The statements contained in this report with respect to our financial condition,
results of operations and business that are not historical facts are
forward-looking statements. Forward-looking statements can be identified by the
use of forward-looking terminology, such as "anticipate," "believe," "expect,"
"plan," "intend," "seek," "estimate," "project," "could," or the negative
thereof or other variations thereon, or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the readers that any such
forward-looking statements contained in this report reflect our current beliefs
with respect to future events and involve known and unknown risks, uncertainties
and other factors, including, but not limited to, economic, competitive,
regulatory, technological, key employees, and general business factors affecting
our operations, markets, growth, services, products, licenses and other factors,
some of which are described in this report and some of which are discussed in
our other filings with the Securities and Exchange Commission (the "SEC"). These
forward-looking statements are only estimates or predictions. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of risks facing our company, and actual events may
differ from the assumptions underlying the statements that have been made
regarding anticipated events.
These risk factors should be considered in connection with any subsequent
written or oral forward-looking statements that we or persons acting on our
behalf may issue. All written and oral forward-looking statements made in
connection with this report that are attributable to our company or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any
obligation to review or confirm analysts' expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events, except as required by applicable law or
regulation.
Business Overview & Recent Developments
We are principally engaged in the development, manufacture and marketing of
pharmaceutical products for human use in connection with a variety of
high-incidence and high-mortality diseases and medical conditions prevalent in
the People's Republic of China (the "PRC"). All of our operations are conducted
in the PRC, where our manufacturing facilities are located. We manufacture
pharmaceutical products in the form of dry powder injectables, liquid
injectables, tablets, capsules, and cephalosporin oral solutions. The majority
of our pharmaceutical products are sold on a prescription basis and all of them
have been approved for at least one or more therapeutic indications by the
National Medical Products Administration (the "NMPA", formerly China Food and
Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
China's consistency evaluation of generic drugs continues to proceed in 2022.
The supporting policies from central and provincial governments were constantly
issued, including polices regarding consistency evaluation for injectable
products. We have always taken the task of promoting the consistency evaluation
as a top priority, and worked on them actively. However, for each drug's
consistency evaluation, due to the continuous dynamic changes of the detailed
consistency evaluation policies, market trends, expected investments, and
expected returns of investment ("ROI") the whole industry, including us, has
been making slow progress in terms of the consistency evaluation. We have
submitted application documents to NMPA at the end of 2021, and passed the
clinical verification of the drug by NMPA in June 2022. We had completed the
supplementary documents as required by the NMPA in early November 2022We had
completed the registration inspection and quality standard review of the
Institute for Drug Control on February 2023, and are currently undergoing
technical review and waiting for on-site verification.
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We have taken a more cautious and flexible attitude towards initiating and
progressing any project for existing products' consistency evaluation to cope
with the changing macro environment of drug sales in China. Since trial
Centralized Procurement ("CP") activities were initiated in 2018 in 11 cities
(including 4 municipalities and 7 other cities), eight rounds of CP activities
have been carried out throughout China by the end of 2022, which significantly
reduced the price of the drugs that won the bids. In addition, the consistency
evaluation has been adopted as one of the qualification standards for
participating in the CP activities. As a result, we need to balance at least the
two factors above (namely, the investment of financial resources and time to
obtain the qualification of CP, and the sharp decline in the price of drugs
included in CP) before making decisions for any products.
In addition, we continue to explore the field of comprehensive healthcare.
Comprehensive healthcare is a general concept proposed by the Chinese government
according to the development of the times, social needs and changes in disease
spectrum. According to the Outline of "Healthy China 2030" issued by Chinese
government in October 2016, the total size of China's health service industry
will reach RMB 16 trillion (approximately 2.5 trillion) by 2030. This industry
focuses on people's daily life, aging and diseases, pays attention to all kinds
of risk factors and misunderstandings affecting health, calls for self-health
management, and advocates the comprehensive care throughout the entire process
of life. It covers all kinds of health-related information, products and
services, as well as actions taken by various organizations to meet the health
needs. In response to this trend, we launched Noni enzyme, a natural,
Xeronine-rich antioxidant food supplement at the end of 2018. We also launched
wash-free sanitizers and masks, in 2020, to address the market needs caused by
COVID-19 in China. With Chinese government officially terminated its zero-case
policy, now the responsibility to protect people from the impact of COVID-19
falls more to the citizens themselves, and masks and sanitizers have been more
and more popular. We have sufficient production capacity for medical masks,
surgical masks, KN95 masks, and N95 masks, which meets the personal needs for
protection against the epidemic outbreak. Thanks to the green channel provided
by Hainan Medical Products Administration, we received the Registration
Certificate of N95 medical protective mask at the fastest speed by the end of
2022, when the infection of COVID-19 has surged in China.
We will continue to optimize our product structure and actively respond to the
current health needs of human beings.
Market Trends
As a generic drug company, we are presented with a huge domestic market. We
believe that through further upgrades and better conformity with Chinese
consistency evaluations, which are based on European and American production
standards, we will be able to export our products to overseas markets. In
China's market, we believe that in the future, cost management and control
ability will gradually become important factors in determining the
competitiveness of generic pharmaceutical enterprises. Although price control
leads to a decline in the profitability, the CP's winning enterprise has a good
chance of achieving price-for-volume in order to increase its market share and
support its continuous innovation and transformation. On a separate note, rising
and advancing consumer demand in China drives the increase of discretionary
consumption. With the improvement of residents' quality of life, the healthcare
demand is also changing. We believe that there is a large number of unmet
demands in comprehensive healthcare and internet healthcare sectors.
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In addition, the Office of the State Council issued "Pilot Plan for Marketing
Authorization Holders" on May 24, 2016, allowing eligible drug research and
development institutions and scientific researchers to become Marketing
Authorization Holders ("MAH") by obtaining drug marketing authorization and drug
approval numbers from the State Council. This policy uses a management model of
separating drug marketing authorization and drug production licenses, thereby
allowing MAHs to produce pharmaceuticals themselves or to consign production to
other pharmaceutical manufacturers. This policy not only transitions our
production practices to meet the European and United States standards by
separating drug approval and production qualifications, thereby changing the
existing model of bundling drug approval numbers to pharmaceutical manufacturers
in China, but also serves as a supplement to the ongoing consistency evaluations
policy.
In general, demand for pharmaceutical products continues its steady growth in
China. We believe the ongoing generic drug consistency evaluations and reform of
China's drug production registration and review policies will have major effects
on the future development of our industry and may change its business patterns.
We will continue to actively adapt to the national policy guidance and further
evaluate market conditions for our existing products then adjust accordingly,
and compete in the market in order to optimize our development strategy.
Results of Operations for the Fiscal Year ended December 31, 2022
Revenue
Revenue was $8.1 million for the year ended December 31, 2022, which represented
a decrease of $1.5 million, as compared to $9.6 million for the year ended
December 31, 2021. This decline was mainly due to exchange rate changes,
resurgence of COVID-19 in many cities in China, including Haikou, the city where
our operations and manufacturing located, and China's strict epidemic isolation
and control, which made offline activities difficult to carry out, and
pharmacies and hospitals implementing strict controls.
Set forth below are our revenues by product category in millions (USD) for the
years ended December 31, 2022 and 2021:
Year Ended December 31, Net %
Product Category 2022 2021 Change Change
CNS Cerebral & Cardio Vascular 1.70 2.68 -0.98 -37 %
Anti-Viral/ Infection & Respiratory 4.94 5.22 -0.28 -5 %
Digestive Diseases 0.40 0.37 0.03 8 %
Other 1.06 1.37 -0.31 -23 %
The most significant revenue decrease in terms of dollar amount was in our "CNS
Cerebral & Cardio Vascular", which generated $1.70 million in sales revenue in
2022 compared to $2.68 million in 2021, a decrease of $0.98 million. This
decrease was mainly due to a decrease in sales of our Alginic Sodium Diester due
to market fluctuation.
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Sales revenue of our "Anti-Viral/ Infection & Respiratory" product category was
$4.94 million in 2022, compared to $5.22 million in 2021, which represented a
decrease of $0.28 million. This decrease was mainly due to a decrease in sales
of our Cefaclor due to market fluctuation, and change in foreign exchange rate.
Sales revenue in the "Other" category was $1.06 million in 2022, which
represented a decrease of $0.31 million compared to $1.37 million in 2021. This
decrease was mainly due to the sales decrease of Vitamin B6 in fiscal year 2022,
caused by the implementation of centralized procurement policy, a stricter drug
centralized procurement policy, as well as market fluctuation.
Our "Digestive Diseases" category generated $0.40 million of sales revenue in
2022, which represented an increase of $0.03 million compared to $0.37 million
in 2021. This increase was mainly due to an increase in sales of our Tiopronin
due to market fluctuation.
Year Ended December 31,
Product Category 2022 2021
CNS Cerebral & Cardio Vascular 21 % 28 %
Anti-Viral/ Infection & Respiratory 61 % 54 %
Digestive Diseases 5 % 4 %
Other 13 % 14 %
For the year ended December 31, 2022, revenue breakdown by product category
experienced certain variances compared with that of the prior year. Sales in the
"Anti-Viral/Infection & Respiratory" product category represented 61% and 54% of
total sales in the years ended December 31, 2022 and 2021, respectively. The
"CNS Cerebral & Cardio Vascular" category represented 21% of total revenue in
2022, compared to 28% in 2021. The "Digestive Diseases" category represented 5%
and 4% of total revenue in 2022 and 2021, respectively. The "Other" category
represented 13% and 14% of revenues in 2022 and 2021, respectively.
Cost of Revenue
For the year ended December 31, 2022, our cost of revenue was $8.6 million, or
106.1% of total revenue, which represented a decrease of $0.7 million from $9.3
million, or 96.4% of total revenue, in 2021. The increase in the proportion of
costs to revenue is mainly due to the decline in revenue.
Gross Profit (Loss) and Gross (Loss) Margin
Gross loss for the year ended December 31, 2022 was $0.5 million, compared to
gross profit of $3.0 million in 2021. Our gross loss margin in 2022 was 6.1%,
compared to gross profit margin of 3.6% in 2021. The decrease in our profit and
our gross margin was mainly due to the decrease in the sales price of main
products and the increase in the purchase price of main raw materials.
Selling Expenses
Our selling expenses for the year ended December 31, 2022 were $1.1 million, a
decrease of $0.4 million compared to $1.5 million for the year ended December
31, 2021. Selling expenses accounted for 13.2% of the total revenue in 2022
compared to 15.5% in 2021. Because of adjustments in our sales practices and
Chinese national centralized drug procurement, we reduced selling expenses to
efficiently support our sales and the collection of accounts receivable.
Especially in the context of the increasing impact of centralized drug
procurement, like other players in the industry, we have reduced the promotion
expenses.
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General and Administrative Expenses
Our general and administrative expenses for the year ended December 31, 2022 was
$1.9 million, compared to $1.7 million for the year ended December 31, 2021.
General and administrative expenses accounted for 23.4% and 17.1% of our total
revenues in 2022 and 2021, respectively.
Research and Development Expenses
Our research and development expenses for the year ended December 31, 2022 was
$0.19 million, compared to $0.32 million in 2021. Research and development
expenses accounted for 2.3% and 3.3% of our total revenues in 2022 and 2021,
respectively. These expenditures were mainly spent on the consistency evaluation
of our existing products.
Bad Debt Benefit
Our bad debt benefit for the year ended December 31, 2022 was $93,851, as
compared to $255,215 in 2021.
In general, our normal customer credit or payment terms are 90 days. This has
not changed in recent years. Due to the peculiar environment affecting the
Chinese pharmaceutical market, deferred payments to pharmaceutical companies by
state-owned hospitals and local medicine distributors are common.
The amount of net accounts receivable that were past due (or the amount of
accounts receivable that were more than 180 days old) was $0.03 million and
$0.11 million as of December 31, 2022 and 2021, respectively.
The following table illustrates our accounts receivable aging distribution in
terms of the percentage of the total accounts receivable as of December 31, 2022
and 2021:
December 31, December 31,
2022 2021
1 - 180 Days 2.28 % 3.17 %
180 - 360 Days 0.16 % 0.11 %
360 - 720 Days 0.13 % 0.24 %
> 720 Days 97.44 % 96.48 %
Total 100.00 % 100.00 %
Our bad debt allowance estimate practice is that we consider accounts receivable
balances aged within 180 days current, except for any individual uncollectible
account assessed by management. We account for the following respective
percentage as bad debt allowance based on age of the accounts receivables: 10%
of accounts receivable that are between 180 days and 365 days old, 70% of
accounts receivable that are between 365 days and 720 days old, and 100% of
accounts receivable that are greater than 720 days old.
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We recognize bad debt expenses per actual write-offs as well as changes of
allowance for doubtful accounts. To the extent that our current allowance for
doubtful accounts is higher than that of the previous period, we recognize a bad
debt expense for the difference during the current period, and when the current
allowance is lower than that of the previous period, we recognize a bad debt
credit for the difference. The allowance for doubtful account balances were
$16.7 million and $18.3 million as of December 31, 2022 and December 31, 2021,
respectively. The changes in the allowances for doubtful accounts during the
years ended December 31, 2022 and 2021 were as follows:
For the Fiscal Years Ended
December 31,
2022 2021
Balance, Beginning of Period $ 18,312,707 $ 18,150,493
Bad debt expense (93,851 ) (255,215 )
Foreign currency translation adjustment (1,479,329 ) 417,429
Balance, End of Period $ 16,739,527 $ 18,312,707
Loss from Operations
Our operating loss for the year ended December 31, 2022 was $3.5 million,
compared to an operating loss of $2.9 million in 2021. The increase in Loss from
Operations was mainly due to the decrease in revenue in 2022.
Net Interest Expense
Net interest expense was $0.42 million for the year ended December 31, 2022 and
$0.54 million for the year ended December 31, 2021.
Net Loss
Net Loss for year ended December 31, 2022 was $4.0 million, compared to net loss
of $3.4 million for the year ended December 31, 2021. The increase in net loss
was mainly a result of the decrease in revenue.
Loss per basic and diluted common share was $0. 76 for the year ended December
31, 2022 and $0.74 for the year ended December 31, 2021, respectively.
The number of basic and diluted weighted-average outstanding shares used to
calculate loss per share was 5,256,855 for 2022, as compared to 4,612,926 for
2021.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated from operations, bank lines
of credit and the Convertible Note Payable. Currently the Company has not
witnessed or expected to encounter any difficulties to refinance those lines of
credit this year. In addition to the aggregated advance of $1,425,123 from our
CEO as of December 31,2021, we received some temporary advances from and made
several repayments to her in the twelve months ended December 31, 2022. As of
December 31, 2022, the aggregated advance from our CEO was $1,121,273 for use in
operations. Our cash and cash equivalents were $2.0 million, representing 11.3%
of our total assets, as of December 31, 2022, as compared to $4.9 million,
representing 21.5% of our total assets as of December 31, 2021. All of the $2.0
million of cash and cash equivalents as of December 31, 2022 are considered to
be reinvested indefinitely in the Company's Chinese subsidiary, Helpson and are
not expected to be available for payment of dividends or for other payments to
its parent company or to its shareholders.
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The Company obtained various lines of credit in details described under Note 7
to its condensed consolidated financial statements contained in this report
which is incorporated by reference herein.
The Company issued a convertible note to an institutional accredited investor as
disclosed in Note 8 to the condensed consolidated financial statements contained
in this report which is incorporated by reference herein.
Although the Company obtained the convertible note and additional lines of
credit in 2021, there can be no assurance that the Company will be able to
achieve its future strategic goal to accelerate the launch of nutrition
products. This raises substantial doubt about the Company's ability to continue
as a going concern. Although our Chairperson and Chief Executive Officer had
advanced funds for working capital during the year ended December 31, 2022,
there can be no assurances that this will be the case in the future. We may seek
additional debt or equity financing as necessary when we believe the market
conditions are the most advantageous to us and/or require us to reduce certain
discretionary spending, which could have a material adverse effect on our
ability to achieve our business objectives. There can be no assurance that any
additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash used in operating activities was $0.41 million in the year ended
December 31, 2022, compared to $0.25 million in 2021.
As of December 31, 2022, our net accounts receivable was $0.4 million, a
decrease of $0.3 million from $0.7 million as of December 31, 2021.
As of December 31, 2022, total inventory was $2.9 million, compared to $3.3
million as of December 31, 2021.
Investing Activities
During the year ended December 31, 2022, net cash used in investing activities
was $0.40 million, compared to $0.44 million for the year ended December 31,
2021. The payments in 2022 were mainly due to the purchase of equipment.
Financing Activities
Cash flow used in financing activities was $1.77 million in the year ended
December 31, 2022; compared to cash flow generated in financing activities of
$4.60 million in the year ended December 31, 2021. This change was mainly
because of a convertible debt issued in 2021, and the payback of certain bank
loans in 2022.
According to relevant PRC laws, companies registered in the PRC, including our
PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of
their after-tax net income, as determined under the accounting standards and
regulations in the PRC, to statutory surplus reserve accounts until the reserve
account balances reach fifty percent (50%) of the companies' registered capital
prior to their remittance of funds out of the PRC. Allocations to these reserves
and funds can only be used for specific purposes and are not transferrable to
the parent company in the form of loans, advances or cash dividends. As of
December 31, 2022 and December 31, 2021, Helpson's net assets totaled $(190,000)
and $3,447,000, respectively. Due to the restriction on dividend distribution to
overseas shareholders, the amount of Helpson's net assets that was designated
for general and statutory capital reserves, and thus could not be transferred to
our parent company as cash dividends, was 50% of Helpson's registered capital,
which was both $8,145,000 as of December 31, 2022 and December 31, 2021,
respectively. The amount that Helpson must set aside for the statutory surplus
fund accounts is (4,279)% and 236% of its total net assets. There were no
allocations to the statutory surplus reserve accounts during the twelve months
ended December 31, 2022.
The Chinese government also imposes controls on the conversion of RMB into
foreign currencies and the remittance of currencies out of China. Our businesses
and assets are primarily denominated in RMB. All foreign exchange transactions
take place either through the People's Bank of China or other banks authorized
to buy and sell foreign currencies at the exchange rates quoted by the People's
Bank of China. Approval of foreign currency payments by the People's Bank of
China or other regulatory institutions requires the submission of a payment
application form together with certain invoices and executed contracts. The
currency exchange control procedures imposed by Chinese government authorities
may restrict the ability of Helpson, our Chinese subsidiary, to transfer its net
assets to our parent company through loans, advances or cash dividends.
Off-Balance Sheet Arrangements
As of December 31, 2022, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP"). Our financial statements reflect the selection and
application of accounting policies which require management to make significant
estimates and judgments. Please refer to Note 1 to our consolidated financial
statements, "Organization and Significant Accounting Policies" for the
discussion of our critical accounting policies. .
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