| Summary of Significant Accounting Policies | NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Basis of Presentation and Principles
of Consolidation The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP
for complete financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with
the Company’s consolidated financial statements and the notes thereto for the year ended September 30, 2019 included in the
Company’s Registration Statement Form F-1. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the interim
period ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September
30, 2020. Non-controlling interests Non-controlling interests represent minority
shareholders’ 25% ownership interest in Xi’an DT and a minority shareholder’s 49% ownership interest in Tianjin
YHX as of March 31, 2020. The non-controlling interests are presented in the condensed consolidated balance sheets, separately
from equity attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented
on the face of the condensed consolidated statements of operations and comprehensive income as an allocation of the total income
or loss for the six months ended March 31, 2020 and 2019 between non-controlling interest holders and the shareholders of the Company. Uses of estimates In preparing the unaudited condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”),
management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. These estimates are based on information as of the date of the unaudited condensed consolidated financial statements. Significant
estimates required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables,
inventory valuations, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets,
provision necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could
differ from those estimates. Risks and Uncertainties The main operation of the Company is located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political,
economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may
be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced
losses from these situations and believes that it is in compliance with existing laws and regulations including its organization
and structure disclosed in Note 1, this may not be indicative of future results. The Company’s business, financial condition
and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health
epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations (see Note 18- Subsequent
Events The development and commercialization of natural
and healthy extracts and compounds products is highly competitive, and the industry currently is characterized by rapidly changing
technologies, significant competition and a strong emphasis on intellectual property. The Company may face competition with respect
to our current and future pharmaceutical product candidates from major pharmaceutical companies in China. Cash and cash equivalents Cash includes currency on hand and deposits
held by banks that can be added or withdrawn without limitation. The Company maintains most of its bank accounts in the PRC. Cash
balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs. Accounts receivable, net Accounts receivable are presented net of allowance
for doubtful accounts. The Company determines the adequacy of reserves
for doubtful accounts based on individual account analysis and historical collection trend. The Company establishes a provision
for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance
is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends
of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment.
Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the
collection is not probable. Allowance for uncollectable balances amounted to $90,051 and $73,386 as of March 31, 2020 and September
30, 2019, respectively. Advances to Suppliers, net Advances to suppliers
consist of balances paid to suppliers for inventory raw materials and construction materials associated with the Company’s
construction-in-progress projects that have not been provided or received. Advances to suppliers are short-term in nature. Advances
to Suppliers are reviewed periodically to determine whether their carrying value has become impaired. The Company considers the
assets to be impaired if the collectability of the advance becomes doubtful. The Company uses the aging method to estimate the
allowance for uncollectible balances. In addition, at each reporting date, the Company generally determines the adequacy of allowance
for doubtful accounts by evaluating all available information, and then records specific allowances for those advances based on
the specific facts and circumstances. As of March 31, 2020 and September 30, 2019, allowance for doubtful account amounted to $115,819
and $6,377, respectively. Inventories, net Inventories are stated at net realizable value
using weighted average method. Costs include the cost of raw materials, freight, direct labor and related production overhead.
Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in
the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to
complete and sell products. The Company evaluates inventories on a quarterly basis for its net realizable value adjustments, and
reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable
value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected
future product sales. The Company recorded inventory reserve of $392,546 and $389,867 as of March 31 2020 and September 30, 2019,
respectively. Deferred initial public offering (“IPO”)
costs The Company complies with the requirement of
the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A — “Expenses of Offering”.
Deferred offering costs consist of underwriting, legal, accounting and other expenses incurred through the balance sheet date that
are directly related to the intended IPO. Deferred offering costs will be charged to shareholders’ equity upon the completion
of the IPO. Should the IPO prove to be unsuccessful, these deferred costs, as well as additional expenses to be incurred, will
be charged to operations. Deferred initial public offering costs of $42,238 and $Nil was included in “prepaid expenses and
other current assets” as of March 31, 2020 and September 30, 2019, respectively. Fair value of financial instruments Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to
maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair
value are as follows:
● Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.
● Level 3 — inputs to the valuation methodology are unobservable. Unless otherwise disclosed, the fair value
of the Company’s financial instruments, including cash, accounts receivable, inventories, advance to suppliers, prepaid expenses
and other current assets, accounts payable, short-term bank loans, accrued expenses and other current liabilities, taxes payable
and due to related parties, approximate the fair value of the respective assets and liabilities as of March 31, 2020 and September
30, 2019 based upon the short-term nature of the assets and liabilities. Property, plant and equipment, net Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is provided using
the straight-line method over their expected useful lives, as follows:
Useful life
Buildings 20 years
Machinery and equipment 5–10 years
Automobiles 8 years
Office and electric equipment 3–5 years Expenditures for maintenance and repairs, which
do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and
betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation
of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements
of income and other comprehensive income in other income or expenses. Intangible assets, net The Company’s intangible assets primarily
includes land use rights. A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land
during the contractual term of the land use right. The cost of a land use right is usually paid in one lump sum at the date the
right is granted. The prepayment usually covers the entire period of the land use right. The lump sum advance payment is capitalized
and recorded as land use right and then charged to expense on a straight-line basis over the period of the right, which is normally
50 years. Impairment of long-lived Assets Long-lived assets, such as property, plant
and equipment, land use rights and long-term investment, are reviewed for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and
used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows
expected to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of
the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the
lower of carrying amount or fair value less costs to sell, and are no longer depreciated. No impairment of long-lived assets was
recognized as of March 31, 2020 and September 30, 2019. Capital lease obligation In accordance with ASC 840, Leases Capital leases are measured at the commencement
of the lease at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease
term. During the lease term, each minimum lease payment is allocated between a reduction of the obligation and interest expense
to produce a constant periodic rate of interest on the remaining balance of the obligation (the interest method). Assets held under
capital leases are depreciated over the useful lives of the assets or the lease term, whichever is shorter. On October 6, 2018, the Company’s VIE,
Xi’an App-Chem (the “Lessee”) entered into a capital lease agreement with Guian Hengxin Finance Lease (Shanghai)
Ltd. (“the Lessor”) and sold part of its plant machines with carrying value of RMB 5 million (approximately $0.7 million)
to the lessor and then leases them back from the lessor within two years. Pursuant to the terms of the contract, the Company is
required to pay to the lessor monthly lease payment and interest, and is entitled to obtain the ownership of these machinery and
equipment at a nominal price upon the expiration of the lease., Management deemed the arrangement as a capital lease (see Note
13). Foreign Currency Translation The functional currency for Bon Natural is
the U.S Dollar (“US$”). Tea Essence uses Hong Kong dollar as its functional currency. However, Bon Natural, and Tea
Essence currently only serve as the holding companies and did not have active operation as of the date of this report. The Company
operates its business through its subsidiary and VIEs in the PRC as of March 31, 2020. The functional currency of the Company’s
subsidiary and VIEs is the Chinese Yuan (“RMB”). The Company’s consolidated financial statements have been translated
into US$. Assets and liabilities accounts are translated
using the exchange rate at each reporting period end date. Equity accounts are translated at historical rates. Income and expense
accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are
reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and
balances are reflected in the results of operations. The RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. The following table outlines the currency exchange
rates that were used in creating the consolidated financial statements in this report:
March 31, 2020 March 31, 2019 September 30, 2019
Period-end spot rate US$1=RMB 7.0896 US$1=RMB 7.7119 US$1=RMB 7.1383
Average rate US$1=RMB7.0120 US$1=RMB6.8320 US$1=RMB 6.8767 Revenue recognition On October 1, 2017, the Company adopted Accounting
Standards Codification (“ASC”) 606 using the modified retrospective approach. The adoption of this standard did not
have a material impact on the Company’s consolidated financial statements. Therefore, no adjustments to opening retained
earnings were necessary. ASC 606, Revenue from Contracts with customers,
establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising
from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to
be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. ASC 606 requires the use of a five five not five not In accordance to ASC 606, the Company recognizes
revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company
expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its products to its customers,
in which the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing
prices, and is responsible for fulfilling the promise to provide customers the specified goods. All of the Company’s contracts
have single performance obligation as the promise is to transfer the individual goods to customers, and there is no other separately
identifiable promises in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk
of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s products are sold with
no right of return and the Company does not provide other credits or sales incentive to customers. The Company’s sales are
net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of
product sales. Contract Assets and Liabilities Payment terms are established on the Company’s
pre-established credit requirements based upon an evaluation of customers’ credit. Contract assets are recognized for in
related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery.
The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery
occurs. As of March 31, 2020 and September 30, 2019, other than accounts receivable and advances from customers, the Company had
no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet.
Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer
of control, are recognized in selling, general and administrative expense when incurred. Disaggregation of Revenues The Company disaggregates its revenue from
contracts by product types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue
and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the six months ended March
31, 2020 and 2019 are disclosed in Note 17 of this unaudited condensed consolidation financial statements. Research and development expenses The Company expenses all internal research
and development costs as incurred, which primarily comprise employee costs, internal and external costs related to execution of
studies, including manufacturing costs, facility costs of the research center, and amortization and depreciation to intangible
assets and property, plant and equipment used in the research and development activities. For the six months ended March 31, 2020
and 2019, research and development expense were approximately $128,481 and $165,464, respectively. Selling, General and Administrative
Expenses Selling expenses represents
primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative
expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises,
depreciation and amortization of office facilities, professional fees and other administrative expenses. Advertising expense Advertising expenses primarily relate to promotion
of the Company’s brand name and products through outdoor billboards and social media such as Weibo and WeChat. Advertising
expenses are included in selling expenses in the consolidated statements of income and comprehensive income. Advertising expenses
amounted to $3,709 and $32,805 for the six months ended March 31, 2020 and 2019, respectively. Government subsidies Government subsidies primarily relate to local
government’s cash award to High and New Technology Enterprises (“HNTEs”) to encourage entrepreneurship and stimulate
local economy. Such awards are granted on a case-by-case basis by local government. The Company’s VIE, Xi’an App-chem
was approved as a HNTE and received government subsidy in the form of export sales refund and cash awards based on annual financial
performance. The Company recognizes government subsidies as other operating income when they are received because they are not
subject to any past or future conditions, there are no performance conditions or conditions of use, and they are not subject to
future refunds. Government subsidies received and recognized as other operating income totaled $332,418 and $101,239 for the six
months ended March 31, 2020 and 2019, respectively. Income taxes The Company accounts for current income taxes
in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist
between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. An uncertain tax position is recognized only
if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting
the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income
taxes have been incurred during the six months ended March 31, 2020 and 2019. The Company does not believe there was any uncertain
tax provision at March 31, 2020 and September 30, 2019. The Company’s operating subsidiary and
VIE in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the six months
ended March 31, 2020 and 2019. As of March 31, 2020 and September 30, 2019, all of the Company’s tax returns of its PRC subsidiary,
its VIE and VIE’s subsidiaries remain open for statutory examination by PRC tax authorities. Value added tax (“VAT”) Sales revenue represents the invoiced value
of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to 17% (starting from May 1, 2018, VAT rate
was lowered to 16%, and starting from April 1, 2019, VAT rate was further lowered to 13%), depending on the type of products sold.
The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring
its finished products. The Company recorded a VAT payable or recoverable net of VAT payments in the accompanying consolidated financial
statements. For export sales, VAT is not imposed on gross
sales price, but the VAT related to purchasing raw materials is refunded after the export is completed. Employee Defined Contribution Plan The Company’s subsidiaries in the PRC
participate in a government-mandated multi-employer defined contribution plan pursuant to which pension, work-related injury benefits,
maternity insurance, medical insurance, unemployment benefit and housing fund are provided to eligible full-time employees. The
relevant labor regulations require the Company’s subsidiaries in the PRC to pay the local labor and social welfare authorities
monthly contributions based on the applicable benchmarks and rates stipulated by the local government. The contributions to the
plan are expensed as incurred. Employee social security and welfare benefits included as expenses in the accompanying unaudited
condensed consolidated statements of income and comprehensive income amounted to $15,336 and $30,204 for the six months ended March
31, 2020 and 2019, respectively. Earnings per Share The Company computes earnings per share (“EPS”)
in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares
outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per
share) are excluded from the calculation of diluted EPS. For the six months ended March 31, 2020 and 2019, there were no dilutive
shares. Comprehensive income (loss) Comprehensive income (loss) consists of two
components, net income and other comprehensive income (loss). The foreign currency translation gain or loss resulting from translation
of the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss) in the consolidated statements
of income and comprehensive income. Statement of Cash Flows In accordance with ASC 230, “Statement
of Cash Flows”, cash flows from the Company’s operations are formulated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets. Segment Reporting The Company uses the management approach in
determining reportable operating segments. The management approach considers the internal reporting used by the Company’s
chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment
of its performance in determining the Company’s reportable operating segments. Management has determined that the Company
has one operating segment. Recent Accounting Pronouncements In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability
on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands
the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the
balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU
2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for
financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for
the separation of non-lease components from lease components. In March 2019, the FASB issued Accounting Standards Update No. 2019-01,
Leases (Topic 842): Codification Improvements Accounting Changes and Error Corrections Financial
Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates In June 2016, the
FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets
measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements
to Topic 326, Financial Instruments—Credit Losses, Codification Improvements to
Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments Targeted Transition Relief. In August 2018, the FASB Accounting Standards
Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements.
ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December
15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted
on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance
will have a material impact on its consolidated financial statements. In November 2019, the FASB issued ASU 2019-10,
“Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)”
(“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective dates for future major accounting standards
and (ii) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of
entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB
Accounting Standards Codification (ASC): (a) Derivatives and Hedging (ASC 815) – now effective for fiscal years beginning
after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (b) Leases (ASC 842) - now effective
for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (c)
Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal years beginning after December 15, 2022, including
interim periods within those fiscal years; and (d) Intangibles — Goodwill and Other (ASC 350) - now effective for fiscal
years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect the cumulative
effect resulting from the adoption of this guidance will have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12,
Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for
income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent
application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal
years, which is fiscal 2021 for us, with early adoption permitted. The Company does not expect the adoption of the new guidance
to have a significant impact on its consolidated financial statements. | Note 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Basis of Presentation and Principles
of Consolidation The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying consolidated
financial statements include the financial statements of the Company, its wholly owned subsidiaries, and entities it controlled
through VIE agreements. All inter-company balances and transactions are eliminated upon consolidation. Non-controlling interests Non-controlling interests represent minority
shareholders’ 25% ownership interest in Xi’an DT and a minority shareholder’s 49% ownership interest in Tianjin
YHX as of September 30, 2019. The non-controlling interests are presented in the consolidated balance sheets, separately from equity
attributable to the shareholders of the Company. Non-controlling interests in the results of the Company are presented on the face
of the consolidated statements of operations and comprehensive loss as an allocation of the total loss for the year between non-controlling
interest holders and the shareholders of the Company. Uses of estimates In preparing the consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), management
makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates
required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, inventory
valuations, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision
necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from
those estimates. Risks and Uncertainties The main operation of the Company is located
in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by political,
economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s results may
be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although the Company has not experienced
losses from these situations and believes that it is in compliance with existing laws and regulations including its organization
and structure disclosed in [ Note 1], this may not be indicative of future results. The Company’s business, financial condition
and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health
epidemics and other catastrophic incidents, which could significantly disrupt the Company’s operations (see Note 18- Subsequent
Events The development and commercialization of natural
and healthy extracts and compounds products is highly competitive, and the industry currently is characterized by rapidly changing
technologies, significant competition and a strong emphasis on intellectual property. The Company may face competition with respect
to our current and future pharmaceutical product candidates from major pharmaceutical companies in China. Cash and cash equivalents Cash includes currency on hand and deposits
held by banks that can be added or withdrawn without limitation. The Company maintains most of its bank accounts in the PRC. Cash
balances in bank accounts in PRC are not insured by the Federal Deposit Insurance Corporation or other programs. Accounts receivable, net Accounts receivable are presented net of allowance
for doubtful accounts. The Company determines the adequacy of reserves
for doubtful accounts based on individual account analysis and historical collection trend. The Company establishes a provision
for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance
is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends
of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment.
Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the
collection is not probable. Allowance for uncollectable balances amounted to $73,386 and $48,529 as of September 30, 2019 and 2018,
respectively. Inventories, net Inventories are stated at net realizable value
using weighted average method. Costs include the cost of raw materials, freight, direct labor and related production overhead.
Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in
the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to
complete and sell products. The Company evaluates inventories on a quarterly basis for its net realizable value adjustments, and
reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable
value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected
future product sales. The Company recorded inventory reserve of $389,867 and $405,205 as of September 30, 2019 and 2018, respectively. Fair value of financial instruments Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to
maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair
value are as follows:
● Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data.
● Level 3 — inputs to the valuation methodology are unobservable. Unless otherwise disclosed, the fair value
of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses and other current assets, accounts
payable, short-term bank loans, accrued expenses and other current liabilities, taxes payable and due to related parties, approximate
the fair value of the respective assets and liabilities as of September 30, 2019 and 2018 based upon the short-term nature of the
assets and liabilities. Property, plant and equipment, net Property, plant and equipment are stated at
cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is provided using
the straight-line method over their expected useful lives, as follows:
Useful life
Buildings 20 years
Machinery and equipment 5–10 years
Automobiles 8 years
Office and electric equipment 3–5 years Expenditures for maintenance and repairs, which
do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and
betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation
of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the consolidated statements
of income and other comprehensive income in other income or expenses. Intangible assets, net The Company’s intangible assets primarily
includes land use rights. A land use right in the PRC represents an exclusive right to occupy, use and develop a piece of land
during the contractual term of the land use right. The cost of a land use right is usually paid in one lump sum at the date the
right is granted. The prepayment usually covers the entire period of the land use right. The lump sum advance payment is capitalized
and recorded as land use right and then charged to expense on a straight-line basis over the period of the right, which is normally
50 years. Impairment of long-lived Assets Long-lived assets, such as property, plant
and equipment, land use rights and long-term investment, are reviewed for impairment when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. Recoverability of a long-lived asset or asset group to be held and
used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows
expected to be generated by the asset or asset group. If the carrying value of an asset or asset group exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value of
the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models,
quoted market values and third party independent appraisals, as considered necessary. Assets to be disposed are reported at the
lower of carrying amount or fair value less costs to sell, and are no longer depreciated. No impairment of long-lived assets was
recognized as of September 30, 2019 and 2018. Capital lease obligation In accordance with ASC 840, Leases Capital leases are measured at the commencement
of the lease at an amount equal to the present value at the beginning of the lease term of minimum lease payments during the lease
term. During the lease term, each minimum lease payment is allocated between a reduction of the obligation and interest expense
to produce a constant periodic rate of interest on the remaining balance of the obligation (the interest method). Assets
held under capital leases are depreciated over the useful lives of the assets or the lease term, whichever is shorter. In accordance with ASC 840-40-25-2, the Company
sells part of its plant machines to the lessor, leased them back from the lessor, and retains all of the plant machines and their
remaining economic lives, therefore, the sale-and-leaseback arrangement is not a sales arrangement for the designated properties.
Instead, the arrangement is a lease in nature. Under ASC 840-10-25-1 and ASC 840-10-25-29,
at the time of the lease agreement, the plant machines had agreed-upon fair value, and the minimum lease payments had present value
over 90% of the fair value. Management deemed the arrangement as a capital lease. Foreign Currency Translation The functional currency for Bon Natural is
the U.S Dollar (“US$”). Tea Essence uses Hong Kong dollar as its functional currency. However, Bon Natural, and Tea
Essence currently only serve as the holding companies and did not have active operation as of the date of this report. The Company
operates its business through its subsidiary and VIEs in the PRC as of September 30, 2019 The functional currency of the Company’s
subsidiary and VIEs is the Chinese Yuan (“RMB”). The Company’s consolidated financial statements have been translated
into US$. Assets and liabilities accounts are translated
using the exchange rate at each reporting period end date. Equity accounts are translated at historical rates. Income and expense
accounts are translated at the average rate of exchange during the reporting period. The resulting translation adjustments are
reported under other comprehensive income. Gains and losses resulting from the translations of foreign currency transactions and
balances are reflected in the results of operations. The RMB is not freely convertible into foreign
currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at the rates used in translation. The following table outlines the currency exchange
rates that were used in creating the consolidated financial statements in this report:
September 30, September 30,
Year-end spot rate US$1=RMB 7.1383 US$1=RMB 6.8681
Average rate US$1=RMB 6.8767 US$1=RMB 6.5359 Revenue recognition On October 1, 2017, the Company adopted Accounting
Standards Codification (“ASC”) 606 using the modified retrospective approach. The adoption of this standard did not
have a material impact on the Company’s consolidated financial statements. Therefore, no adjustments to opening retained
earnings were necessary. ASC 606, Revenue from Contracts with customers,
establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising
from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to
be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. ASC 606 requires the use of a five five not five not In accordance to ASC 606, the Company recognizes
revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company
expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its products to its customers,
in which the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing
prices, and is responsible for fulfilling the promise to provide customers the specified goods. All of the Company’s contracts
have single performance obligation as the promise is to transfer the individual goods to customers, and there is no other separately
identifiable promises in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk
of loss passes and the customer accepts the goods, which generally occurs at delivery. The Company’s products are sold with
no right of return and the Company does not provide other credits or sales incentive to customers. The Company’s sales are
net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of
product sales. Contract Assets and Liabilities Payment terms are established on the Company’s
pre-established credit requirements based upon an evaluation of customers’ credit. Contract assets are recognized for in
related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery.
The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery
occurs. As of September 30, 2019 and 2018, other than accounts receivable and advances from customers, the Company had no other
material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of
fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control,
are recognized in selling, general and administrative expense when incurred. Disaggregation of Revenues The Company disaggregates its revenue from
contracts by product types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue
and cash flows are affected by economic factors. The Company’s disaggregation of revenues for the years ended September 30,
2019 and 2018 are disclosed in Note 17 of this consolidation financial statements. Research and development expenses The Company expenses all internal research
and development costs as incurred, which primarily comprise employee costs, internal and external costs related to execution of
studies, including manufacturing costs, facility costs of the research center, and amortization and depreciation to intangible
assets and property, plant and equipment used in the research and development activities. For the years ended September 30, 2019
and 2018, research and development expense were approximately $522,867 and $556,090, respectively. Selling, General and Administrative
Expenses Selling expenses represents
primarily costs of payroll, benefits, commissions for sales representatives and advertising expenses. General and administrative
expenses represents primarily payroll and benefits costs for administrative employees, rent and operating costs of office premises,
depreciation and amortization of office facilities, professional fees and other administrative expenses. Advertising expense Advertising expenses primarily relate to promotion
of the Company’s brand name and products through outdoor billboards and social media such as Weibo and WeChat. Advertising
expenses are included in selling expenses in the consolidated statements of income and comprehensive income. Advertising expenses
amounted to $51,257 and $49,289 for the years ended September 30, 2019 and 2018, respectively. Government subsidies Government subsidies primarily relate to local
government’s cash award to High and New Technology Enterprises (“HNTEs”) to encourage entrepreneurship and stimulate
local economy. Such awards are granted on a case-by-case basis by local government. The Company’s VIE, Xi’an App-chem
was approved as a HNTE and received government subsidy in the form of export sales refund and cash awards based on annual financial
performance. The Company recognizes government subsidies as other operating income when they are received because they are not
subject to any past or future conditions, there are no performance conditions or conditions of use, and they are not subject to
future refunds. Government subsidies received and recognized as other operating income totaled $140,295 and $67,608 for the years
ended September 30, 2019 and 2018, respectively. Income taxes The Company accounts for current income taxes
in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist
between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. An uncertain tax position is recognized only
if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting
the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment
of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income
taxes have been incurred during the years ended September 30, 2019 and 2018. The Company does not believe there was any uncertain
tax provision at September 30, 2019 and 2018. The Company’s operating subsidiary and
VIE in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal
years ended September 30, 2019 and 2018. As of September 30, 2019, all of the Company’s tax returns of its PRC subsidiary,
its VIE and VIE’s subsidiaries remain open for statutory examination by PRC tax authorities. Value added tax (“VAT”) Sales revenue represents the invoiced value
of goods, net of VAT. The VAT is based on gross sales price and VAT rates range up to 17% (starting from May 1, 2018, VAT rate
was lowered to 16%, and starting from April 1, 2019, VAT rate was further lowered to 13%), depending on the type of products sold.
The VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring
its finished products. The Company recorded a VAT payable or recoverable net of VAT payments in the accompanying consolidated financial
statements. For export sales, VAT is not imposed on gross
sales price, but the VAT related to purchasing raw materials is refunded after the export is completed. Employee Defined Contribution Plan The Company’s subsidiaries in the PRC
participate in a government-mandated multi-employer defined contribution plan pursuant to which pension, work-related injury benefits,
maternity insurance, medical insurance, unemployment benefit and housing fund are provided to eligible full-time employees. The
relevant labor regulations require the Company’s subsidiaries in the PRC to pay the local labor and social welfare authorities
monthly contributions based on the applicable benchmarks and rates stipulated by the local government. The contributions to the
plan are expensed as incurred. Employee social security and welfare benefits included as expenses in the accompanying statements
of income and comprehensive income amounted to US$68,128 and US$63,243 for the years ended September 30, 2019 and 2018, respectively. Earnings per Share The Company computes earnings per share (“EPS”)
in accordance with ASC 260, “Earnings per Share” (“ASC 260”). ASC 260 requires companies with complex capital
structures to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common shares
outstanding for the period. Diluted presents the dilutive effect on a per share basis of potential common shares (e.g., convertible
securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if
later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per
share) are excluded from the calculation of diluted EPS. As of September 30, 2019 and 2018, there were no dilutive shares. Comprehensive income (loss) Comprehensive income (loss) consists of two
components, net income and other comprehensive income (loss). The foreign currency translation gain or loss resulting from translation
of the financial statements expressed in RMB to US$ is reported in other comprehensive income (loss) in the consolidated statements
of income and comprehensive income. Statement of Cash Flows In accordance with ASC 230, “Statement
of Cash Flows”, cash flows from the Company’s operations are formulated based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheets. Segment Reporting The Company uses the management approach in
determining reportable operating segments. The management approach considers the internal reporting used by the Company’s
chief operating decision maker for making operating decisions about the allocation of resources of the segment and the assessment
of its performance in determining the Company’s reportable operating segments. Management has determined that the Company
has one operating segment. Recent Accounting Pronouncements The Company considers the applicability and
impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that
are issued. In February 2016, the FASB issued Accounting
Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease
liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also
expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases
on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued
ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard
for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient
for the separation of non-lease components from lease components. In November 2019, FASB released ASU No. 2019-10, Financial
Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates In June 2016, the
FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets
measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements
to Topic 326, Financial Instruments—Credit Losses, Codification Improvements to
Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments Targeted Transition Relief. In August 2018, the FASB Accounting Standards
Board issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements
for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements.
ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December
15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted
on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect this guidance
will have a material impact on its consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12,
Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for
income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent
application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal
years, which is fiscal 2021 for us, with early adoption permitted. The Company does not expect adoption of the new guidance to
have a significant impact on our financial statements. In February 2020, the FASB issued ASU 2020-02,
“Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02,
Leases (topic 842)”. This ASU provides guidance regarding methodologies, documentation, and internal controls related to
expected credit losses. This ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption
is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements. |
