GNI : Consolidated Financial Results for Q2 FY2022, Cumulative YTD (IFRS)

GNI Group Ltd. (2160) Consolidated Financial Results for Q2 FY2022

Notes:

1. Changes in Significant Subsidiaries during the Period under Review: N.A.

(Changes in specified subsidiaries resulting in a change in the scope of consolidation)
New: ―	Excluded: ―
(2) Changes in Accounting Policies and Changes in Accounting Estimates
①	Changes in accounting policies that are required under IFRS: N.A.
②	Changes in accounting policies other than ① : N.A.
③	Changes in accounting estimates: N.A.
(3) Number of Shares Issued (Common Stock)
①	Number of shares issued as of the end	Q2 FY2022		47,462,943 shares	FY2021	47,462,943 shares
	of the period (including treasury stock)
②	Number of treasury stock as of the end of	Q2 FY2022		1,313 shares	FY2021	1,313 shares
	the period
③	Average number of shares for the period	Q2 FY2022		47,461,630 shares	Q2 FY2021	46,377,475 shares

• This consolidated financial report is not subject to audit procedures by certified public accountants or an auditing firm.
• Explanation Concerning the Proper Use of Financial Results Forecasts and Other Relevant Specific Items

Forward-looking statements including earnings forecasts contained in this report are based on currently available information and management's assumptions and beliefs regarding uncertainties that may impact future earnings forecasts. The Company cautions readers that actual results may differ materially from forecasts due to a variety of factors. For the assumptions that underpin financial results forecasts as well as other related items, please refer to "1. (4) Outlook for the fiscal year ending December 31, 2022."

The Group is planning to conduct a corporate presentation meeting for institutional investors and analysts on August 17, 2022. Briefing materials used at that session will be posted on the Group's website.

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GNI Group Ltd. (2160) Consolidated Financial Results for Q2 FY2022

Contents
1. Analysis of Operating Results and Financial Position ………………………………………………………………	3
(1)	Analysis of operating results ………………………………………………………………………………………	3
(2)	Analysis of financial position ………………………………………………………………………………………	4
(3)	Research and development activities …………………………………………………………………………….	6
(4)	Outlook for the fiscal year ending December 31, 2022 …………………………………………………………	7
2. Summary of Quarterly Consolidated Financial Statements and Notes …………………………………………..	8
(1)	Summary of quarterly consolidated statements of financial position ……………………………………….	8
(2)	Summary of quarterly consolidated statements of income and summary of quarterly consolidated statements of	9
	comprehensive income ……………………………………………………………………………
	Summary of quarterly consolidated statements of income ……………………………………………………	9
	Summary of quarterly consolidated statements of comprehensive income …………………………………	10
(3)	Summary of quarterly consolidated statements of changes in equity ……………………………………….	11
(4)	Summary of quarterly consolidated statements of cash flows ………………………………………………..	13
(5)	Notes to the summary of quarterly consolidated financial statements ……………………………………..	14
	(Notes related to going concern assumptions) …………………………………………………………………..	14
	(Basis of preparation) ………………………………………………………………………………………………	14
	(Segment information) ………………………………………………………………………………………………	14
	(Important subsequent events) ……………………………………………………………………………………	16

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GNI Group Ltd. (2160) Consolidated Financial Results for Q2 FY2022

1. Analysis of Operating Results and Financial Position

(1) Analysis of operating results

COVID-19 pandemic, supply chain disruptions, rising inflation rates, and volatile capital markets all combined to make Q2 2022 very challenging to global pharmaceutical industry. Although the lockdown in Shanghai was eased, COVID-19 continues to pose many constraints on various business activities in China. The United States has steadily returned to normal, but rapidly rising inflation has made it difficult for businesses to plan ahead. These macroeconomic factors had mixed influences on GNI Group's (the Group below) financial results in the first half of 2022.

Notwithstanding such a challenging environment, the Group posted cumulative revenue of ¥8.1 billion thus far in the first half of 2022, a 26.1% increase compared to the same period last year. Although depreciation of Japanese yen is a factor, the Group's key subsidiaries had a solid performance despite the macro-level challenges. The Group's operating profit for the first half was ¥1.0 billion, a decrease of 31.0% YoY. This decline comes from an increase in SG&A expenses in our core subsidiaries whose functional currencies are primarily RMB. At their functional currencies level, SG&A increased by 13.5% for the first half of 2022 YoY. On average much greater in size than combined R&D spending in RMB terms, that increase in SG&A overshadowed a decline in combined R&D costs of 15.1%. Likewise, in our core pharmaceutical subsidiary in the US whose functional currency is USD, SG&A expenses increased by 82.6% while its R&D costs was roughly flat for the first half of 2022 YoY. As reported in our Q1 results, our total SG&A results continue to be impacted by significant one-timeIPO-related expenses in China, in JPY terms approximately ¥111 million. As a result, the Group's consolidated half-year profit before tax was ¥790 million, a 34.0% decrease YoY. The decline was mainly due to non-cash accrual of interest expenses (around ¥390 million so far this year) associated with Cullgen's financing in 2020. Our consolidated half-year profit was JPY 197million, a decrease of 73.4% YoY, but the profit attributable to parent company was less impacted.

BC achieved comparable results in YoY under difficult COVID-19 conditions. In addition to the manufacturing and sales of ETUARY®, BC made steady progress in R&D such as ETUARY® indication expansions, as stated in the disclosure, "First Subject Enrolled for Phase III Clinical Trial of Pirfenidone Capsules (F647) for Treatment of Pneumoconiosis" on June 13th, 2022. BC received the listing approval by Chinese Securities Regulatory Commission on July 11th, 2022 and continues to make efforts towards the IPO in HKEX; however, BC's IPO is still subject to the approval of HKEX as well as prevailing market conditions and other factors considered. The Group will provide further update in due course.

Berkeley Advanced Biomaterials LLC (BAB below) in the US also continued steady recovery from the pandemic in the first half of the year. BAB's gross profit was down slightly, but operating profit was slightly up in the local currency base YoY. BAB has begun work with counterparties in China to expand its sales into East Asia and is exploring possibilities for Japan.

Cullgen continues to focus on progressing and expanding new drug pipeline that utilizes targeted protein degradation technology with 8 different drug discovery programs in progress. Cullgen filed an Investigational New Drug (IND below) for its first cancer drug with China's National Medical Products Administration (NMPA below) at the end of April 2022 and was approved in early August 2022.

• Operating results by segment Pharmaceutical Segment
  Despite all the difficulties in the market, the revenue from the Group's main subsidiary BC achieved strong performance from its flagship drug product ETUARY® in China on a local currency basis. In yen terms, the Pharmaceutical Segment as a whole had ¥6.9 billion in revenue, an increase of 28.0% for the first half of 2022, roughly at par YoY. The Segment's operating profit was ¥479 million, a decrease of 55.0% YoY. The decrease was mainly due to the strengthening of sales and marketing functions in China and the expansion of R&D functions both in the U.S. and China.

Medical Device Segment

Our Medical Device Segment in the US performed roughly at par with the same period last year in the local currency terms both at revenue and profit levels. In yen terms, net sales for the period totaled 1.1 billion, up 15.5% from the same period previous year, partly due to foreign exchange effects. Segment income was 525 million, up 34.7% YoY.

• Selling, General and Administrative Expenses; Research and Development Expenses

			Thousand yen
	Q2 FY2021 YTD	Q2 FY2022 YTD	Difference
Selling, general and administrative expenses	(3,677,925)	(4,765,750)	(1,087,824)
Personnel expenses	(1,420,567)	(1,892,666)	(472,098)
Research and development expenses	(864,935)	(1,089,540)	(224,604)

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GNI Group Ltd. (2160) Consolidated Financial Results for Q2 FY2022

Note: Personnel expenses exclude Board member emoluments; actual salaries paid only.

Selling, general and administrative (SG&A) expenses in JPY terms for the first half-year period FY2022 were ¥4.7 billion, a 29.5% increase YoY. The increase in SG&A expenses comes mainly from the increase in manpower costs both in the US and China as well as the increase in sales and marketing and IPO preparation expenses in China.

Research and Development expenses in JPY terms for the first half-year period of FY2022 were ¥1.0 billion, a 25.9% increase YoY. However, as described above, this increase is due to depreciation of JPY. In local currency terms, the R&D expenses declined YoY. The decline mainly comes from slowdown in business activities due to COVID-19 pandemic.

• Finance Income and Finance Costs

			Thousand yen
	Q2 FY2021 YTD	Q2 FY2022 YTD	Difference
Finance income	32,809	175,775	142,965
Finance costs	(290,762)	(390,055)	(99,292)

Finance income

In the first half-year period of FY2022, the Group recorded finance income of ¥175 million, a 435.7% increase YoY caused mainly by currency translation from depreciating Japanese yen.

Finance costs

In the first half-year period of FY2022, the Group recorded finance costs of ¥390 million, a 34.1% increase YoY. These finance costs come from non-cash accrual of interest expenses related to financing activities at Cullgen.

(2) Analysis of financial position

Summary of Consolidated Financial Position

			Thousand yen
	As of December 31, 2021	As of June 30, 2022	Difference
Total assets	30,296,980	35,266,795	4,969,815
Total liabilities	11,030,734	13,504,294	2,473,560
Total equity	19,266,246	21,762,501	2,496,255

Total assets

As of June 30, 2022, the total assets stood at ¥35.2 billion, a 16.4% increase compared to the previous fiscal year end. This increase mainly comes from acquisition of property, plant, and equipment; increase in R&D expense capitalization; increase in goodwill due to weaker JPY; and increase in working capital due to increasing business activities. In addition, long-term bank deposits purchased in China are included in these figures.

Total liabilities

As of June 30, 2022, the total liabilities stood at ¥13.5 billion, a 22.4% increase compared to the previous fiscal year end. This increase was primarily due to additional non-cash accrual of interest expenses related to Cullgen's funding.

Total equity

As of June 30, 2022, the total equity stood at ¥21.7 billion, a 12.9% increase compared to the previous fiscal year end. The increase was mainly due to the increase in retained earnings and exchange differences on translation of foreign operations.

Summary of Consolidated Cash Flows

			Thousand yen
	Q2 FY2021 YTD	Q2 FY2022 YTD	Difference
Cash flows from operating activities	1,100,855	389,264	(711,591)
Cash flows from investing activities	(1,006,877)	(1,496,808)	(489,931)
Cash flows from financing activities	2,906,178	(267,292)	(3,173,471)

Cash flows from operating activities

The cash flow from operating activities came to ¥389 million in Q2 FY2022 YTD, a 64.6% decrease YoY. The main drivers are increase in marketing and R&D expenses as well as corporate tax payments.

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