicine derivatives, heparin products, sausage casings, and fertilizers, primarily in China.
Financial Performance and Position
| US$ millions, except per-share data | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | 64.9 | 57.1 | +14% |
| Gross profit | 6.2 | 5.6 | +10% |
| Gross margin | 9.6% | 9.9% | -0.3 percentage points |
| Income from operations | 2.1 | 2.4 | -12% |
| Net income | 1.4 | 3.1 | -56% |
| Net income attributable to shareholders | 1.1 | 3.2 | -66% |
| Basic and diluted EPS | $0.03 | $0.09 | Down |
| EBITDA, non-GAAP | 2.8 | 4.6 | -40% |
| EBITDA margin | 4.3% | 8.1% | -3.8 percentage points |
- Revenue growth was led by oxytetracycline, licorice products, and TCMD, which increased 20% to $40.3 million and represented 62% of revenue. Heparin and sausage casing revenue increased 1% to $23.5 million, while fertilizer revenue increased 124% to $1.1 million.
- Oxytetracycline and licorice gross margin declined to 10.2% from 15.2%, as average costs increased approximately 12% and selling-price increases did not offset cost inflation and competition.
- Heparin and sausage casing gross margin improved to 7.7% from 2.3%, helped by lower pig-intestine costs, higher heparin demand, and a shift toward raw sausage casing products.
- Selling, general and administrative expense increased 27% to $4.1 million, primarily because research and development expense increased by approximately $1.2 million.
- Other income and expense shifted from $1.0 million of net income in FY2021 to a $0.5 million net expense in FY2022, primarily because of losses on available-for-sale securities.
Cash Flow, Liquidity, Capital Expenditures and Debt
- Operating cash flow was $12.7 million, compared with $0.3 million in FY2021. The improvement was driven largely by working-capital changes, including an $8.7 million reduction in bank acceptance notes receivable and a $2.2 million reduction in inventory.
- Investing cash outflow was $3.3 million, principally for $3.2 million of property and equipment. FY2021 investing outflow was $24.2 million, including a $20.0 million private fund investment.
- Financing cash outflow was $5.9 million, primarily reflecting a $6.1 million net repayment of bank notes payable.
- Cash and cash equivalents were $14.3 million at September 30, 2022, with restricted cash of $0.7 million. Total current assets were $30.0 million and current liabilities were $9.2 million, implying reported current assets of approximately 3.3 times current liabilities.
- Total liabilities were $9.6 million versus $18.7 million at September 30, 2021. Debt included $0.1 million of bank loans and $1.5 million of bank notes payable at year-end; the bank notes were fully repaid by the report date. The company had a bank facility with a total credit limit of approximately $4.6 million and $0.2 million utilized as of the report date.
- Management stated that operating cash flow and existing resources should satisfy normal working-capital and debt obligations for at least the next twelve months, but also stated that additional financing will be needed to execute its plans.
- Management estimated at least $20.5 million of financing needs over the next three years for expansion, marketing, capacity increases, and potential acquisitions. FY2023 capital expenditures were estimated at $5.0 million for a Chongqing heparin facility, whose construction was delayed by COVID-19 and expected to be completed by December 2023.
Material Changes Versus the Prior Comparable Period
- Revenue increased 14%, but shareholder-attributable net income fell 66% because of weaker operating leverage, higher R&D and operating expenses, lower margins in the principal product segment, and investment losses.
- Gross margin was broadly stable overall but deteriorated materially in oxytetracycline and licorice products; fertilizer margins recovered as production resumed after an extended FY2021 interruption.
- Working-capital conversion improved sharply, resulting in substantially higher operating cash flow despite lower earnings.
- On December 1, 2022, the prior service agreement between the Chengdu WFOE and Gansu QLS was terminated and replaced by an agreement with Hainan Trade. The new agreement grants Hainan Trade contractual control and a service fee equal to 99.214% of Gansu QLS’s net profits. Management stated that the change did not alter the company’s controlling financial interest or accounting consolidation.
- The company reported 344 employees at September 30, 2022, compared with 283 in 2021.
Outlook, Risks and Unusual Items
- Management plans to expand its marketing network, invest in pharmaceutical and chemical facilities, increase heparin and oxytetracycline capacity, and develop new products. Execution depends on obtaining additional debt or equity financing, which could dilute shareholders or be unavailable on acceptable terms.
- COVID-19, raw-material inflation, logistics disruption, and competitive pricing adversely affected margins. Management noted continued uncertainty from possible resurgences and supply-chain effects.
- Customer and supplier concentration is material: two customers each represented approximately 11% of FY2022 revenue; one vendor represented 14% of purchases; and three customers represented 61%, 13%, and 11% of accounts receivable at year-end.
- The company relies on a VIE structure that has not been tested in a PRC court. Changes in PRC regulation or enforcement could invalidate the arrangements, restrict operations, or cause deconsolidation of the VIE, which generates substantially all revenue and holds most operating assets and licenses.
- PRC regulatory, foreign-exchange, cybersecurity, data-protection, tax, and overseas-listing approval requirements remain uncertain. The company stated that it had not received an inquiry, warning, or sanction regarding its offshore listing as of the filing date.
- The company disclosed incomplete social-insurance contributions at Gansu QLS and noncompliance by Chengdu QLS with housing-fund requirements, potentially resulting in additional contributions, fines, or enforcement.
- Management concluded that internal control over financial reporting was not effective at September 30, 2022 because in-house accounting personnel lacked sufficient ability to prepare SEC-compliant financial statements and disclosures. The company is recruiting personnel and providing U.S. GAAP training, but cannot assure timely remediation. The auditor did not provide an attestation opinion on internal controls because the company is an emerging growth company.
- The company held approximately $19.5 million of available-for-sale fund investments at year-end, down from $20.3 million, and recognized an approximately $0.8 million investment loss.
- On February 16, 2023, the board declared a one-time $0.05 per-share special dividend, totaling approximately $1.8 million and paid on March 6, 2023. The company stated that it does not currently plan regular cash dividends.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for Qilian International Holding Group Limited, not BGM Group Ltd., and covers the fiscal year ended September 30, 2022 rather than only Q4.
- Verify the legal enforceability and continuing effectiveness of the VIE agreements, including the December 2022 transition from Chengdu Trade to Hainan Trade.
- Reconcile the sharp decline in shareholder-attributable earnings and EBITDA with revenue growth, particularly the impact of product-level costs, R&D spending, and investment losses.
- Assess the quality and liquidity of operating cash flow, including the large working-capital benefit from lower bank acceptance notes receivable and inventory.
- Confirm the status, valuation, redemption restrictions, and liquidity of the approximately $19.5 million private fund investment.
- Evaluate the company’s ability to fund the estimated $20.5 million three-year investment program and approximately $5.0 million of FY2023 capital expenditures without material dilution or additional leverage.
- Monitor remediation of the material weakness in internal control over financial reporting and any future restatements or reporting delays.
- Review outstanding regulatory, tax, social-insurance, housing-fund, customer-concentration, supplier-concentration, and PRC capital-control exposures.