UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2020

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _____________.

 

OR

 

 SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report:

 

Commission file number: 001-38773

 

China SXT Pharmaceuticals, Inc.

(Exact name of Registrant as Specified in its Charter)

 

British Virgin Islands

(Jurisdiction of Incorporation or Organization)

 

178 Taidong Rd North, Taizhou

Jiangsu, China

(Address of Principal Executive Offices)

 

Feng Zhou

178 Taidong Rd North, Taizhou

Jiangsu, China

+86- 523-86298290

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange On Which Registered
Ordinary shares, par value US$0.001 per share   NASDAQ Capital Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

 

 

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of March 31, 2020 was: 34,667,707 ordinary shares, par value $0.001 per share.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ☐   No ☒

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes ☐   No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP International Financial Reporting Standards as issued by the
International Accounting Standards Board
Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17 ☐ Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐   No ☒

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

 

 

 

 

CHINA SXT PHARMACEUTICALS, INC.

FORM 20-F ANNUAL REPORT

 

TABLE OF CONTENTS

 

    Page
     
PART I
     
Item 1. Identity of Directors, Senior Management and Advisers 1
Item 2. Offer Statistics and Expected Timetable 1
Item 3. Key Information 2
Item 4. Information On The Company 22
Item 4A. Unresolved Staff Comments 41
Item 5. Operating And Financial Review And Prospects 42
Item 6. Directors, Senior Management And Employees 53
Item 7. Major Shareholders And Related Party Transactions 60
Item 8. Financial Information 61
Item 9. The Offer And Listing 61
Item 10. Additional Information 62
Item 11. Quantitative And Qualitative Disclosures About Market Risk 88
Item 12. Description Of Securities Other Than Equity Securities 88
     
PART II
     
Item 13. Defaults, Dividend Arrearages And Delinquencies 89
Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds 89
Item 15. Controls And Procedures 89
Item 16. [Reserved] 90
Item 16A. Audit Committee Financial Expert 90
Item 16B. Code Of Ethics 90
Item 16C. Principal Accountant Fees and Services 91
Item 16D. Exemptions From The Listing Standards For Audit Committees 91
Item 16E. Purchases Of Equity Securities By The Issuer And Affiliated Purchasers 91
Item 16F. Change In Registrant’s Certifying Accountant 91
Item 16G. Corporate Governance 91
Item 16H. Mine Safety Disclosure 91
     
PART III
     
Item 17. Financial Statements 92
Item 18. Financial Statements 92
Item 19. Exhibits 92

 

i

 

 

PART I

 

CERTAIN INFORMATION

 

In this annual report on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company” and “China SXT” refer to China SXT Pharmaceuticals, Inc., a company organized in the British Virgin Islands, its predecessor entities and its subsidiaries.

 

Unless the context indicates otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China, all references to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China, all references to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 31, 2020, the cash buying rate announced by the People’s Bank of China was RMB7.0808 to $1.00.

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may”, “will”, “should”, “could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”, “future”, “intends”, “plans”, “believes”, “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.

 

These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.

 

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere in this report.

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

1

 

 

ITEM 3. KEY INFORMATION

 

3.A. Selected Financial Data

 

The following table presents the selected consolidated financial information of our company. The selected consolidated statements of operations data for the years ended March 31, 2020, 2019 and 2018 and the selected consolidated balance sheets data as of March 31, 2020 and 2019 have been derived from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. Our audited consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future period. You should read the following selected financial data in conjunction with the consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this report.

 

   For the years ended March 31, 
   2020   2019   2018 
Summary Consolidated Statements of Operations:            
Operating revenue  $5,162,268   $7,012,026   $7,019,243 
Cost of revenue   (2,458,566)   (2,400,491)   (3,617,748)
Gross Profit   2,703,702    4,611,535    3,401,495 
                
Operating expense               
Selling   1,583,284    1,605,497    512,482 
General and administrative   2,461,535    1,236,546    1,256,747 
Total operating expenses   4,044,819    2,842,043    1,769,229 
                
Other income (expense)               
Other income (expense), net   (9,048,477)   21,967    (4,582)
                
(Loss) income before income taxes (benefits)   (10,389,594)   1,791,459    1,627,684 
                
Provision (benefit) for income taxes   (101,722)   252,232    440,103 
                
Net income (loss)   (10,287,872)   1,539,227    1,187,581 
Net income (loss) attributable to China SXT Pharmaceuticals, Inc.  $(10,287,872)  $1,539,227   $1,187,581 

 

The following table presents our summary consolidated balance sheet data as of March 31, 2020 and 2019.

 

   March 31,   March 31, 
   2020   2019 
         
Summary Consolidated Balance Sheet Data:        
Cash and cash equivalents  $7,287,032   $9,130,849 
Other assets   14,415,146    8,339,984 
Total assets  $21,702,178   $17,470,833 
Total liabilities   12,300,825    6,363,078 
Total shareholders’ equity  $9,401,353   $11,107,755 

 

3.B. Capitalization and Indebtedness

 

Not Applicable.

 

3.C. Reasons For The Offer And Use Of Proceeds

 

Not Applicable.

 

2

 

 

3.D. Risk Factors

 

An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment that in many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects could be materially and adversely affected.

  

Risks Related to the COVID-19 Pandemic

 

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic.”   Governments in affected countries are imposing travel bans, quarantines and other emergency public health measures, which have caused material disruption to businesses globally resulting in an economic slowdown. These measures, though temporary in nature, may continue and increase depending on developments in the COVID-19’s outbreak.

 

Jiangsu Province, where we conduct a substantial part of our business, was materially impacted by the COVID-19. We have been following the recommendations of local health authorities to minimize exposure risk for our employees, including the temporary closures of our offices and production, and having employees work remotely. Our on-site work was not resumed until mid-March, 2020 upon the approval from the local government. Due to the extended lock-down and self-quarantine policies in China, we have experienced significant business disruption for the past two and a half months. Some of our employees in other provinces are still subject to the lock-down policy implemented by the local governments and could not return to work. Our production was resumed in mid-March, 2020. Due to the material impacts of COVID-19 on our logistics, our production was picking up slowly and returned to the normal level in May, 2020. 

 

The extent to which the COVID-19 continues to impact the Company’s business, sales, and results of operations will depend on future developments, which are highly uncertain and will include emerging information concerning the severity of the coronavirus and the actions taken by governments and private businesses to attempt to contain the coronavirus, but is likely to result in a material impact on our business operations at least for the near term.

 

Risks Related to the May 2019 Private Placement and the Forbearance Agreement

 

The Company completed a private placement on May 2, 2019 (the “May 2019 Private Placement”) with two unaffiliated institutional investors (each, a “Investor” or “Holder”, collectively, “Investors” or “Holders”) pursuant to certain Securities Purchase Agreement dated April 16, 2019, as amended on May 2, 2019 (the “Purchase Agreement”). The securities sold by the Company in the May 2019 Private Placement consisted of (1) Senior Convertible Notes in the aggregate principal amount of $15 million (each, a “Note” and collectively, the “Notes”), consisting of (i) Series A Senior Convertible Notes (“Series A Notes”) and (ii) Series B Senior Secured Convertible Notes (“Series B Notes”) and (2) Warrants (“Series A Warrants”) to purchase 596,658 of the Company’s ordinary shares, and (3) Warrants (“Series B Warrants”, collectively with Series A Warrants, “Warrants”) to purchase 298,330 of the Company’s ordinary shares. The Purchase Agreement, the Notes, Series A Warrants and Series B Warrants and other transaction documents in connection with the May 2019 Private Placement are referred to as “Transaction Documents”.

 

On July 23, and July 29, 2019 the Company received event of default redemption notices from two Holders claiming that the Company failed to timely make the payment for the Installment Amount (as defined in the Notes) due under the terms of Series A Note, therefore, the Holders elected to effect the redemption of Series A Notes.

 

If the Company fails to fulfill its obligation under the forbearance agreements with its investors in May 2019 private placement, it will cause significant dilution of to existing shareholders when the Holders elect to convert shares under the Notes or exercise the Warrants, and cause material adverse effect on the Company’s cash flow, financial conditions and operation results if the Holders require us to repay in cash.

 

The Company completed a private placement on May 2, 2019 (the “May 2019 Private Placement”) with two unaffiliated institutional investors (each, a “Investor” or “Holder”, collectively, “Investors” or “Holders”) pursuant to certain Securities Purchase Agreement dated April 16, 2019, as amended on May 2, 2019 (the “Purchase Agreement”). The securities sold by the Company in the May 2019 Private Placement consisted of (1) Senior Convertible Notes in the aggregate principal amount of $15 million (each, a “Note” and collectively, the “Notes”), consisting of (i) Series A Senior Convertible Notes (“Series A Notes”) and (ii) Series B Senior Secured Convertible Notes (“Series B Notes”) and (2) Warrants (“Series A Warrants”) to purchase 596,658 of the Company’s ordinary shares, and (3) Warrants (“Series B Warrants”, collectively with Series A Warrants, “Warrants”) to purchase 298,330 of the Company’s ordinary shares. The Purchase Agreement, the Notes, Series A Warrants and Series B Warrants and other transaction documents in connection with the May 2019 Private Placement are referred to as “Transaction Documents”.

 

3

 

 

On July 23, and July 29, 2019the Company received event of default redemption notices from two Holders claiming that the Company failed to timely make the payment for the Installment Amount (as defined in the Notes) due under the terms of Series A Note, therefore, the Holders elected to effect the redemption of Series A Notes.

 

Upon negotiation with the Investors, on December 13, 2019, the Company entered into certain Forbearance and Amendment Agreements (each a “Forbearance Agreement”, collectively with other ancillary agreements, as amended from time to time, the “Forbearance Agreements”) with each Investor. Concurrently with the execution of the Forbearance Agreement, the Investors and the Company have entered into the Lock-Up Agreements, Leak-Out Agreements and Mutual Releases.

 

Due to the Company’s failure to obtain timely approval from State Administration of Foreign Exchange in People’s Republic of China to redeem Series A Notes in cash as previously contemplated, we separately amended and restated the Leak-Out Agreements (each an “Amended Leak-Out Agreement”) with each Investor on March 3, 2020.

 

Any failure by us to meet our payment and other obligations under the Forbearance Agreements, including failure to timely convert the shares under Series A Note per Holders’ conversion notices, could lead to defaults under our Forbearance Agreement. In the event of a default that we cannot remedy, the Holders may require us to redeem all or portion of the outstanding principal of the Notes with unpaid and accrued interests, make-whole amount, liquidated damages and late charges, if any. Payment of redemption price may negatively impact our liquidity, financial condition and results of operations of the Company.

 

The conversion of the Series A Notes will dilute the ownership interest of existing shareholders or may otherwise depress the price of our ordinary shares.

 

The conversion of some or all of the Series A Notes will dilute the ownership interests of existing shareholders to the extent we deliver shares of our ordinary shares upon conversion of the Notes. The Notes are convertible at the option of the holders of the Series A Notes prior to October 15, 2020 under certain circumstances as provided in the indenture governing the Notes. Any sales in the public market of the ordinary shares issuable upon such conversion could adversely affect prevailing market prices of our ordinary shares. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our ordinary shares could depress the price of our ordinary shares.

 

The terms of Transaction Documents and Forbearance Agreements could impede our ability to enter into certain transactions or obtain additional financing and could result in our paying premiums or penalties to the holders of the Notes and Warrants.

 

The terms of the Notes and other Transaction Documents, prohibit us from entering into a “fundamental transaction” (as defined in the Notes and such Transaction Documents) (including generally, a merger, sale of all or substantially all of our assets, or permitting a purchase tender or exchange offering resulting in a person or group of persons owning at least 50% of the outstanding shares of our Ordinary Shares) unless, among other things, the successor resulting from the fundamental transaction assumes all of our obligations under the Notes, the applicable warrants and the associated transaction documents.

 

The Notes and Warrants require us to deliver the number of Ordinary Shares issuable upon conversion or exercise within a specified time period. If we are unable to deliver such shares within the timeframe required, we may be obligated to reimburse the Holder for the cost of purchasing the Ordinary Shares in the open market or pay them the profit they would have realized upon the conversion or exercise and sale of such shares.

 

We may also be obligated to redeem the Notes at a premium upon the occurrence of an event of default (as defined in the Notes) or a change of control (as defined in the Notes). The Warrants also contain features that may require us to repurchase such warrants upon the occurrence of a change of control or other event of default.

 

The payments we may be obligated to make as described above may adversely affect our results of operations and cash flows.

 

4

 

 

Failure to maintain effectiveness of the registration statement could materially adversely affect our company.

 

We have agreed, at our expense, to prepare a registration statement covering the Conversion Shares and Warrant Shares in connection with the Offering pursuant to our recent Private Placement with certain buyers (“the May 2019 Private Placement”). The May 2019 Private Placement was closed on May 2, 2019 (“Closing Date”). We are obligated to file the registration statement with the SEC within certain period after the Closing Date and maintain such registration statement effective until the Investors have sold all Registrable Securities as defined in the Registration Right Agreement, including but not limited to, all the Ordinary Shares issuable upon conversion of the Notes and exercise of the Warrants. The registration statement was declared effective on June 27, 2019. However, if we fail to maintain its effectiveness, such failure will be deemed as an event of default under the Transaction Documents and resulting in Holders’ right to convert at the alternative conversion price. Such failure could materially adversely affect us.

 

The exercise prices of the warrants and conversion prices of the convertible notes are not indications of our value.

 

The exercise prices of the warrants and the conversion prices of the convertible notes may not necessarily bear any relationship to the book value of our assets, past operations, cash flows, losses, financial condition or any other established criteria for value. You should not consider the exercise price or the conversion price as an indication of the value of the Ordinary Shares underlying the warrants. After May 30, 2019, the Ordinary Shares may trade at prices above or below such exercise prices.

 

Risks Related to Our Business

 

We have limited sources of working capital and will need substantial additional financing

 

The working capital required to implement our business plan will most likely be provided by funds obtained through offerings of our equity, debt, debt-linked securities, and/or equity-linked securities, and revenues generated by us. No assurance can be given that we will have revenues sufficient to sustain our operations or that we would be able to obtain equity/debt financing in the current economic environment. If we do not have sufficient working capital and are unable to generate sufficient revenues or raise additional funds, we may delay the completion of or significantly reduce the scope of our current business plan; delay some of our development and clinical or marketing efforts; postpone the hiring of new personnel; or, under certain dire financial circumstances, substantially curtail or cease our operations.

 

To date, we have relied almost exclusively on organically generated revenues and financing transactions to fund our operations. Our inability to obtain sufficient additional financing would have a material adverse effect on our ability to implement our business plan and, as a result, could require us to significantly curtail or potentially cease our operations. At March 31, 2020, we had cash and cash equivalents of $7,287,032, total current assets of $19,636,313 and total current liabilities of $12,264,314. At March 31, 2019, we had cash and cash equivalents of $9,130,849, total current assets of $15,588,100 and total current liabilities of $6,321,372. We will need to engage in capital-raising transactions in the near future. Such financing transactions may well cause substantial dilution to our shareholders and could involve the issuance of securities with rights senior to the outstanding shares. Our ability to complete additional financings is dependent on, among other things, the state of the capital markets at the time of any proposed offering, market reception of the Company and the likelihood of the success of its business model and offering terms. There is no assurance that we will be able to obtain any such additional capital through asset sales, equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and to support our operations. If we do not obtain adequate capital on a timely basis and on satisfactory terms, our revenues and operations and the value of our Ordinary Shares and Ordinary Share equivalents would be materially negatively impacted and we may cease our operations.

 

5

 

 

Although we were incorporated 15 years ago, our significant business lines have a limited operating history, which makes it difficult to evaluate our future prospects and results of operations.

 

We only started to produce Directly-Oral TCMP and After-Soaking-TCMP as our principal products three years ago. As a result, our past operating results are not an accurate indication of the lines of business we are principally engaged in currently. Thus, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets rather than typical companies of our age. Some of these risks and uncertainties relate to our ability to:

 

  attract additional customers and increased spending per customer;

 

  increase awareness of our brand and develop customer loyalty;

 

  respond to competitive market conditions;

 

  respond to changes in our regulatory environment;

 

  manage risks associated with intellectual property rights;

 

  maintain effective control of our costs and expenses;

 

  raise sufficient capital to sustain and expand our business;

 

  attract, retain and motivate qualified personnel; and

 

  upgrade our technology to support additional research and development of new products.

 

If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

 

Our investment in Huangshan Panjie Investment LLP Fund may not be successful.

 

In June 2019 the Company entered into a limited partnership agreement with Huangshan Panjie Investment Management Co., Ltd. (the “GP”), one of the general partner of Huangshan Panjie Investment LLP Fund (“the Fund”), to join the Fund as a limited partner. Pursuant to the limited partnership agreement and its supplements and the Company is committed to contribute $7 million (RMB50 million) into the Fund in two installments, with one installment of $3.5 million (RMB 25 million) made on June 14, 2019, and the second installment of $3.5 million (RMB 25 million) to be made no later than October 31, 2019. The GP will take 20% carried interest.

 

The Company’s investment in the Fund is to leverage the Fund’s capacity to incubate TCM, pharmaceutical or bio-tech start-ups so as to give the Company a steady line of acquisition candidates complementary to its core business. However, there is no guarantee that the start-ups incubated by the Fund will be suitable acquisition target or, if the Company was able to identify suitable target, it will be able to execute the acquisition or consolidate the acquisition target into the Company’s business.

 

In June 2020, the Company agreed with the Fund, the GP and other limited partners to withdraw the installment of $3.5 million (RMB 25 million) made on June 14, 2019. The Company received payment of $2.8 million (RMB 20 million) on June 30, 2020 and expects to receive the rest within 3 months after the issuance date of these financial statements. If we are unsuccessful in collecting the rest of the investment, our business may be materially and adversely affected.

 

Our failure to compete effectively may adversely affect our ability to generate revenue.

 

We compete with other companies, many of whom are developing or can be expected to develop products similar to ours. Many of our competitors are also more established than we are, and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our competitors, such as “Huichuntang” and “Tongrentang”, have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We cannot assure you that we will be able to compete effectively with current or future competitors or that the competitive pressures we face will not harm our business.

 

6

 

 

Our dependence on a small number of customers could adversely affect our business or results of operations.

 

We derive a substantial portion of our revenue from a relatively small number of customers. For additional information regarding Suxuantang’s customer concentrations, see “Consolidated Financial Statements - Note 2 (v) 4). Concentration Risks.” We expect that Suxuantang’s largest customers will continue to account for a substantial portion of its total net revenue for the foreseeable future. Suxuantang has long-standing relationships with many of its significant customers. However, because Suxuantang’s customers generally contract with a finite duration, Suxuantang may lose these customers if the contracts are not renewed or replaced. The loss or reduction of, or failure to renew or replace, any significant contracts with any of these customers could materially reduce Suxuantang’s revenue and cash flows. If Suxuantang does not replace them with other customers, the loss of business from any one of such customers could have a material adverse effect on our business or results of operations.

 

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

 

Our success is, to a certain extent, attributable to the management, sales and marketing, and research and development expertise of key personnel. We are dependent upon the services of Mr. Zhou, our President, Chief Executive Officer and Chairman of the Board, for the continued growth and operation of our Company, due to his industry experience, as well as his personal and business contacts in the PRC. We may not be able to retain Mr. Zhou for any given period of time. Although we have no reason to believe that Mr. Zhou will discontinue his services with us or Taizhou Suxuantang, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations. Additionally, Jingzhen Deng, our Chief Scientific Officer (R&D team leader) and Chief Operation Officer, performs key functions in the operation of our business. There can be no assurance that we will be able to retain these officers after the terms of their employment expire. The loss of these officers could have a material adverse effect upon our business, financial condition, and results of operations. We do not carry key man life insurance for any of our key personnel, nor do we foresee purchasing such insurance to protect against the loss of key personnel.

 

We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire these personnel in the future, our ability to improve our products and implement our business objectives could be adversely affected.

 

We must attract, recruit and retain a sizeable workforce of technically competent employees. Competition for senior management and personnel in the PRC is intense and the pool of qualified candidates in the PRC is very limited. We may not be able to retain the services of our senior executives or personnel, or attract and retain high-quality senior executives or personnel in the future. This failure could materially and adversely affect our future growth and financial condition.

 

If we fail to increase our brand recognition, we may face difficulty in obtaining new customers.

 

Although our brand is well-respected in TCMP industry, we still believe that maintaining and enhancing our brand recognition in a cost-effective manner outside of that market is critical to achieving widespread acceptance of our current and future products and services and is an important element in our effort to increase our customer base. Successful promotion of our other brands, or Suxuantang outside the TCMP industry, will depend largely on our ability to maintain a sizeable and active customer base, our marketing efforts and ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in building our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, in which case our business, operating results and financial condition, would be materially adversely affected.

 

Any disruption in the supply chain of raw materials and our products could adversely impact our ability to produce and deliver products.

 

As to the products we manufacture, we must manage our supply chain for raw materials and delivery of our products. Supply chain fragmentation and local protectionism within China further complicates supply chain disruption risks. Local administrative bodies and physical infrastructure built to protect local interests pose transportation challenges for raw material transportation as well as product delivery throughout China. In addition, profitability and volume could be negatively impacted by limitations inherent within the supply chain, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Any of these occurrences could cause significant disruptions to our supply chain, manufacturing capability and distribution system that could adversely impact our ability to produce and deliver some of our products.

 

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Additionally, some of the raw materials we use are procured from farmers, who can be faced with environmental risks outside of their control. If these farmers are unable to control any environmental issues, they may not have the ability to supply continuously and stably.

 

Our success depends on our ability to protect our intellectual property.

 

Our success depends on our ability to obtain and maintain patent protection for products developed utilizing our technologies, in the PRC and in other countries, and to enforce these patents. There is no assurance that any of our existing and future patents will be held valid and enforceable against third-party infringement or that our products will not infringe any third-party patent or intellectual property. Although we have filed additional patent applications with the Patent Administration Department of the PRC, there is no assurance that they will be granted.

 

Any patents relating to our technologies may not be sufficiently broad to protect our products. In addition, our patents may be challenged, potentially invalidated or potentially circumvented. Our patents may not afford us protection against competitors with similar technology or permit the commercialization of our products without infringing third-party patents or other intellectual property rights.

 

We also rely on or intend to rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or will apply to register a number of these trademarks. However, third parties may oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing these new brands. Further, our competitors may infringe our trademarks, or we may not have adequate resources to enforce our trademarks.

 

In addition, we also have trade secrets, non-patented proprietary expertise and continuing technological innovation that we shall seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to products arising from research, we may not be able to maintain the confidentiality of information relating to these products.

 

Our TCMP business is subject to inherent risks relating to product liability and personal injury claims.

 

TCMP companies, similar to pharmaceutical companies, are exposed to risks inherent in the manufacturing and distribution of TCMP products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, and unintentional distribution of counterfeit drugs. In addition, product liability claims may be asserted against us with respect to any of the products we sell and as a distributor, we are required to pay for damages for any successful product liability claim against us, although we may have the right under applicable PRC laws, rules and regulations to recover from the relevant manufacturer for compensation we paid to our customers in connection with a product liability claim. We may also be obligated to recall affected products. If we are found liable for product liability claims, we could be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation as well as our brand name may also suffer. We, like many other similar companies in China, do not carry product liability insurance. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any available business interruption insurance in China, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.

 

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We face risks related to research and the ability to develop new TCMP products.

 

Our growth and survival depends on our ability to consistently discover, develop and commercialize new products and find new and improved technology and platforms. As such, if we fail to make sufficient investments in research, be attentive to consumer needs or focus on the most advanced technology, our current and future products could be surpassed by more effective or advanced products of other companies.

 

Our business requires a number of permits and licenses in order to carry on their business.

 

Pharmaceutical companies in China are required to obtain certain permits and licenses from various PRC governmental authorities, including Good Manufacturing Practice (“GMP”) certification. We are also required to obtain a Pharmaceutical Product Permit.

 

Also, we participate in the manufacture of Chinese medicine, which is subject to various PRC laws and regulations pertaining to the pharmaceutical industry. We have obtained certificates, permits, and licenses required for the operation of a pharmaceutical enterprise and the manufacturing of pharmaceutical products in the PRC. We are required to meet GMP standards in order to continue manufacturing pharmaceutical products. We are required to renew the GMP every five years and our current GMP expires in 2019. There is no guarantee we will be able to renew the GMP when it next expires.

 

We cannot assure you that we can maintain all required licenses, permits and certifications to carry on our business at all times, and in the past from time to time we may have not been in compliance with all such required licenses, permits and certifications. Moreover, these licenses, permits and certifications are subject to periodic renewal and/or reassessment by the relevant PRC governmental authorities and the standards of such renewal or reassessment may change from time to time. We intend to apply for the renewal of these licenses, permits and certifications when required by then applicable laws and regulations. Any failure by us to obtain and maintain all licenses, permits and certifications necessary to carry on our business at any time could have a material adverse effect on our business, financial condition and results of operations. In addition, any inability to renew these licenses, permits and certifications could severely disrupt our business and prevent us from continuing to carry on our business. Any changes in the standards used by governmental authorities in considering whether to renew or reassess our business licenses, permits and certifications, as well as any enactment of new regulations that may restrict the conduct of our business, may also decrease our revenue and/or increase our costs and materially reduce our profitability and prospects. Furthermore, if the interpretation or implementation of existing laws and regulations changes or if new regulations come into effect requiring us to obtain any additional licenses, permits or certifications that were previously not required to operate our existing businesses, we cannot assure you that we will successfully obtain such licenses, permits or certifications.

 

Our innovative Directly-Oral-TCMP and After-Soaking-Oral-TCMP in China are subject to continuing regulation by the CFDA. If the labeling or manufacturing process of an approved medicine is significantly modified, the CFDA requires that we obtain a new pre-market approval or pre-market approval supplement. Furthermore, there is no specific law or details of regulations that apply to our innovative Directly-Oral-TCMP and After-Soaking-Oral-TCMP, but we will be required to comply with all existing and new rules related to them.

 

Price control regulations may decrease our profitability.

 

The laws of the PRC provide for the government to fix and adjust prices. The prices of certain TCMP products we distribute, including those listed in the Chinese government’s catalogue of medications that are reimbursable under the PRC’s social insurance program, or the Insurance Catalogue, are subject to control by the relevant state or provincial price administration authorities. The PRC establishes price levels for products based on market conditions, average industry cost, supply and demand and social responsibility. In practice, price control with respect to these medicines sets a ceiling on their retail price. The actual price of such medicines set by manufacturers, wholesalers and retailers cannot historically exceed the price ceiling imposed by applicable government price control regulations. Although, as a general matter, government price control regulations have resulted in lower drug prices over time, there has been no predictable pattern for such decreases. It is possible that additional products may be subject to price control, or that price controls may be increased in the future. To the extent that our products are subject to price control, our revenue, gross profit, gross margin and net income will be affected since the revenue we derive from our sales will be limited and we may face no limitation on our costs. Further, if price controls affect both our revenue and costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC. Since May 1998, the relevant PRC governmental authorities have ordered price reductions on thousands of pharmaceutical products. Such reductions, along with any future price controls or government mandated price reductions may have a material adverse effect on our financial condition and results of operations, including significantly reducing our revenue and profitability.

 

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If the TCMP products we produce are replaced by other medicines or are removed from the PRC’s insurance catalogue in the future, our revenue may suffer.

 

Under Chinese regulations, patients purchasing medicine listed by the central and/or provincial governments in the insurance catalogue may be reimbursed, in part or in whole, by a social medicine fund. Accordingly, pharmaceutical distributors prefer to engage in the distribution of medicine listed in the insurance catalogue. Currently, 95% of our TCMP products, including 11 Advanced TCMP products are listed in the insurance catalogue. The content of the insurance catalogue is subject to change by the PRC Ministry of Labor and Social Security, and new medicine may be added to the insurance catalogue by provincial level authorities as part of their limited ability to change certain medicines listed in the insurance catalogue. If the TCMP products we produce are replaced by other medicines or removed from the insurance catalogue in the future, our revenue may suffer.

 

Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results.

 

The results of our operations may be significantly affected by the public’s perception of our product and similar companies. This perception is dependent upon opinions concerning:

 

  the safety and quality of our products and ingredients;

 

  the safety and quality of similar products and ingredients distributed by other companies; and

 

  our sales force.

 

Adverse publicity concerning any actual or purported failure to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse effect on our goodwill and could negatively affect our sales and ability to generate revenue. In addition, our consumers’ perception of the safety and quality of products and ingredients as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not accurate or resulting from consumers’ use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could negatively impact our reputation or the market demand for our products.

 

Risks Related to Our Corporate Structure

 

We rely on contractual arrangements with our variable interest entities in China for our business operations, which may not be as effective in providing operational control or enabling us to derive economic benefits as through ownership of controlling equity interests.

 

We rely on and expect to continue to rely on our wholly owned PRC subsidiary’s contractual arrangements with Taizhou Suxuantang and its respective shareholders to operate business. These contractual arrangements may not be as effective in providing us with control over Taizhou Suxuantang as ownership of controlling equity interests would be in providing us with control over, or enabling us to derive economic benefits from the operations of Taizhou Suxuantang. Under the current contractual arrangements, as a legal matter, if Taizhou Suxuantang or any of their shareholders fails to perform its, his or her respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements, and rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective. For example, if shareholders of a variable interest entity were to refuse to transfer their equity interests in such variable interest entity to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may have to take a legal action to compel them to fulfill their contractual obligations.

 

If (i) the applicable PRC authorities invalidate these contractual arrangements for violation of PRC laws, rules and regulations, (ii) any variable interest entity or its shareholders terminate the contractual arrangements or (iii) any variable interest entity or its shareholders fail to perform their obligations under these contractual arrangements, our business operations in China would be materially and adversely affected, and the value of your stock would substantially decrease. Further, if we fail to renew these contractual arrangements upon their expiration, we would not be able to continue our business operations unless the then current PRC law allows us to directly operate businesses in China.

 

In addition, if any variable interest entity or all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of the variable interest entities undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business and our ability to generate revenues.

 

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All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our operating entities and we may be precluded from operating our business, which would have a material adverse effect on our financial condition and results of operations.

 

Taizhou Suxuantang’s shareholders may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The equity interests of Taizhou Suxuantang are held by Mr. Feng Zhou, who is our founder, director. His interests may differ from the interests of our Company as a whole. He may breach, or cause Taizhou Suxuantang to breach, or refuse to renew the existing contractual arrangements we have with Taizhou Suxuantang, which would have a material adverse effect on our ability to effectively control Taizhou Suxuantang and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with Taizhou Suxuantang to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our Company, except that we could exercise our purchase option under the exclusive option agreement with these shareholders to request them to transfer all of their equity interests in Taizhou Suxuantang to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Taizhou Suxuantang, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Contractual arrangements in relation to our variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entity owe additional taxes, which could negatively affect our results of operations and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our WFOE, our variable interest entity Taizhou Suxuantang and the shareholders of Taizhou Suxuantang were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust Taizhou Suxuantang’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Taizhou Suxuantang for PRC tax purposes, which could in turn increase their tax liabilities without reducing WFOE’s tax expenses. In addition, if WFOE requests the shareholders of Taizhou Suxuantang to transfer their equity interests in Taizhou Suxuantang at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject WFOE to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on Taizhou Suxuantang for the adjusted but unpaid taxes according to the applicable regulations. Our results of operations could be materially and adversely affected if Taizhou Suxuantang’s tax liabilities increase or if they are required to pay late payment fees and other penalties.

 

If we exercise the option to acquire equity ownership of Taizhou Suxuantang, the ownership transfer may subject us to certain limitation and substantial costs.

 

Pursuant to the contractual arrangements, WFOE has the exclusive right to purchase all or any part of the equity interests in Taizhou Suxuantang from Taizhou Suxuantang’s shareholders for a nominal price, unless the relevant government authorities or then applicable PRC laws request that a minimum price amount be used as the purchase price, in such case the purchase price shall be the lowest amount under such request. The shareholders of Taizhou Suxuantang will be subject to PRC individual income tax on the difference between the equity transfer price and the then current registered capital of Taizhou Suxuantang. Additionally, if such a transfer takes place, the competent tax authority may require WFOE to pay enterprise income tax for ownership transfer income with reference to the market value, in which case the amount of tax could be substantial.

 

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Risks Related to Our Ordinary Shares

 

Our ordinary shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our ordinary shares may be “thinly-traded”, meaning that the number of persons interested in purchasing our ordinary shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our ordinary shares may not develop or be sustained.

 

The market price for our ordinary shares may be volatile.

 

The market price for our ordinary shares may be volatile and subject to wide fluctuations due to factors such as:

 

  the perception of U.S. investors and regulators of U.S. listed Chinese companies;

 

  our operating and financial performance;

 

  quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;

 

  the public reaction to our press releases, our other public announcements and our filings with the SEC;

 

  strategic actions by our competitors;

 

  changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;

 

  speculation in the press or investment community;

 

  the failure of research analysts to cover our Ordinary Shares;

 

  sales of our Ordinary Shares by us or other shareholders, or the perception that such sales may occur;

 

  changes in accounting principles, policies, guidance, interpretations or standards;

 

  additions or departures of key management personnel;

 

  actions by our shareholders;

 

  domestic and international economic, legal and regulatory factors unrelated to our performance; and

 

  the realization of any risks described under this “Risk Factors” section.

 

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Ordinary Shares. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

 

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For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

 

In April 2012, President Obama signed into law the JOBS Act. We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) provide certain disclosure regarding executive compensation required of larger public companies or (iv) hold nonbinding advisory votes on executive compensation. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700 million in market value of our Ordinary Shares held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our Ordinary Shares to be less attractive as a result, there may be a less active trading market for our Ordinary Shares and our stock price may be more volatile.

 

If we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to file a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. The presence of material weaknesses in internal control over financial reporting could result in financial statement errors which, in turn, could lead to errors in our financial reports and/or delays in our financial reporting, which could require us to restate our operating results. We might not identify one or more material weaknesses in our internal controls in connection with evaluating our compliance with Section 404 of the Sarbanes-Oxley Act. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, we will need to expend significant resources and provide significant management oversight. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and divert management’s attention from other business concerns. These changes may not, however, be effective in maintaining the adequacy of our internal control.

 

If we are unable to conclude that we have effective internal controls over financial reporting, investors may lose confidence in our operating results, the price of the Ordinary Shares could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, the Ordinary Shares may not be able to remain listed on the NASDAQ Capital Market.

 

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

 

As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual general meetings will be governed by British Virgin Islands requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our Ordinary Shares.

 

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As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NASDAQ Stock Market corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.

 

As a foreign private issuer, we are permitted to take advantage of certain provisions in the NASDAQ Stock Market listing rules that allow us to follow British Virgin Islands law for certain governance matters. Certain corporate governance practices in the British Virgin Islands may differ significantly from corporate governance listing standards as, except for general fiduciary duties and duties of care, British Virgin Islands law has no corporate governance regime which prescribes specific corporate governance standards. When our Ordinary Shares are listed on the Nasdaq Capital Market, we intend to continue to follow British Virgin Islands corporate governance practices in lieu of the corporate governance requirements of the Nasdaq Stock Market in respect of the following: (i) the majority independent director requirement under Section 5605(b)(1) of the NASDAQ Stock Market listing rules, (ii) the requirement under Section 5605(d) of the NASDAQ Stock Market listing rules that a compensation committee comprised solely of independent directors governed by a compensation committee charter oversee executive compensation, (iii) the requirement under Section 5605(e) of the NASDAQ Stock Market listing rules that director nominees be selected or recommended for selection by either a majority of the independent directors or a nominations committee comprised solely of independent directors and (iv) the requirement under Section 5605(b)(2) of the NASDAQ Stock Market listing rules that our independent directors hold regularly scheduled executive sessions. British Virgin Islands law does not impose a requirement that our board of directors consist of a majority of independent directors. Nor does British Virgin Islands law impose specific requirements on the establishment of a compensation committee or nominating committee or nominating process. Therefore, our shareholders may be afforded less protection than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on September 30, 2020. We would lose our foreign private issuer status if, for example, more than 50% of our Ordinary Shares are directly or indirectly held by residents of the U.S. and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms beginning on January 1, 2021, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the NASDAQ Stock Market listing rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange.

 

The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal, accounting, and financial compliance costs and investor relations and public relations costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results as well as proxy statements.

 

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As a result of disclosure of information in this annual report and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if we are successfully listed and the market price of our Ordinary Shares increases.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

As a public company, we are required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our Company and shareholders. Although we may be able to attain confidential treatment of some of our developments, in some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S. public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public Company status could affect our results of operations.

 

A sale or perceived sale of a substantial number of shares of our Ordinary Shares may cause the price of our Ordinary Shares to decline.

 

All of our executive officers and directors and all of our shareholders have agreed not to sell shares of our Ordinary Shares for a period of six months following our initial public offering, subject to extension under specified circumstances. See “Lock-Up Agreements.” Ordinary shares subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act of 1933, as amended. If our shareholders sell substantial amounts of our Ordinary Shares in the public market, the market price of our Ordinary Shares could fall. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short our ordinary shares. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

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Risks Related to Doing Business in China

 

Recent scrutiny and potential tightened regulation of public companies with majority of its operation in China may have adverse impact on our share performance and even our listing on the Nasdaq Capital Market.

 

At various times in recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between the two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our ordinary shares.

 

In June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, and passed requiring the SEC to maintain a list of issuers for which the Public Company Accounting Oversight Board, or the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act, or HFCA Act, which in effect would prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if registrant’s financial statements have, for a period of three years, been audited by an accounting firm branch or office that is not subject to PCAOB inspection. Although our independent registered public accounting firm is located in the United States and subject to the regular inspection of PCAOB to assess its compliance with the applicable professional standards, enactment of any of such legislations or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected Chin-based issuers, and our share price could be adversely affected. There is uncertainty as to whether and when these bills or legislations will be enacted in the proposed form, or at all. 

 

Furthermore, Nasdaq has proposed changes to its rules to allow it to consider whether the auditor of a company has been inspected by the PCAOB in considering whether to allow the new or continued listing of that company. The proposed Nasdaq rule changes are subject to approval by the SEC. Enactment of either the EQUITABLE Act or HFCA Act, implementation of the proposed Nasdaq rule changes, or other efforts to increase U.S. regulatory access to audit information could cause uncertainty for affected issuers, including us; the market price of our ordinary shares could be adversely affected, and the trading of our ordinary shares on Nasdaq Capital Market may be prohibited if our auditors fail to be inspected by the PCAOB for three consecutive years. It is unclear if the proposed acts of Congress or Nasdaq rule changes will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to lead to legislation, the resulting legislation may have adverse impact on the share performance of China-based issuers listed in the U.S like us. 

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds from our future financing activities to make loans or additional capital contributions to our PRC operating subsidiaries.

 

As an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans or capital contributions. Any capital contributions or loans that we, as an offshore entity, make to our Company’s PRC subsidiaries are subject to PRC regulations. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with China’s State Administration of Foreign Exchange (“SAFE”), or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, shall be approved by China’s Ministry of Commerce (“MOFCOM”), or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to obtain such approvals or make such registration, our ability to make equity contributions or provide loans to our Company’s PRC subsidiaries or to fund their operations may be negatively affected, which may adversely affect their liquidity and ability to fund their working capital and expansion projects and meet their obligations and commitments. As a result, our liquidity and our ability to fund and expand our business may be negatively affected.

 

Labor disputes could significantly affect our operations.

 

Labor disputes with our employees or labor disputes regarding social welfare could significantly disrupt operations or expansion plans. Delays caused by any such disruptions could materially affect projections for increased capacity, production and revenues, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.

 

Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. In response to the recent global and Chinese economic downturn, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy, our results of operations could be adversely affected as a result.

 

Labor laws in the PRC may adversely affect our results of operations.

 

On December 28, 2012, the PRC government released the revision of the Labor Contract Law of the PRC, which became effective on July 1, 2013. The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

 

China passed the Enterprise Income Tax Law, or the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

On April 22, 2009, the State Administration of Taxation of China issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation to offshore entities controlled by a Chinese enterprise or group. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate stamps, board and stockholder minutes are kept in China; and (iv) all of its directors with voting rights or senior management reside in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. Because substantially all of our operations and senior management are located within the PRC and are expected to remain so for the foreseeable future, we may be considered a PRC resident enterprise for enterprise income tax purposes and therefore subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise controlled by a Chinese natural person. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, as we conduct our sales, including export sales, in China. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which the dividends we pay with respect to our Ordinary Shares, or the gain our non-PRC stockholders may realize from the transfer of our Ordinary Shares, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. The EIT Law and its implementing regulations are, however, relatively new and ambiguities exist with respect to the interpretation and identification of PRC-sourced income, and the application and assessment of withholding taxes. If we are required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC stockholders, or if non-PRC stockholders are required to pay PRC income tax on gains on the transfer of their shares of Ordinary Shares, our business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable income, and our PRC tax may not be creditable against such other taxes.

 

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We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.

 

In connection with our initial public offering, we became subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants or distributors of our Company, because these parties are not always subject to our control.

 

Although we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

 

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct all of our business through our subsidiaries and variable interests entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries and variable interests entities are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises.

 

The PRC legal system is based on the PRC Constitution and is made up of written laws, regulations, circulars and directives. The PRC government is still in the process of developing its legal system, so as to meet the needs of investors and to encourage foreign investment. As the PRC economy is generally developing at a faster pace than its legal system, some degree of uncertainty exists in connection with whether and how existing laws and regulations will apply to certain events or circumstances.

 

Some of the laws and regulations, and the interpretation, implementation and enforcement thereof, are still subject to policy changes. There is no assurance that the introduction of new laws, changes to existing laws and the interpretation or application thereof or the delays in obtaining approvals from the relevant authorities will not have an adverse impact on our PRC subsidiaries’ business, financial performance and prospects.

 

Further, precedents on the interpretation, implementation and enforcement of the PRC laws and regulations are limited, and unlike other common law countries such as the United States, decisions on precedent cases are not binding on lower courts. As such, the outcome of dispute resolutions may not be consistent or predictable as in the other more developed jurisdictions and it may be difficult to obtain swift or equitable enforcement of the laws in the PRC, or obtain enforcement of judgment by a court of another jurisdiction.

 

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An offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

 

Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign invested entities (“FIEs”), to finance their activities cannot exceed statutory limits and must be registered with SAFE. On March 30, 2015, SAFE promulgated Hui Fa [2015] No.19, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB. The foreign exchange capital, for which the monetary contribution has been confirmed by the foreign exchange authorities (or for which the monetary contribution has been registered for account entry) in the capital account of a foreign-invested enterprise may be settled at a bank as required by the enterprise’s actual management needs. Foreign-invested enterprises with investment as their main business (including foreign-oriented companies, foreign-invested venture capital enterprises and foreign-invested equity investment enterprises) are allowed to, under the premise of authenticity and compliance of their domestic investment projects, carry out based on their actual investment scales direct settlement of foreign exchange capital or transfer the RMB funds in the foreign exchange settlement account for pending payment to the invested enterprises’ accounts.

  

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances.

 

Circular 21 may significantly limit our ability to convert, transfer and use the net proceeds from our financing activities and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by MOFCOM or its local counterpart, which usually takes no more than 30 working days to complete. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

 

Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

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We are a holding company and we rely for funding on dividend payments from our subsidiaries, which are subject to restrictions under PRC laws.

 

We are a holding company incorporated in the British Virgin Islands, and we operate our core businesses through our subsidiaries in the PRC and through various variable interest entities, or VIEs, agreements with third parties. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from these PRC subsidiaries and VIEs. If our subsidiaries and VIEs incur debt or losses, their ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiaries calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to pay dividends to us. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.

 

Our business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

Our PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

According to SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, effective on 17 December 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, prior approval from SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.

 

Substantial uncertainties exist with respect to the enactment timetable and final content of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

The Ministry of Commerce published a discussion draft of the proposed Foreign Investment Law in January 2015 (the “Draft FIL”) aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Draft FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Ministry of Commerce is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.

 

Among other things, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. The Draft FIL specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market entry clearance, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities and/or citizens. Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued by the State Council later. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE. Under the Draft FIL, VIEs that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the “negative list” the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, the VIEs will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

 

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The provision of services, which we conduct through our VIEs, is currently subject to foreign investment restrictions set forth in the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform Commission and the Ministry of Commerce that was amended on June 28, 2017 and became effective On July 28 2017. The Draft FIL, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering and/or other future financing activities into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our shares of Ordinary Shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, and our reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our business. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations will be severely hampered and your investment in our stock could be rendered worthless.

 

You may face difficulties in protecting your interests and exercising your rights as a stockholder since we conduct substantially all of our operations in China, and almost all of our officers and directors reside outside the U.S.

 

Although we are incorporated in the British Virgin Islands, we conduct substantially all of our operations in China. All of our current officers and almost all of our directors reside outside the U.S. and substantially all of the assets of those persons are located outside of the U.S. It may be difficult for you to conduct due diligence on the Company or such directors in your election of the directors and attend shareholders meeting if the meeting is held in China. We plan to have one shareholder meeting each year at a location to be determined, potentially in China. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation doing business entirely or predominantly within the U.S.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of the Company

 

We were incorporated in the British Virgin Islands on July 4, 2017. Our wholly owned subsidiary China SXT Group Limited (“SXT HK”) was incorporated in Hong Kong on July 21, 2017. China SXT Group Limited in turn holds all the capital stocks of Taizhou Suxantang Biotechnology Co. Ltd. (“WFOE”), a wholly foreign owned enterprise incorporated in China on October 13, 2017. WFOE controls Jiangsu Taizhou Suxantang Pharmaceutical Co., Ltd. (“Taizhou Suxuantang”) through a series of VIE agreements. See” Business — Contractual Agreements with WFOE and Taizhou Suxuantang.”

 

Pursuant to PRC laws, each entity formed under PRC law shall have certain business scope approved by the Administration of Industry and Commerce or its local counterpart. As such, WFOE’s business scope is to primarily engage in technology development, provision of technology service, technology consulting; development of computer software and hardware, computer network technology, game software; provision of enterprise management and related consulting service, human resource consulting service and intellectual property consulting service. Since the sole business of WFOE is to provide Taizhou Suxuantang with technical support, consulting services and other management services relating to its day-to-day business operations and management in exchange for a service fee approximately equal to the net income of Taizhou Suxuantang, such business scope is necessary and appropriate under PRC laws.

 

China SXT Pharmaceutical is a holding company with no business operation other than holding the shares in SXT HK; SXT HK is a pass-through entity with no business operation. WFOE is exclusively engaged in the business of managing the operation of Taizhou Suxuantang. Taizhou Suxuantang has become principally engaged in offering Advanced TCMP products since March, 2015. Before 2015, Taizhou Suxuantang specialized in manufacturing and selling Regular and Fine TCMP products.

 

Our principal executive offices are located at 178 Taidong Rd North, Taizhou, Jiangsu, PRC, and our phone number is +86-523-8629-8290. We maintain a corporate website at www.sxtchina.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this annual report.

  

B. Business Overview 

 

We are an innovative pharmaceutical company based in China that focuses on the research, development, manufacture, marketing and sales of TCMP. TCMP is a type of TCM products that has been widely accepted by Chinese people for thousands of years. Throughout the decades of years, TCMP products’ origin, identification, prepared process, quality standard, indication, dosage and administration, precautions, and storage have been well documented, listed and specified in “China Pharmacopoeia” a state-governmental issued guidance on manufacturing TCMP. In recent years, TCMP industry enjoyed more rapid growth than any other segments of the pharmaceutical industry primarily due to the favorable government policies for the TCMP industry. Because of the favorable government policies, TCMP products do not have to go through rigorous clinical trials before commercialization. We currently sell three types of TCMP products: Advanced TCMP, Fine TCMP and Regular TCMP. Although all of our TCMP products are generic TCMP drugs and we did not change the medical effects of these products in any significant way, these products are innovative in terms of their unconventional administration. The complexity of the manufacturing process is what differentiates these types of products. Advanced TCMP typically has the highest quality because it requires specialized equipment and prepared processes to manufacture, and has to go through more manufacturing steps to produce than Fine TCMP and Regular TCMP. Fine TCMP is also manufactured with more refined ingredients than Regular TCMP.

 

 We recently reconstructed and assembled a facility and received a “Food Manufacturing Certificate” issued by the local Food and Drug Administration, which granted the Company permission to produce TCMHS (TCM Homologous Supplements), a classification of health-supporting food used traditionally in China as TCM but which are also consumed as food. The scope of production includes “Substitute Teas,” made of TCMHS plants, and “Solid Beverages,” a kind of granule produced through extraction of TCMHS materials.

 

We have successfully developed 4 solid beverage products which were commercially launched in April 2019.

 

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We currently produce 19 Advanced TCMPs and market 13 of them, 15 Fine TCMPs, 430 Regular TCMPs and 4 TCMHS solid beverages. Advanced TCMP has gradually become our principal product due to its quality and greater market potential. For the fiscal year ended March 31, 2020, Advanced TCMP brought in 30.6% of the total revenue, whereas Fine TCMP and Regular TCMP each brought in 20.0% and 44.2% of the total revenue respectively. For the fiscal year ended March 31, 2019, Advanced TCMP brought in 51.8% of the total revenue, whereas Fine TCMP and Regular TCMP each brought in 7.5% and 40.7% of the total revenue respectively. Our Advanced TCMP segment includes nineteen products, which can be further divided into eight Directly-Oral TCMP products, and eleven After-Soaking-Oral TCMP products. Directly-Oral TCMP, as the name suggests, has the advantage of being taken orally. After-Soak-Oral TCMP comes as a small, porous, sealed bag that can be immersed in boiling water to make an infusion. Our major Directly-Oral-TCMP are SanQiFen, CuYanHuSuo, XiaTianWu and LuXueJing; our major After-Soaking-Oral-TCMP are ChenXiang, SuMu, ChaoSuanZaoRen, and JiangXiang. For each principal product’s indications and year of commercialization, see “Business – Our Products.”

 

Taizhou Suxuantang, our VIE entity, was founded in 2005 and has grown significantly in recent years. Our net revenues decreased from $7,012,026 in fiscal year ended March 31, 2019 to $5,162,268 in fiscal year ended March 31, 2020, representing a decrease of 26%. Our net income decreased from $1,539,227 in fiscal year ended March 31, 2019 to a net loss of $10,287,872 in fiscal year ended March 31, 2020, representing a decrease of 768% during this period. Our net revenues decreased from $7,019,243 in fiscal year ended March 31, 2018 to $7,012,026 in fiscal year ended March 31, 2019, representing a decrease of 0%. Our net income increased from $1,187,581 in fiscal year ended March 31, 2018 to $1,539,227 in fiscal year ended March 31, 2019, representing an increase of 29.6% during this period.

 

We own twelve Chinese registered trademarks related to our brand “Suxuantang.” Our TCMP products received the prestigious award of Jiangsu Taizhou Famous Product, and Well-known Brand Trademark in December 2016, and 2017, respectively. The awards were granted by the Government of Taizhou City, Jiangsu, China. In the near future, we plan to increase our efforts in cooperation with universities, research institutes, and R&D agents on joint R&D projects involving TCMP processing methods and quality standard, as well as the training of our researchers. 

 

We have been focusing on the research and development of new Advanced TCMP products. Dr. Jingzhen Deng, who has over 36 years of experience in the TCMP research and development field, joined our Company in June 2013 as Vice President and Director of research and development. Under his leadership, we established a research center in December 2013. We submitted eight invention patent applications regarding Advanced TCMP to the State Intellectual Property Office of the PRC in the Spring of 2017. We also submitted five additional invention patent applications to the State Intellectual Property Office of PRC afterward. All of these patents have been under the substantive examination stages, which do not involve new products.

 

Our major customers are hospitals, especially TCM hospitals, primarily in the Jiangsu province in China. Another substantial part of our sales are made to pharmaceutical distributors, which then sell our products to hospitals and other healthcare distributors. As of May 2, 2020, our end-customer base includes 116 pharmaceutical companies, 56 pharmacies and 76 hospitals in 10 provinces and municipalities in China including Jiangsu, Hubei, Shandong, Hebei, Jiangxi, Guangdong, Anhui, Henan, Liaoning, and Fujian.

 

Our Products

 

We currently sell three types of TCMP products: Advanced TCMP, Fine TCMP, Regular TCMP, and TCMHS Solid Beverages.

 

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Advanced TCMP

 

Advanced TCMP typically has the highest quality because it requires specialized equipment to manufacture and has to go through more manufacturing steps to produce than Fine TCMP and Regular TCMP. Although Advanced TCMP has the same medicinal effects as Fine and Regular TCMP and cannot be considered a new type of medicine, Advanced TCMP is much easier to be taken since it does not require decoction. We have two types of Advanced TCMP depending on the way it is consumed, Directly-Oral TCMP and After-Soaking-Oral TCMP products

 

Directly-Oral TCMP

 

Directly-Oral TCMP is a novel Advanced TCMP recently cataloged on Pharmaceutical GMP (version 2010) and China Pharmacopoeia (version 2015) Part IV. The products, unlike Regular TCMP, can be taken orally without decocting. Following the principle of Directly-Oral-TCMP, we have established a new scientific and technological strategy and methods for the research and development of the direct-oral pharmaceutical TCMP products. Our products comply with the regulations of the CFDA and provincial FDA, as well as keep the principles of TCM. Our R&D results indicated that the Directly-Oral TCMP products, in contrast to Regular TCMPs, have significant advantages in terms of preserving the quality of the TCM original ingredients, and being safer and easier to use.

 

After-Soaking-Oral TCMP

 

After-Soaking-Oral TCMP is another new type of Advanced TCMP, which can be taken after soaking with hot water without decocting. It is defined on China Pharmacopoeia (version 2015) Part IV. Like the Directly-Oral TCMP, we also have built a new scientific and technological strategy and methods for the R&D of the after-soaking orally pharmaceutical TCMP products. The products comply with the regulations of the CFDA and local FDA, as well as retain the principles of Chinese Traditional Medicine (“TCM”). Like Directly-Oral TCMP, our After-Soaking-Oral-TCMP provide the special features of being non-decocting, such as keeping CFDA-recognized TCM theoretic fundamental principles, preserving the quality of TCM original ingredients, increasing aqueous extracts to improve bioavailability for bioactive constitutes, and being easy to use and store.

 

Fine TCMP

 

We currently produce over 15 Fine TCMP products for drug stores and hospitals. Our Fine TCMP products are manufactured manually from only high-quality authentic ingredients derived from their region of origin.

 

Regular TCMP

 

We currently manufacture almost 430 Regular TCMP products listed on China Pharmacopoeia (version 2015) Part I for hospitals and drug stores for the treatment of various diseases or serving as dietary supplements.

 

TCMHS Solid Beverages

 

 

We developed and commercially launched four solid beverage products in April 2019, as part of the Company’s TCM Homologous Supplements (“TCMHS”) products, a classification of health-supporting food used traditionally in China as TCM but which are also consumed as food. The solid beverages are a kind of granules produced through extraction of TCMHS materials.

 

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We currently have a product-marketed portfolio of 19 Directly-Oral-TCMP and After-Soaking-Oral-TCMP products, 15 Fine TCMP products, and almost 430 Regular TCMP products that address a wide variety of diseases and medical indications. All of our products have complied with quality, dosage, safety and efficacy standards of Chinese Pharmacopoeia and have been granted permits issued by the Jiangsu FDA based on product manufacturing scope described in the Pharmaceutical Product Permit and GMP certification, and most of our products are sold on a prescription basis. The following table summarizes the approved indications for our marketed TCMP and TCMHS products and the year in which each such product was first marketed to our distributors.

 

Product   Ingredients   Indication   Year of
Commercial
Launch
             
ChenXiang (powders)   Powders of timbers of Aquilaria sinensis containing chromone, triterpenoid, volatile constituents.   Hiccups, vomit; chest distension, abdominal pain; urethral syndrome; prostatitis; atrophic gastritis, gastric ulcer; irritable bowel syndrome; and chronic pulmonary heart disease.   2015
             
SanQiFen (powders)   Powders of roots and rhizomes of Panax notoginseng containing ginsenoside and sanchinoside, dencichine, flavonoids, amino acids.   Coronary heart disease; high cholesterol; angina; hyperlipidemia; hemorrhage (bleeding); hepatobiliary diseases; intractable headache; and cancer.   2015
             
HongQi (pieces)   Dry roots of Hedysarum polybotrys containing flavonoids, saponins, polysaccharides.   Sweating; dizziness, palpitations; shortness of breath; chronic diarrhea archoptosis; dyspeptic fullness; indigestion; hemiplegia, arthralgia, numbness; chronic wound; diabetic nephropathy; low immunity; cancer; and liver disease.   2015
             
SuMu (powders)   Powders heartwoods of Caesalpinia sappan containing homeisoflavonoid, and triterpenoid compounds.   Digestive tract tumor; liver cancer; ovarian neoplasms; cervical cancer; chronic myeloid leukemia; fracture; traumatic injury; thoracic abdominal pain; carbuncle furuncle sore; immunosuppressive agent; and diabetes.   2015
             

JiangXiang (powders)

 

  Powder of heartwoods of trunks and roots of Dalbergia odorifera containing flavonoid, terpenoid, volatile constituents.   Coronary heart disease; angina pectoris, arrhythmia; hypertension; hyperlipidemia; dizziness; vomiting blood, nose bleed, bleeding and injury; pain caused by ecchymoma; pediatric glomerulonephritis; and pediatric pneumonia.   2015
             
CuYanHuSuo (powders)    Powders of dry tubers of Corydalis yanhusuo W.T.Wang containing isoquinoline alkaloids.   Various pains (non-addictive analgesics); Paroxysmal atrial fibrillation; Rapid supraventricular arrhythmia; Superficial gastritis; Acute or chronic torsion and contusion   2015
             
XiaTianWu (powders)   Powders of tubers of Corydalis decumbens containing isoquinoline alkaloid constituents.   Hemiplegia; facial paralysis; cerebral infarction; waist intervertebral disc prominent sickness; cervical spondylopathy; shoulder periarthritis; sciatica; arthritic symptoms; cerebral apoplexy; and pseudomyopia.   2016
             
LuXueJing
(crystal-like scales)
  Dry blood of Cervus nippon or Cervus elaphus containing proteins.   Leukopenia; thrombocytopenia; or hypoimmunity; chronic anemia; aplastic anemia; erectile dysfunction; and postoperative rehabilitation.   2016

 

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Product   Ingredients   Indication   Year of
Commercial
Launch
XueJie (powders)   Powders of fruit resins of Daemonorops draco containing flavanoide, terpenoid, and phlobaphene constituents, and resins.   Myocardial infarction; coronary heart disease, angina pectoris; anorectal, gastrointestinal diseases; internal and external bleeding; chronic inflammatory colitis; chronic dermal ulcer; cervical erosion, diabetic foot ulcer; scrotal edema; and post-herpetic neuralgia.   2016
             
ChaoSuanZaoRen (powders)   Powders of slight flied seeds of Ziziphus jujuba containing flavonoid, saponin, alkaloid compounds.   Insomnia, upsetting; spontaneous sweating; night sweat; hyperhidrosis; cardiovascular atherosclerosis; hypertension; high blood lipids; epileptic; and hypoimmunity.   2016
             
HongQuMi (grains)   Dry rice fermented by fungi Monascus purpureus containing monacolins, monascus pigments, polysaccharides.   High blood lipids, high blood pressure; postpartum lochiorrhea; abdominal pain; dyspeptic fullness; indigestion; poor appetite; osteoporosis, climacteric syndrome; hypoimmunity; and diabetic nephropathy syndrome   2016
             
ChuanBeiMu (powders)   Powders of bulbus of Fritilaria cirrhosa or F. unibracteata or F. przezvalskii or F. delavayi or F. taipaiensis, or F. unibracteata containing alkaloid, sterol, nucleosides constituents.   Children with chronic irritating cough; difficultly in expectoration; sore throat; acute or chronic bronchitis; dry cough; epilepsy; mastitis; and hypertension.   2017
             
HuangShuKuiHua (powders)   Powders of corollas of Abelmoschus manihot containing flavonoid and flavone glycoside, polysaccharide constituents, volatile oil, proteins.   Chronic nephritis; hydremic nephritis; adiabatic nephropathy; oral ulcers; parotitis; edemas; cerebrovascular disease; cancer; and scalds or burns.   2017
             

WuWeiZi
(Crude powders)

 

  Ripe fruits of Schisandra chinensis (Turcz.) Baill. containing lignans, volatile constituents, organic acids, sterol, vitamin C, vitamin E.   Acute or chronic hepatitis; dizziness and vitreous opacification; neurasthenic and insomnia; asthma and bronchitis; angioneurotic headache; gallstones.   2018
             

DingXiang (powders)

 

  Buds of Ewgewia caryophyllata Thunb. containing volatile oil, such aseugenol, beta-caryophyllene, humuleno, chavicol, eugenone; flavonoids, and triterpenoid constituents.   Abdominal pain; hiccup; nausea and vomiting; erectile dysfunctiona (ED); chronic gastritis and gastric ulcer; tooth pains.   2018
             

RenShen (powders)

 

  Roots and rhizomes of Panax ginseng C. A. Mey. containing panaxosides, such as panaxoside Rg1, Re, Rb1, flavonoids, panax polysaccharides, organogermanium.   Cardiogenic shock, fatigue, diabetes, impotence, senility, and asthenic overstrain.   2018

 

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Product   Ingredients   Indication   Year of
Commercial
Launch

QingGuo

(crude powders)

  Dry fruits of Canarium album Raeusch. containing flavonoids, triterpenes, lignans, polyphenols, organic acids, volatile oil, etc.   Sore throat, laryngopharyngitis, cough, allergic asthma, diabetes, and intoxication.   2018
             

JueMingZi

(powders)

  Mature seeds of Cassia obtusifolia L. containing anthraquinones, naphthyl ketones, fatty acids, volatile constituents, daidzein, polysaccharides, amino acids.   High blood pressure; hyperlipidemia; cerebrovascular diseases; constipation; mastitis; ophthalmologic diseases.    2018
             

ShaRen

(powders)

  Ripe fruits of Amomom villosum Lour. or A. villosum var. xanthioides T. L. Wu et Senjen or A. longiligulare T. L. Wu containing volatile constituents and flavonoids.   Gastric and duodenal ulcer; enteritidis; pediatrics abdominal pain and chronic diarrhea; irritable bowel syndrome; threatened abortion; chronic renal failure; glomerulonephritis; Kidney stones; asthma; chronic myeloid leukemia; malignant lymphoma.   2018

 

We believe we are well-positioned in a steadily growing industry in one of the fastest-growing economies in the world. We currently manufacture a number of advanced TCMP that were among the first to market in the PRC. Instead of requiring consumers that take TCMP to go through the rather complex decoction process before use, our advanced Chinese medicine products can be simply administered orally as tablets, capsules or liquids. We believe this innovative feature of our products has given us a competitive edge in the market. In addition, and unlike chemical entity medicines and Traditional Chinese Patent Medicine (“TCPM”中成药) products which can only be sold to GSP-certified pharmaceutical distributors according to latest Guidelines on Perfecting Medicine Procurement of Public Hospitals in China, our TCMP products can also be sold directly to hospitals. We expect to continue to gain additional competitive advantages through the growing pipeline of new TCMP products. Our diverse portfolio of products and our new product pipelines include products for high-incidence and high-mortality conditions in the PRC, such as cardiovascular, central nervous system (“CNS”), infectious, and digestive diseases.

  

Our Suppliers, Customers and Distributors

 

We believe we have a well-functioning production and sales network. Our current Chinese medicine product portfolio is comprised of both prescription drugs and supplements. We have 5 major suppliers in Bozhou city of Anhui province in China, which is one of the largest TCM markets in China, Shilu Group in Jilin province of China, and other major suppliers in Anhui, Qinghai, Gansu and Yunnan Province. We have long-term relationship with these suppliers, who supply raw materials of genuine TCM for our production process.

 

Our major customers are hospitals, especially TCM hospitals primarily in the Jiangsu and Liaoning provinces in China and pharmaceutical wholesalers. The wholesalers distribute our products to hospitals and other healthcare distributors such as Liaoning Jiuzhoutong Pharmaceutical Co. Ltd. and Shandong Luoxin Pharmaceutical Co. Ltd. As of June 30, 2020, our end-customer base includes 116 pharmaceutical companies, 56 pharmacies and 76 hospitals in 10 provinces and municipalities in China including Jiangsu, Hubei, Shandong, Guangdong, Liaoning, Anhui, Henan, Jiangxi, Heilongjiang and Hainan.

 

We currently have 4 sales offices covering 10 of China’s major provinces/municipalities, including Jiangsu, Hubei, Shandong, Liaoning, Anhui, Henan, Jiangxi, Guangdong, Hebei and Fujian, and over 62 sales representatives who assist in managing our relationships with our existing distributors and developing future distributors. With relatively less intermediaries involved in distribution and sales compared to many other pharmaceutical companies in China, we are able to keep our selling cost lower than the industry average.

 

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Research and Development

 

We devote substantial resources to the research and development of new products, which do not require additional approval from regulatory agencies unless the products are PTCMs. We have submitted 13 invention patent applications with the State Intellectual Property Office of the PRC, all of which are under the substantive examination stage. All of these patents are preparation process patents, which do not involve new products.

 

Dr. Jingzhen Deng, a veteran in the TCM industry, joined the company as a vice president in June 2013 and rebuilt our R&D team. Since 2013, he has been our Chief Scientific Officer. Dr. Deng has 16 years of experiences at university and pharmaceutical companies specializing in natural products in the USA and more than 14 years at TCM related universities and institutes and a pharmaceutical company in China. He established our general R&D strategy to use advanced technology to revolutionize TCMP production and continue developing newly advanced and non-decocting TCMP/TCM products capable of meeting the highest quality standard.

 

The strategy includes a calculated system of studying aqueous extracting ratio and fingerprint or characteristic charts of components, quantization of bioactive compounds, quality control, stability, development of production process of TCMP products, and establishing a higher benchmark for advanced TCMP products in China.

 

Recently, our R&D team found that electron beam (“e-beam”) processing could break down certain medicinal plant cells to create additional paths for components in the cells to be extracted into aqueous solution more easily. This processing significantly improved the bioavailability of some TCMP forms (such as pieces). Our research data on our Directly-Oral-TCMP and After-Soaking-Oral-TCMP indicated the total aqueous component and bioactive compound extracting ratios at 37±1oC (human body temperature) were increased by 15% through e-beam processing than through regular extraction processing; the finding has been included in our patent application for each product.

 

Our R&D team has received numerous national awards for its significant contribution in the TCMP field. Recently in the China Scientist Forum, we received three awards on the research and development of Directly-Oral TCMP and After-Soaking-Oral TCMP products: Innovation Award, Outstanding Contribution Award, Best R&D Article Award, and State High-tech Enterprise which further demonstrated that we maintain a national leading position in the research and development of Advanced TCMP.

 

We built a DNA Exam Laboratory which was approved by Jiangsu province Drug Administration (JSDA) in October of 2019. The Laboratory has been granted to perform research and development (R&D) and quality control of TCM raw materials and TCMP products applying DNA testing technology.

 

We believe our R&D team holds a leading position in the R&D field of Advanced TCMP products based on our market analysis of our 19 Advanced TCMP. We will continue to sharpen our advantages and expect to develop new Advanced TCMP products in the foreseeable future.

 

Under the administration and regulation of the CFDA, a new TCMP product is subject to GMP requirements to comply with corresponding standards of Chinese Pharmacopeia (Version 2015) Part I and Part IV before it can be sold commercially without clinic trails and any additional approval from the CFDA. Since 2014, we have developed 8 Directly-Oral TCMP and 11 After-Soaking-Oral TCMP products and commercially marketed all of those to pharmaceutical distributors/hospitals.

 

We recently reconstructed and assembled an 850-square-meter facility and received a “Food Manufacturing Certificate” issued by the local Food and Drug Administration, which granted the Company permission to produce TCMHS (TCM Homologous Supplements). The scope of production includes “substitute teas,” made of TCMHS plants, and “solid beverage” a kind of granule produced through extraction of TCMHS materials.

 

We have successfully developed 42 substitute tea and four solid beverage products. The four solid beverage products were commercially launched in April 2019.

 

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Intellectual Property

 

We emphasize the protection of intellectual property and have signed agreements with patent agents to assist us to file patent applications. We also have signed confidentiality agreements with every employee we have to protect our production design. We will submit an application for every technology, production design and research results to the Chinese national intellectual property department to get protection for our intellectual property. The beneficiary of all of our patent applications is “Taizhou Suxuantang”

 

Each patent application we have submitted is an invention patent in which we are seeking patent protection of our prepared process. Under the Patent Law of the People’s Republic of China (Revised), the validity period of patent rights for an invention shall be 20 years, which shall commence from the date of application. We have submitted the following 8 patent applications:

 

Name   Patent Type   Patent Application No.   Expiration Date
(if granted)
SanQiFen Directly-Oral TCMP   Invention   CN 201710234868.1   2037.4.11
ChenXiangFen After-Soaking-Oral TCMP   Invention   CN 201710234867.7   2037.4.11
XiaTianWu Directly-Oral TCMP   Invention   CN 201710345663.0   2037.5.16
CuYanHuSuo Directly-Oral TCMP   Invention   CN 201710355312.8   2037.5.18
HuangShuKuiHua Directly-Oral TCMP   Invention   CN 201710345688.0   2037.5.16
JiangXiangFen After-Soaking-Oral TCMP   Invention   CN 201710388685.5   2037.5.26
SuMu After-Soaking-Oral TCMP   Invention   CN 201710388696.3   2037.5.26
HongQi After-Soaking-Oral TCMP   Invention   CN 201710377191.7   2037.5.24

 

We submitted five additional invention patent applications as follows:

 

Name   Patent Type   Patent Application No.   Expiration Date
(if granted)
XueJie Directly-Oral TCMP   Invention   CN 201810058409.7   2039.1.2
ChuanBeiMu Directly-Oral TCMP   Invention   CN 201810058566.8   2039.1.22
LuXueJing Directly-Oral TCMP   Invention   CN 201810058553.0   2039.1.22
ChaoSuanZaoRen After-Soaking TCMP   Invention   CN 201810058914.1   2039.1.22
HongQuMi After-Soaking-Oral TCMP   Invention   CN 201810058924.5   2039.1.22 

 

Environmental Matters

 

We comply with the Environmental Protection Law of China as well as applicable local regulations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. Penalties may be levied upon us if we fail to adhere to and maintain certain standards. Such failure has not occurred in the past, and we generally do not anticipate that it will occur in the future, but no assurance can be given in this regard.

 

Manufacturing

 

Regularly, raw materials used in the production of TCMP, primarily medicinal plants, first go through a purifying process, during which raw materials are selected, cut, rinsed and dried. Processed raw materials then go through a series of extraction processes that involve mixing with solvents, soaking, stewing, drying and grinding. Materials extracted from the plants are then processed into various dosage forms such as capsules, tablets, syrups, tinctures and granules. In the past, many steps in the manufacturing of TCMP were performed manually, with limited assistance from modern production equipment, which resulted in a lack of quality and dosage consistency; such manual processing also resulted in lengthy production cycles. We refined the traditional labor intensive manufacturing process to employ modern technology and production equipment to help us improve the quality of our products and to increase manufacturing yield. We use two unique manufacturing methods:

  

  1. High-Energy Electron Beam Sterilization Method

 

Electron beam (“e-beam”) processing or electron irradiation is a process that involves using beta radiation, usually of high energy, to treat an object for a variety of purposes. E-beam processing has the ability to break the chains of DNA in living organisms, such as bacteria, resulting in microbial death and rendering the space they inhabit sterile. E-beam processing has been used for the sterilization of medical products and aseptic packaging materials for foods as well as disinfestation, the elimination of live insects from grain, tobacco, and other unprocessed bulk crops.

 

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Sterilization with electrons has significant advantages over current methods of sterilization. The process is quick, reliable, and compatible with most materials, and does not require any quarantine following the processing. For some materials and products that are sensitive to oxidative effects, radiation tolerance levels for electron beam irradiation may be slightly higher than for gamma exposure. This is due to the higher dose rates and shorter exposure times of e-beam irradiation that have been shown to reduce the degradative effects of oxygen.

 

Our research results on the sterilization of TCMP products revealed that certain high energy e-beam processing is a quick, efficient, reliable, non-degradable, and compatible sterilization method for most advanced TCMP products. Combining with the guideline on TCM irradiation sterilization released by CFDA on November 11, 2015, we use the e-beam processing for the sterilization of Directly-Oral TCMP and After-Soaking-Oral TCMP products. The e-beam processing is carried out at a certified and contracted company in Taizhou city of Jiangsu province in the PRC under our closed supervision. The technical method applied for the sterilization has been in our patent application for each product.

 

  2. Dust-Sucking Thermostatic Pulverizing Technique

 

We also apply the dust sucking thermostatic pulverizing technique for the pulverization of various materials such as roots, barks, fruits, seeds, and leafs to produce the Fine and Advanced TCMP products. This technique allows raw materials to go through multiple filters and cleaning mechanisms to remove impurities.

 

Quality Control and Assurance

 

In China, each pharmaceutical manufacturer was required to comply with the GMP standards and to obtain Pharmaceutical Product Manufacturing Permits and GMP Certification granted by the CFDA of the PRC before it engages in any pharmaceutical manufacturing and distribution. GMP standards regulate whole processes and procedures in generating pharmaceutical products to ensure the quality in China. Those include strict Quality Control (“QC”) and Quality Assurance (“QA”).

 

 China National People’s Congress promulgated a new Drug Administration Law of PRC, and was effective as of December 1, 2019. National Medical Products Administration (“NMPA”) is the new agency that replaced CFDA. The pharmaceutical GMP requirements has replaced the “Pharmaceutical Certificate”. As a result, pharmaceutical manufacturers are required to obtain a “Pharmaceutical Product manufacturing Permit”.

 

Besides the strict pharmaceutical GMP requirements, TCMP manufacturers also need to obtain pharmaceutical product manufacturing permit specifically tailored to manufacturing of TCMP products.

 

We are GMP requirements-certified and have obtained a pharmaceutical product manufacturing permit with the product manufacturing scopes covering all types of TCMP. We have well-qualified and trained professional employees for manufacturing and quality control procedures. Our quality control starts with procurement and continues in our manufacturing, packaging, storage capabilities, and cost competitiveness to ensure that all of our products meet the requirements and are still profitable.

 

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Certificates and Permits

 

A pharmaceutical manufacturer, including a TCMP manufacturer, must obtain a pharmaceutical manufacturing permit from the NMPA’s relevant provincial branch. This permit is valid for five years and is renewable for an additional five-year period upon its expiration. Our current pharmaceutical manufacturing permit, issued by the NMPA, will expire on December 31, 2020. Generally, we will file a renewal request 3 months before the expiration date.

 

Good Manufacturing Practice. A pharmaceutical manufacturer must meet the Good Manufacturing Practice (“GMP”) requirements and standards for each of its production facilities in China for each form of pharmaceutical product it produces. GMP requirements and standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. If a manufacturer fails to meet the GMP retirements and standards in the NMPA non-scheduled inspection, it may be suspended the pharmaceutical product manufacturing Permit by the NMPA. 

 

A new GMP Certificate for our manufacturing facility had been issued and is effective from August 5, 2019 to August 4, 2024, before the new Drug Administration Law was in effeteness as of December 1, 2019. Beside regular TCMP, fine TCMP, and Directly-oral TCMP, the high-Energy Electron Beam Sterilization Method utilized currently for our advanced TCMP products, and classification of After-Soaking-Oral TCMP had been also certified in the scope of this Certificate.

 

Competition

 

We compete with other top-tier pharmaceutical companies specialized in manufacturing TCM in China. Many of them entered into TCMP markets earlier than us, thus they are more established than we are and have significantly greater financial, technical, marketing and other resources than we presently possess. Some of our product competitors have greater name recognition and a larger customer base. Those competitors may be able to respond more quickly to new opportunities or market changes or customer requirements, and may be able to undertake more extensive promotional activities, offer more attractive terms to distributors, and adopt more aggressive pricing policies. Some of our competitors have also developed similar TCMP products that compete with ours.

 

Numerous competitors nationwide, including Kangmei, CTCM and Xiangxue, participate in the sale of Chinese medicinal herbs and TCMPs; among them are some high-profile and large-scale companies along with some companies that have huge production and storage capacity to influence the market price. Despite that, we believe we are well-positioned to compete in this fast-developing market with our well recognized Suxuangtang brand, diversified product portfolio, proven research and development and in-licensing capabilities, established sales and marketing network, management experience and favorable cost structure.

 

Our Competitive Advantages

 

We believe our principal competitive strengths are as follows:

 

Recognized Brand Name

 

“Suxuangtang”(苏轩堂), which has over 270 years of history, is a well-known TCM brand in China, especially in Eastern China. Because of its brand recognition, Suxuantang has received numerous awards from the local government such as the Jiangsu Taizhou Famous Product Award and Well-known Brand Trademark granted by the government of Taizhou city. To some, Suxuangtang is more than just a TCM brand; it is a symbol of tradition and culture, which Chinese customers value deeply. Suxuangtang is also widely recognized by the industry as one of the three most famous TCM brands; the other two are “Hui Chun Tang” (回春堂) and “Tong Ren Tang”(同仁堂). Suxuangtang is a household brand in Jiangsu province, having originated there and being well recognized in provinces nearby, such as Hubei, Shandong, Anhui, where our products have been widely used and their curative effects proven. Our Fine and Regular TCMP products have been in pharmaceutical markets such as hospitals and drug stores for decades, and received steady and consistent positive feedbacks from our customers. As a result, we believe the curative effects of our products have been firmly demonstrated. 

 

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Ready to Use TCMPs

 

Unlike most TCMPs in the market that have to be prepared as decoction before use, our innovative Directly-Oral TCMPs and After-soaking-oral TCMPs can be easily dissolved or infused in hot water without requiring lengthy preparation. This feature sets us apart from our peers and makes our products more appealing to our customers.

 

Complete Permits to Produce Advanced TCMP Products

 

We have the Pharmaceutical Manufacturing Permit and pharmaceutical good manufacturing practices (“GMP”) Certificates, both the Permit and the Certificate with the scope of Directly-Oral TCMP authorized by Jiangsu provincial FDA, to produce After-Soaking-Oral-TCMPs, Directly-Oral-TCMPs, Fine TCMPs and Regular TCMPs and there is no need to apply for additional permits from Jiangsu Food and Drug Commission in order to manufacture or sell our products. In China, TCMP companies are treated differently from other pharmaceutical companies manufacturing western drugs and Traditional Chinese Patent Medicine (“TCPM”). Both western drugs and TCPM are required to go through clinical trials and obtain clinical trial approval, whereas TCMP products have no such requirement. Once a TCM company obtains the Pharmaceutical Manufacturing Permit and GMP Certificate, it can begin manufacturing its products immediately. Currently, very few TCM companies in China have both the permit and the certificate with the scope required to produce TCMP, and Directly-Oral and After-Soaking-Oral products.

 

Strong Research and Development Capability

 

We believe that our research and development capabilities allow us to create innovative TCMP that fulfill our customers’ needs. Although all of our TCMP products are generic TCMP drugs and, these products are innovative in terms of their conventional administration. Our advance TCMPs come in the form of powders or sachets, which make oral administration easier for our customers. This improvement is significant because otherwise TCMP have to be prepared through decoction before use, which has proven to be both inconvenient and overly complex for customers. Our research and development team has demonstrated its success in use of the sophisticated research strategies and modern technologies to develop TCMP products with innovative features that lend us an edge over our major competitors. We have established a strong research and development team of 18 dedicated researchers as of June 30, 2020. Our R&D Team has successfully developed multiple modernized TCMPs, many of which have already been directly commercialized with our Pharmaceutical Manufacturing Permit, the Pharmaceutical GMP requirements and standards, and China Pharmacopoeia without the need for additional approvals or registrations by the regulatory authorities.

 

We believe that our research and development capabilities allow us to create innovative TCMP, and TCMHS products that fulfill our customers’ needs. Although all of our TCMP products are generic drugs and we did not change their medical effects in any significant way, these products are innovative in terms of their physical properties. Our advance TCMPs come in the form of powder or sachet, which make oral administration easier for our customers. This improvement is significant because otherwise TCMP have to be prepared through decoction, which has proven to be both ineffective and overly complex for customers. Our research and development team has demonstrated its success in use of the sophisticated research strategies and modern technologies to develop new TCMP products with innovative features that lend us an edge over our major competitors. We have established a strong research and development team of 18 dedicated researchers as of June 30, 2020. Our R& D Team has successfully developed multiple modernized TCMPs and TCMHS products, many of which have already been directly commercialized with our Pharmaceutical Manufacturing Permit and the Food Manufacturing Permit without the need for additional approvals or registrations by the regulatory authorities.

 

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Experienced and accomplished leadership team with a proven track record.

 

We have an experienced management team. Almost all of our members, except our CEO Mr. Feng Zhou, whose expertise is procurement, possess more than 10 years of pharmaceutical and related industry experience. We believe that our leadership team is well positioned to lead us through clinical development, regulatory approval and commercialization of our product candidates. Collectively, our management team has extensive experience in the research and development, manufacture, commercialization, and in-licensing and acquisition of companies in China’s TCM industry. Experienced in managing fast-growing enterprises, our entrepreneurial management team takes the initiative to adapt our business strategies to market, industry and therapeutic trends. Our management team has successfully established a deep product pipeline, and built an integrated research and development, production, and sales and marketing infrastructure. Our success in existing product development and branding reflects the significant experience that members of our management team have in their respective fields of expertise and their in-depth knowledge of the regulatory framework in China.

 

Our Growth Strength

 

The key elements of our strategy to grow our business include:

 

Promoting Our Existing Brands to Increase Our National Recognition. Although “Suxuantang” is a brand (“苏轩堂”) with a solid reputation in Eastern China, particularly Jiangsu Province, our national reach is relatively limited. In order to become a national brand, we intend to support and grow the existing recognition and reputation of our over 270-year old brand “Suxuantang” and maintain our branded pricing strategy through continued sales and marketing efforts, as well as our newly upgraded GMP-compliant production lines. To achieve this goal, we plan to promote the efficacy and safety profiles of all of our Advanced TCMP products to physicians at hospitals and clinics through our sales force, independent distributors and educational physician conferences and seminars. Under the current pharmaceutical regulations in China, TCMP manufacturers are not required to obtain approval from any regulatory authority in order to claim the efficacy and safety of TCMP products, since the efficacy and safety of such products are specifically indicated in “China Pharmacopeia”. China Pharmacopoeia provides state pharmaceutical standards and quality control requirements in China. There are currently 618 TCMP raw materials and their related products exclusively listed in China Pharmacopoeia Part I (version 2015). China Pharmacopeia offers guidance related to each TCMP raw material such as its origin, characteristics, properties, identification, quantitation (assay), indication (action), preparation processing, administration and dosage, storage, and side effects. Each TCMP manufacturer is required by law to follow the guidance set forth in the China Pharmacopoeia. China Pharmacopoeia Part I also stipulates the national standard for TCMP products regarding their efficacy and safety. We intend to promote and advertise the efficacy and safety profiles of all of our Advanced TCMP products by educating the physicians who might not be familiar with the China Pharmacopoeia.

 

Developing and Introducing Additional Products to Expand or Strengthen Our Existing Product Portfolio. We plan to focus on our development capabilities towards expanding our existing portfolio, including our TCMHS products. In addition, we are constantly in the process of developing new types of Advanced TCMP products. We are introducing new products at a steady pace to further strengthen our branded market leadership position in Directly-Oral and After-Soaking-Oral-TCMPs.

 

Expanding Our Distribution Network to Increase Market Penetration. We intend to expand our reach in the PRC to drive additional growth in our existing and future products. We currently contract with over 143 distributors in the PRC and plan to expand on these relationships to target new markets. We plan to continue to broaden our marketing efforts outside of major cities in the PRC and to increase our market penetration in cities and rural areas where we already have a growing presence. Over the long term, we intend to expand our presence beyond the PRC to international markets by partnering with international pharmaceutical companies in cross-selling our products.

 

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Employees

 

As of March 31, 2020, we had a total of 97 full-time employees and no part-time employee. The following table sets forth the breakdown of our employees as of March 31, 2020 by function:

 

   Number of
Employees
   %
of Total
 
Function        
Technology and Development   20    21%
Risk Management   3    3%
Operations, Sales and Marketing   15    15%
Product Development   37    38%
General and Administrative   22    23%
           
Total   97    100%

  

As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. As of the date of this report, we have made adequate employee benefit payments. However, if we were found by the relevant authorities that we failed to make adequate payment, we may be required to make up the contributions for these plans as well as to pay late fees and fines. See “Item 3.D. Risk Factors — Risks Related to Doing Business in China — Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.” 

 

We enter into standard labor and confidentiality agreements with our employees. We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.

 

Insurance

 

We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.

 

Legal Proceedings

 

We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention.

 

Regulations

 

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

 

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Overview

 

We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Industry and Information Technology, State Administration for Industry and Commerce (“SAIC”) and their respective local offices.

 

In China, unlike western medicine which is required to go through clinical trials and complex approval process before commercial launch, Chinese Traditional Medicine, including TCMP, is subject to a completely different regulatory system in terms of approval, quality control and development process because it is currently impossible to test the effects of TCMP clinically. TCMP utilizes various herbs as its ingredients, which are natural products and their chemical composition varies and complicates. Given that the drug effect on each person can vary significantly, there is a lack of common scientific standards and appropriate clinical methods for evaluating TCMP to ensure its safety, efficacy. In addition, TCMP has a very long history and it originated from the sum total of the practices based on different TCM practitioners’ theories, beliefs and experiences, which are often inexplicable.

 

The regulatory system, known as the “Traditional Chinese Medicine Pieces System.” provides sole guidance on TCMP production in the following aspects:

 

The production of TCMP must comply with the “The Drug Administration Law of PRC”, “Good Manufacturing Practice (“GMP”) for drugs”, and “Good Supply Practice (“GSP”) for drugs”. Companies manufacturing and selling TCMP products must have two licenses: “Pharmaceutical Manufacturing Permit” and “TCM GMP certificate” (“License Requirement”). TCMP companies that met the License Requirement will not be required to obtain National Medical Products Administration (“NMPA”, in lieu of CFDA effective on December 1, 2019) or local MPA approval before manufacturing their TCMP products and TCMP products are categorically exempted from being tested clinically because the effect of TCMP products are impossible to be tested clinically. As a result, TCMP products do not have the NMPA approval registration number, which is typically found in western medicine products.

 

TCMP also needs to follow national drug reference standard codified in Pharmacopoeia of the PRC (“Guidance”). The Guidance supplies critical information to TCMP manufacturers regarding origin of ingredients, description, identification, processing, assay, property and flavor, meridian tropism, actions, indications, administration and dosage, precautions and warnings and storage.

 

Besides general GMP for drugs, the production of TCMP also needs to follow the GMP specifically tailored for TCMP, which can be found as annex attached to NMPA regulations.

 

Regulations Relating to Pharmaceutical Industry.

 

The pharmaceutical industry in China is highly regulated. The primary regulatory authority is the NMPA, including its provincial and local branches. As a developer and producer of medicinal products, we are subject to regulation and oversight by the NMPA and its provincial and local branches. The Law of the PRC on the Administration of Pharmaceuticals provides the basic legal framework for the administration of the production and sale of pharmaceuticals in China and covers the manufacturing, distribution, packaging, pricing and advertising of pharmaceutical products. These regulations set forth detailed rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that are applicable to business operators, manufacturers and distributors in general.

 

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Registration and Approval of Medicine.

 

Pursuant to the PRC Provisions for Drug Registration, a medicine must be registered and approved by the NMPA before it can be manufactured and sold. The registration and approval process requires the manufacturer to submit to the NMPA a registration application containing detailed information concerning the efficacy and quality of the medicine and the manufacturing process and the production facilities the manufacturer expects to use. This process generally takes two to five years and could be longer, depending on the nature of the medicine under review, the quality of the data provided and the workload of the NMPA. If a manufacturer chooses to manufacture a pre-clinical medicine, it is also required to conduct pre-clinical trials, apply to the NMPA for permission to conduct clinical trials and go through the clinical trials. If a manufacturer chooses to manufacture a post-clinical medicine, it only needs to go through the clinical trials. In both cases, a manufacturer needs to file clinical data with the NMPA for approval for manufacturing after clinical trials are completed.

 

New Medicine. If the NMPA approves a medicine, it will issue a new medicine certificate to the manufacturer and impose a monitoring period for one to five years. During the monitoring period, the NMPA will monitor the safety of the new medicine, and will neither accept new medicine certificate applications for an identical medicine by another pharmaceutical company, nor approve the production or import of an identical medicine by other pharmaceutical companies. As a result of these regulations, the holder of a new medicine certificate has the exclusive right to manufacture the new medicine during the monitoring period.

 

National Production Standard and Provisional Standard. In connection with the NMPA’s approval of a new medicine, the NMPA will normally direct the manufacturer to produce the medicine according to a provisional national production standard, or a provisional standard. A provisional standard is valid for two years, during which time the NMPA closely monitors the production process and quality consistency of the medicine to develop a national final production standard for the medicine, or a final standard. Three months before the expiration of the two-year period, the manufacturer is required to apply to the NMPA to convert the provisional standard to a final standard. Upon approval, the NMPA will publish the final standard for the production of this medicine. There is no statutory timeline for the NMPA to complete its review and grant approval for the conversion. In practice, the approval for conversion to a final standard is time-consuming and could take a number of years. However, during the NMPA’s review period, the manufacturer may continue to produce the medicine according to the provisional standard.

 

Transitional Period. Prior to the latter of (1) the expiration of a new medicine’s monitoring period or (2) the date when the NMPA grants a final standard for a new medicine after the expiration of the provisional standard, the NMPA will not accept applications for an identical medicine nor will it approve the production of an identical medicine by other pharmaceutical companies. Accordingly, the manufacturer will continue to have an exclusive production right for the new medicine during this transitional period.

 

All TCMP (not TCPM) products as medicine are administrated separately by NMPA. Without clinical trial application, the TCMP medicines are registered and approved by the NMPA based on manufacturer’s pharmaceutical product manufacturing permit and GMP certification before they can be manufactured and sold. A TCMP manufacturer manufactures only the TCMP products of scope approved by NMPA described on both pharmaceutical product manufacturing permit and GMP requirements and standards. For example, directly oral TCMP products are not subjected to manufacture without the directly oral TCMP term appeared on both the permit and the GMP requirements and standards. The TCMP production and quality standard must comply with corresponding TCM and sections on the Pharmacopeia of the PRC.

 

Continuing NMPA Regulation

 

Pharmaceutical manufacturers in China are subject to continuing regulation by the NMPA. If the labeling or its manufacturing process of an approved medicine is significantly modified, a new pre-market approval or pre-market approval supplement will be required by the NMPA. A pharmaceutical manufacturer is subject to periodic inspection and safety monitoring by the NMPA to determine compliance with regulatory requirements.

 

The NMPA has a variety of enforcement actions available to enforce its regulations and rules, including fines and injunctions, recall or seizure of products, the imposition of operating restrictions, partial suspension or complete shutdown of production and criminal prosecution.

 

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Pharmaceutical Product Manufacturing

 

A pharmaceutical manufacturer must obtain a pharmaceutical manufacturing permit from the NMPA’s relevant provincial branch. This permit is valid for five years and is renewable for an additional five-year period upon its expiration. Our current pharmaceutical manufacturing permit, issued by the CFDA, will expire on December 31, 2020.

 

A pharmaceutical manufacturer must meet the Good Manufacturing Practice standards, or GMP standards, for each of its production facilities in China in respect of each form of pharmaceutical product it produces. GMP standards include staff qualifications, production premises and facilities, equipment, raw materials, environmental hygiene, production management, quality control and customer complaint administration. If a manufacturer meets the GMP standards, the CFDA will issue to the manufacturer a Good Manufacturing Practice certificate, or a GMP certificate, with a five-year validity period. However, for a newly-established pharmaceutical manufacturer that meets the GMP standards, the CFDA will issue a GMP certificate with only a one-year validity period. The New GMP Standards became effective on March 1, 2011 and pharmaceutical manufacturers (except manufacturers of injectables, blood products or vaccines, which have a three-year grace period) have a five-year grace period to upgrade existing facilities to comply with the revisions.

 

We obtained a pharmaceutical GMP certificate for our manufacturing facility in respect of scope of TCMP and directly oral TCMP and valid until August 4, 2024. While we are required to implement certain upgrades to our manufacturing facilities to comply with the new GMP standards, we do not currently anticipate any difficulty in renewing these certificates when we finish the facility upgrading.

 

China National People’s Congress promulgated a new Drug Administration Law of PRC, and was effective as of December 1, 2019. National Medical Products Administration (“NMPA”) is the new agency that replaced CFDA. The pharmaceutical GMP requirements has replaced the “Pharmaceutical Certificate”. As a result, pharmaceutical manufacturers are required to obtain a “Pharmaceutical Product manufacturing Permit”.

 

Pharmaceutical products packages.

 

Pharmaceutical products packages must, in accordance with the regulations, be labeled and have an instruction booklet attached. The name of the drug, its ingredients, specifications, the manufacturing enterprise, approval number, product batch number, date of production, expiry date, suitability for symptoms or main function, methods of use, dosage, contraindications, side-effects and points to note must be clearly indicated on the label or in the instruction booklet. The labels of narcotic drugs, psychotropic drugs, poisonous drugs, radioactive drugs, drugs for external use only and non-prescription drugs must bear the prescribed mark.

 

Regulations relating to Price Control

 

The laws of the PRC provide for the government to fix and adjust prices. The prices of certain TCMP products we distribute, including those listed in the Chinese government’s catalogue of medications that are reimbursable under the PRC’s social insurance program, or the Insurance Catalogue, are subject to control by the relevant state or provincial price administration authorities. The PRC establishes price levels for products based on market conditions, average industry cost, supply and demand and social responsibility. In practice, price control with respect to these medicines sets a ceiling on their retail price. The actual price of such medicines set by manufacturers, wholesalers and retailers cannot historically exceed the price ceiling imposed by applicable government price control regulations. 

 

We have two product not listed on national Medicare Insurance Catalogue, which are Directly-Oral products LuXueJing and XueJie (powders). The revenue attributable to LuXueJing were $556,629 (RMB 3,688,723), $ 1,608,062 (RMB 10,796,209) and $983,999 (RMB 6,852,276) for the years ended March 31, 2018, 2019 and 2020 respectively.  The revenue attributable to Xuejie powders is $271,320 (RMB 1,798,011), $27,224 (RMB 182,778) and $4,047 (RMB 28,179) for the years ended March 31, 2018, 2019 and 2020 respectively. 

 

Packaging materials and containers selected for production of all TCMP shall accommodate to drug property. No TCMP whose package fails to conform to regulations may be marketed. A label shall be printed on or attached to the package of TCMP. On the label of TCMP shall be indicated the name of the drug, grade/weight, origin of production, manufacturer, product batch number and production date; if the said TCMP is controlled by an approval number, the number shall also be indicated.

 

Currently, all of our marketed products meet the packaging requirements.

 

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Microbial limitation standards on Chinese medicine extraction and TCMP.

 

Chinese medicine extraction - The total number of aerobic organisms shall not exceed 10³ cfu/g or cfu/ml. The total number of molds and yeasts in Chinese medicine extraction shall not exceed 10² cfu/g or cfu/ml. There are no standard regulations regarding control microbes.

 

Powdered, liquid, Directly-Oral-TCMP and After-Soaking-Oral-TCMP - Their regulations and standards are complied with the description on the GMP certificate and China Pharmacopeia parts I and IV, including relation to the limitation of the total number of permitted aerobic organisms, molds and yeasts. However, for every 10 grams of powdered Directly-Oral-TCMP and After-Soaking-Oral-TCMP, shall be no Salmonella bacteria detectable. Any other bile salt resistant organisms shall not exceed 104 cfu (1g). We are in full compliance with these microbial limitation standards.

 

National Drug Reference Standard.

 

Our TCMP products must also satisfy national drug reference standard. In China, companies manufacturing TCMP products must follow a specific guidance known as the “Pharmacopoeia of the People’s Republic of China” (“Guidance”) and relevant standards promulgated by the drug control and administrative department of the State Council. This Guidance (Latest Version 2015) became effective on December 1, 2015 and it has been codified into state law with the purpose of providing clear guidance on TCMP manufacturing process. The Guidance shall apply to all aspects of TCMP manufacturing process including the research and development, production (import), management, use and supervision of TCMP. It provides standard language that can be used by TCMP companies to draft description, identification, processing, assay, property and flavor, meridian tropism, actions, indications, storage, administration and dosage, precautions and warnings of TCMP products.

 

C. Organizational Structure Chart

 

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated affiliated entities, as of the date of this report:

 

 

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Contractual Arrangements between WFOE and Suxuantang

 

Due to PRC legal restrictions on foreign ownership in the pharmaceutical sector, neither we nor our subsidiaries own any equity interest in Taizhou Suxuantang. Instead, we control and receive the economic benefits of Taizhou Suxuantang’s business operations through a series of contractual arrangements. WFOE, Taizhou Suxuantang and its shareholders entered into such a series of contractual arrangements, also known as VIE Agreements, on October 13, 2017. The VIE agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Taizhou Suxuantang, including absolute control rights and the rights to the assets, property and revenue of Taizhou Suxuantang.

 

According to the Exclusive Business Cooperation Agreement between WFOE and Taizhou Suxuantang, which is one of the VIE Agreements that was also entered into on October 13, 2017, Taizhou Suxuantang is obligated to pay service fees to WFOE approximately equal to the net income of Taizhou Suxuantang.

 

Each of the VIE Agreements is described in detail below:

 

Exclusive Business Cooperation Agreement

 

Pursuant to the Exclusive Business Cooperation Agreement between Taizhou Suxuantang and WFOE, WFOE provides Taizhou Suxuantang with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Taizhou Suxuantang granted an irrevocable and exclusive option to WFOE to purchase from Taizhou Suxuantang, any or all of Taizhou Suxuantang’s assets at the lowest purchase price permitted under the PRC laws. Should WFOE exercise such option, the parties shall enter into a separate asset transfer or similar agreement. For services rendered to Taizhou Suxuantang by WFOE under this agreement, WFOE is entitled to collect a service fee each month determined by the parties through negotiation after considering: complexity and difficulty of the services provided by WFOE; title of and time consumed by employees of WFOE providing the services; contents and value of the services provided by WFOE; market price of the same type of services; and operation conditions of Taizhou Suxuantang.

 

The Exclusive Business Cooperation Agreement shall remain in effect unless it is terminated by WFOE for Taizhou Suxuantang’s material breach of this Agreement. Taizhou Suxuantang does not have the right to terminate the Agreement unilaterally.

 

WFOE has absolute authority relating to the management of Taizhou Suxuantang, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business Cooperation Agreement does not prohibit related party transactions. However, since establishment of the Company’s audit committee at the consummation of our initial public offering, the audit committee has been required to review and approve in advance any related party transactions, including transactions involving WFOE or Taizhou Suxuantang.

 

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Share Pledge Agreement

 

Under the Share Pledge Agreement among WFOE and Feng Zhou, Ziqun Zhou, and Di Zhou, who together hold 100% shares of Taizhou Suxuantang (“Taizhou Suxuantang Shareholders”), the Taizhou Suxuantang Shareholders pledged all of their equity interests in Taizhou Suxuantang to WFOE to guarantee the performance of Taizhou Suxuantang’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the agreement, in the event that Taizhou Suxuantang or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. Taizhou Suxuantang Shareholders also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The Taizhou Suxuantang Shareholders further agree not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

 

The Share Pledge Agreement shall be effective upon execution. Taizhou Suxuantang does not have the right to terminate the Share Pledge Agreement. Only WFOE has right to terminate the Share Pledge Agreement. According to the Share Pledge Agreement, upon fulfillment of all the obligations under the Agreement and full payment under the VIE Agreements by Taizhou Suxuantang and its shareholders, WFOE may release Taizhou Suxuantang from its obligations under the Share Pledge Agreement. WFOE may terminate the Share Pledge Agreement when the Company disposes Taizhou Suxuantang by terminating all the VIE Agreements or when WFOE decides to purchase the equity interest in Taizhou Suxuantang from its shareholders pursuant to the Exclusive Option Agreement and terminates all the VIE Agreements in the event the PRC laws allow foreign ownership in the pharmaceutical sector. In case the Company, upon obtaining its shareholders approval, if required, disposes Taizhou Suxuantang by terminating the VIE Agreements, such termination will have significant effect on the Company. In the event WFOE purchases the equity interests in Taizhou Suxuantang when foreign ownership in pharmaceutical sector is permitted, termination of the VIE Agreements shall not have significant effect to the Company as the Company will control Taizhou Suxuantang through equity ownership.

 

Pursuant to the Power of Attorney, WFOE is authorized to act on behalf the Taizhou Suxuantang shareholders as their exclusive agent and attorney with respect to all rights as shareholders, including having Taizhou Suxuantang to make required payment under the Share Pledge Agreement.

 

The purposes of the Share Pledge Agreement are to (1) guarantee the performance of Taizhou Suxuantang’s obligations under the Exclusive Business Cooperation Agreement, (2) make sure the shareholders of Taizhou Suxuantang shall not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice WFOE’s interests without WFOE’s prior written consent and (3) provide WFOE control over Taizhou Suxuantang. Under the Exclusive Option Agreement (described below), WFOE may exercise its option to acquire the equity interests in Taizhou Suxuantang any time to the extent permitted by the PRC Law. In the event Taizhou Suxuantang breaches its contractual obligations under the Exclusive Business Cooperation Agreement, WFOE will be entitled to foreclose on the Taizhou Suxuantang Shareholders’ equity interests in Taizhou Suxuantang and may (1) exercise its option to purchase or designate third parties to purchase part or all of their equity interests in Taizhou Suxuantang and in this situation, WFOE may terminate the VIE agreements after acquisition of all equity interests in Taizhou Suxuantang or form a new VIE structure with the third parties designated by WFOE; or (2) dispose the pledged equity interests and be paid in priority out of the proceeds from the disposal in which case the VIE structure will be terminated.

 

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Exclusive Option Agreement

 

Under the Exclusive Option Agreement, the Taizhou Suxuantang Shareholders irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Taizhou Suxuantang at the exercise price of RMB10.00.

 

Under the Exclusive Option Agreement, WFOE may at any time under any circumstances, purchase, or have its designated person to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholders’ equity interests in Taizhou Suxuantang.

 

This Agreement shall remain effective until all equity interests held by Taizhou Suxuantang Shareholders in Taizhou Suxuantang have been transferred or assigned to WFOE and/or any other person designated by WFOE in accordance with this Agreement.

 

Power of Attorney

 

Under the Power of Attorney, the Taizhou Suxuantang Shareholders authorize WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Taizhou Suxuantang.

  

Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.

 

This Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid for each shareholder from the date it is executed until the date he/she no longer is a shareholder of Taizhou Suxuantang.

 

The Exclusive Option Agreement, together with the Share Pledge Agreement and the Power of Attorney enable WFOE to exercise effective control over Taizhou Suxuantang.

 

D. Property, plants and equipment

 

Facilities

 

We currently have the following GMP-certified facilities located in Taizhou city of Jiangsu province in China: approximately 1,200 square meters for Regular TCMP production, 450 square meters for Fine TCMP production, 240 square meters for Directly-Oral TCMP and After-Soaking-Oral TCMP production, 250 square meters for TCMP raw materials sterilization facility, 450 square meters for quality control, and research & development centers, and a total of 1,100 square meters for storage.

 

We have started expanding a new production base to increase production capacity to meet rapidly growing demand for TCMPs since October 2017, which covers a total of 33,300 square meter land.

 

Description of Property

 

We have leased properties set forth in the table below.

 

    Address   Size(m²)   Leased/Owned/Granted   Function
1.   No. 178 Taidongbei Rd., Taizhou, Jiangsu, China   2028   Leased    
2.   No. 178 Taidongbei Rd., Taizhou, Jiangsu, China   900   Leased    

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not Applicable

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis of our results of operations and financial condition should be read together with our consolidated financial statements and the notes thereto and other financial information, which are included elsewhere in this Form 20-F. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In addition, our financial statements and the financial information included in this Form20-F reflect our organizational transactions and have been prepared as if our current corporate structure had been in place throughout the relevant periods.

 

This section contains forward-looking statements. These forward-looking statements are subject to various factors, risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Further, as a result of these factors, risks and uncertainties, the forward-looking events may not occur. Relevant factors, risks and uncertainties include, but are not limited to, those discussed in the section entitled “Business,” “Risk Factors” and elsewhere in this Form20-F. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s beliefs and opinions as of the date of this Form 20-F. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new Information, future events or otherwise. See “Cautionary Note Regarding Forward-Looking Statements.”

  

Key Factors Affecting Our Results of Operation

 

Working capital required to implement our business plan will most likely be provided by funds obtained through offerings of our equity, debt, debt-linked securities, and/or equity-linked securities, and revenues generated by us. No assurance can be given that we will have revenues sufficient to support and sustain our operations or that we would be able to obtain equity/debt financing in the current economic environment. If we do not have sufficient working capital and are unable to generate sufficient revenues or raise additional funds, we may delay the completion of or significantly reduce the scope of our current business plan; delay some of our development and clinical or marketing efforts; postpone the hiring of new personnel; or, under certain dire financial circumstances, substantially curtail or cease our operations.

 

Our past operating results are not an accurate indication of the lines of business we are principally engaged in currently. Thus, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving markets rather than typical companies of our age. Some of these risks and uncertainties relate to our ability to:

 

  attract additional customers and increased spending per customer;

 

  increase awareness of our brand and develop customer loyalty;

 

  respond to competitive market conditions;

 

  respond to changes in our regulatory environment;

 

  manage risks associated with intellectual property rights;

 

  maintain effective control of our costs and expenses;

 

  raise sufficient capital to sustain and expand our business;

 

  attract, retain and motivate qualified personnel; and

 

  upgrade our technology to support additional research and development of new products.

 

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Results of Operations for the Year Ended March 31, 2020 Compared to the Year Ended March 31, 2019

  

   For the Years Ended
March 31,
   Change 
   2020   2019   Amount   % 
                 
Revenues  $5,162,268    7,012,026   $(1,849,758)   (26)
Cost of revenues   (2,458,566)   (2,400,491)   (58,075)   2 
                     
Gross profit   2,703,702    4,611,535    (1,907,833)   (41)
                     
Selling expenses   (1,583,284)   (1,605,497)   22,213    (1)
General and administrative expenses   (2,461,535)   (1,236,546)   (1,224,989)   99 
                     
Total operating expenses   (4,044,819)   (2,842,043)   (1,202,776)   42 
                     
Income (Loss) from operations   (1,341,117)   1,769,492    (3,110,609)   (176)
                     
Interest (expense) / income, net   (3,348,790)   (5,174)   (3,343,616)   64623 
Loss on debt extinguishment   (5,625,916)   -    (5,625,916)   100 
Other income(expenses), net   (73,771)   27,141    (100,912)   (372)
                     
Total other expenses   (9,048,477)   21,967    (9,070,444)   (41291)
                     
Income (Loss) before income taxes expense   (10,389,594)   1,791,459    (12,181,053)   (680)
Benefit (provision) for income taxes   101,722    (252,232)   353,954    (140)
                     
Net Income  $(10,287,872)   1,539, 227    $(11,827,099)   (768)

 

Revenues 

 

We generated revenues primarily from manufacture and sales of three types of traditional Chinese medicine pieces (the “TCMP”) products: Advanced TCMP, Fine TCMP, Regular TCMP, and TCM Homologous Supplements (“TCMHS”) products. TCMHS is a classification of health-supporting food used traditionally in China as TCM but which are also consumed as food, which recently has been developed and commercialized. As compared with the year ended March 31, 2019, our total revenues decreased by $1,849,758, or 26% for the year ended March 31, 2020. The decrease was primarily due to the decrease in sales of Advanced TCMP products and partly offset by the increase in the sales of Fine TCMP products and newly launched TCMHS products.

 

The following table sets forth the breakdown of revenues by revenue source for each period presented:

 

   For the Years Ended
March 31,
   Change 
   2020   2019   Amount   % 
                 
Advanced TCMP  $1,581,995    3,631,663   $(2,049,668)   (56)
                     
Fine TCMP   1,033,603    524,253    509,350    97 
                     
Regular TCMP   2,279,198    2,856,110    (576,912)   (20)
                     
TCMHS   267,472    -    267,472    100 
                     
   $5,162,268   $7,012,026   $(1,849,758)   (26)

 

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Advanced TCMP

 

Advanced TCMP is comprised of eight Directly Oral TCMP products (the “Directly-Oral-TCMP”) and eleven After-soaking-oral TCMP products (the “After-Soaking-Oral-TCMP”). Both Directly Oral TCMP and After-soaking-oral TCMP are new types of advanced TCMP.

 

Revenue from advanced TCMP accounted for 31% and 52% of revenue recognized during the year ended March 31, 2020 and 2019, respectively. As compared with the year ended March 31, 2019, our revenue from advanced TCMP decreased by $2,049,668 or 56% for the year ended March 31, 2020. This is primarily due to the effect of COVID-19 outbreak in China and demand adjustment product types made by some of our customers.

 

Fine TCMP

 

We currently produce over 15 fine TCMP products for drug stores and hospitals. Our fine TCMP products are manufactured manually from only high-quality authentic ingredients derived from their region of origin.

  

Revenue from fine TCMP accounted for 20% and 7% of revenue recognized during the year ended March 31, 2020 and 2019. As compared with the year ended March 31, 2019, our revenue from fine TCMP increased by $509,350, or 97% for the year ended March 31, 2020. This is primarily attributable to the Company’s strategy to concentrate on fine TCMP, which was identified great advantage over others.

 

Regular TCMP

 

We currently manufacture 430 regular TCMP products listed on China Pharmacopoeia (version 2015) Part I for hospitals and drug store in treatment of various diseases or serving as dietary supplements.

 

Revenue from regular TCMP accounted for 44% and 41% of revenue recognized during the year ended March 31, 2020 and 2019, respectively. Revenue from regular TCMP products decreased by $576,912, or 20%, to $2,279,198 for the year ended March 31, 2020 from $2,856,110 for the year ended March 31, 2019. Decrease in revenue from Regular TCMP products is consistent with the effect of COVID-19 outbreak in China and the company’s plan to shift from low margin Regular TCMPs and to focus more on the business of high margin Fine and Advanced TCMPs.

 

TCMHS Solid Beverages

 

Four solid beverage products as part of the Company’s TCMHS products were developed and commercially launched in April 2019 and generated a revenue of $267,472 in its nascent launch with encouraging growth.

 

Gross Profit

 

Cost of revenues primarily include cost of materials, direct labors, overhead, and other related incidental expenses that are directly attributable to the Company’s principal operations. Total cost of revenue increased by $58,075, or 2%, to $2,458,566 for the year ended March 31, 2020 from $2,400,491 for the year ended March 31, 2019. The reason that cost of revenues did not decrease comparatively with the revenue was mainly due to the changes of packaging requirements and product types combination that led to increase in production cost, and the fixed production cost incurred during the months of decreased revenue influenced by the COVID-19 outbreak.

 

Gross profit decreased by $1,907,833, or 41%, to $2,703,702 for the year ended March 31, 2020 from $4,611,535 for the year ended March 31, 2019. Gross margin was 52.4% for the year ended March 31, 2020, compared to 65.8% for the year ended March 31, 2019. The decrease in gross margin was mainly due to the decrease of gross margin of Regular TCMP and the decrease of revenue generated from Advanced TCMP.

 

Selling expenses

 

Selling expenses primarily consisted of sales staff payroll and welfare expenses, travelling expenses, advertisement expenses, distribution expenses. The selling expenses decrease from $1,605,497 for the year ended March 31, 2019 to $1,583,284 for the year ended March 31, 2020, representing a decrease of $22,213, or 1%.

 

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General and administrative expenses

 

General and administrative expenses primarily consisted of staff payroll and welfare expenses, research and development expenses, entertainment expenses, travelling expenses, depreciation and amortization expenses for administrative purposes, and office supply expenses. The general and administrative expenses increased from $1,236,546 for the year ended March 31, 2019 to $2,461,535 for the year ended March 31, 2020, representing an increase of $1,224,989, or 99%. The increase in general and administrative expenses was mainly due to an increase of $0.9 million in legal and investor relations fees.

 

Other income (expense), net

 

Interest income (expenses) for the year ended March 31, 2020 mainly consists of accretion of finance cost and interest expense of the issuance and forbearance of Convertible Notes issued on April 16, 2019. For the year ended March 31, 2020, the company record amortization of issuance cost and debt discount of $2,519,761 and Convertible Notes (please refer to FS, Note 12) interest expense of $902,149.

 

Loss on debt extinguishment of $5,625,916 represents the extinguishment loss within the amount the paid to forbear the Convertible Notes (please refer to FS, Note 12) of $11,939,410 (modified principle of the Convertible Notes of $10,939,410, initial forbearance fee of $1,000,000), in excess of its net carrying value of $6,055,648 (principal outstanding $7,886,294, unamortized issuance cost $1,830,645), at the time of the debt extinguishment.

 

Income tax expense

 

Income tax expense represented current and deferred income tax expenses derived from income before taxes generated by Suxuantang, the variable interest entity of the Company. As compared with the year ended March 31, 2019, the income tax expense for the year ended March 31, 2020 decreased by $353,954, or 140%. Income tax expense for the year ended March 31, 2020 consists of $101,722 deferred tax benefit. The current income tax of $0 was mainly due to the loss before corporate income taxes of the Company and its subsidiaries and the VIE entity. Income tax expense for the year ended March 31, 2019 consists of $259,955 of current income tax expense and $7,723 deferred tax benefit.

 

Net income

 

As a result of the foregoing, net loss for the year ended March 31, 2020 was $10,287,872, representing a decrease of $ 11,827,099 from net income of $1,539,227 for the year ended March 31, 2019.

 

Liquidity and Capital Resources

 

To date, we have financed our operations primarily through shareholder capital contributions, shareholder loans, and cash flow from operations. As a result of our total activities, we had cash and cash equivalents of $7,287,032 as of March 31, 2020 as compared to $9,130,849 as of March 31, 2019. We primarily hold our excess unrestricted cash in short-term interest-bearing bank accounts at financial institutions. As of March 31, 2020, we had short-term convertible notes balance of $6,643,463, which the Company expects to repay with its common shares. With the current cash and cash equivalents and anticipated cash flows from operating activities, we believe that our cash position is sufficient to meet our liquidity needs for at least the next 12 months.

  

   For the years ended
March 31,
 
   2020   2019 
         
Net Cash Provided by Operating Activities   934,247    239,192 
           
Net Cash Used in Investing Activities   (5,496,704)   (610,085)
           
Net Cash Provided by Financing Activities   3,024,369    9,042,083 
           
Effect of Exchange Rate Changes on Cash   (466,813)   (37,024)
           
Cash, cash equivalents and restricted cash at Beginning of Year   9,291,933    657,767 
           
Cash, cash equivalents and restricted cash at End of Year   7,287,032    9,291,933 

 

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Cash Flow in Operating Activities 

 

For the year ended March 31, 2020 net cash provided by operating activities was $934,247, as compared to net cash provided by operating activities of $239,192 for the year ended March 31, 2019, representing an increase of $695,055. The increase in net cash provided by operating activities primarily resulted from the change of following accounts:

 

  a) A net loss for the year ended March 31, 2020 of $10,287,872, compared with a net income of $1,539,227 for the year ended March 31, 2019. Excluding the accretion of financing cost and extinguishment loss of the Convertible Notes, the net loss for the year ended March 31, 2020 was $1,240,046, representing a decrease of $2,779,273 compared with net income for the year ended March 31, 2019.

 

  b) Accounts receivable for the year ended March 31, 2020 decreased by $104,001 as compared with the increase of $1,811,078 for the year ended March 31, 2019.

 

  c) Prepayments, receivables and other current assets for the year ended March 31, 2020 increased by $361,589 as compared with the decrease of $144,754 for the year ended March 31, 2019. The increase is mainly due to the increase of short-term petty cash paid to the staff of the Company.

 

  d) Accounts payable for the year ended March 31, 2020 increased by $302,266 as compared with the decrease of $567,313 for the year ended March 31, 2019.

  

  e) Advance from customers for the year ended March 31, 2020 increased by $247,588 as compared with the decrease of $216,518 for the year ended March 31, 2019.

 

  f) Accrued expenses and other current liabilities for the year ended March 31, 2020 increased by $1,606,759 as compared with the increase of $310,315 for the year ended March 31, 2019.

 

Cash Flow in Investing Activities 

 

We had net cash used in investing activities of $5,496,704, for the year ended March 31, 2020, which primarily consisted of purchase of property and equipment of $130,839, capital expenditure in construction in process of $275,819, loan receivable from RH Holdings Management (HK) Limited of $1,500,000, and a receivable from Huangshan Panjie Investment Management Co., Ltd. of $3,590,046.

 

We had net cash used in investing activities of $610,085, for the year ended March 31, 2019, which primarily consisted of purchase of property and equipment of $535,825, Purchase of intangible assets of $11,279, capital expenditure in construction in process of $62,981.

 

Cash Flow in Financing Activities 

 

For the year ended March 31, 2020, the net cash provided by financing activities was $3,024,369, which was primarily attributable to net proceeds from the convertible notes of $8,358,950 (gross proceeds of $10,000,000 and debt issuance cost of $1,641,050), repayment of principle and interest of Convertible Notes of $1,157,376, repayment to amounts due from related parties of $3,180,171, payment of deferred financing cost of $518,362 and payment of the initial forbearance fee of Convertible Notes of $439,974.

 

For the year ended March 31, 2019, the net cash provided by financing activities was primarily attributable to net proceeds from our initial public offering of $6,490,494 and proceeds from related parties of $2,482,095.

 

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The Convertible Notes

 

PIPE Transaction

 

On April 16, 2019, the company entered into a Securities Purchase Agreement with certain unaffiliated institutional investors relating to a private placement by the company of (1) Senior Convertible Notes (the “Convertible Notes”) in the aggregate principal amount of $15 million, consisting of (i) a Series A Note in the principal amount of $ 10 million, and (ii) a Series B Note in the principal amount of $ 5 million and (2) warrants (the “Warrants”) to purchase such amount of shares of the company’s ordinary shares equal to 50% of the shares issuable upon conversion of the Notes, exercisable for a period of five years at an initial exercise price of $8.38, for consideration consisting of (i) a cash payment of $10,000,000, and (ii) a secured promissory note payable by the Investors to the Company in the principal amount of $5 million. All amounts outstanding under the Notes will mature and will be due and payable on or before October 2, 2020.

 

Material Terms of the Convertible Notes:

 

The aggregate principal amount of the Series A Notes is $10,000,000 and the Series B Notes is $5,000,000. All of the aggregate principal amount of the Series B Notes will constitute Restricted Principal. If an Investor prepays any amount under such Investor’s Investor Note, an equal amount of the Restricted Principal becomes unrestricted principal under such Investor’s Series B Note. The amount raised by the Company upon closing of the PIPE transaction was $10,000,000 from Series A Notes.

 

The expiration date of Notes and warrant shall be October 2, 2020 and May 2, 2023 respectively. The aggregate redemption amount of the Notes shall be redeemed in installments on or before the expiration date.

 

The interest rate on the Convertible Notes is eight percent (8%) per annum. In the event of default, the Interest Rate shall be increased to eighteen percent (18%) per annum.

 

The initial fixed conversion price will be $8.38 per share, subject to reduction and adjustment for stock splits, stock dividends, and similar events.

 

During an Event of Default Redemption Right Period the Investor may convert all, or any part of, the Conversion Amount into Ordinary Shares at the Alternate Conversion Price.

 

The Alternate Conversion Price is the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, (ii) 80% of the volume-weighted average price (“VWAP”) of the Ordinary Shares as of the Trading Day immediately preceding the delivery or deemed delivery of the applicable Conversion Notice, (iii) 80% of the VWAP of the Ordinary Shares as of the Trading Day of the delivery or deemed delivery of the applicable Conversion Notice and (iv) 80% of the price computed as the quotient of (I) the sum of the VWAP of the Ordinary Shares for each of the three (3) Trading Days with the lowest VWAP of the Ordinary Shares during the fifteen (15) consecutive Trading Day period ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable Conversion Notice, divided by (II) three (3) (such period, the “Alternate Conversion Measuring Period”).

 

The aggregate number of Series A and Series B warrant shares to be converted on expiration is 596,658 and 298,330 shares respectively.

 

Entry into Forbearance Agreements in Connection with the Event of Default Redemption Notices

 

On July 23 and 29, 2019, the company received from the investors an Event of Default Redemption Notice claimed that the company failed to timely make the instalment payment and elected to effect the redemption of $14,318,462.62 comprising in aggregate the entire principal amount, accrued and unpaid Interest. In addition, demand for the company to purchase the Series A Warrant issued for the Event of Default Black Scholes Value of not less than $1,208,384.07 was made.

 

On December 13, 2019, after negotiation with the Investors, the company entered into certain Forbearance and Amendment Agreements with each Investor and agreed to redeem the Series A Notes for an aggregate redemption price of $10,939,410 in installments as set forth in the Forbearance Agreement. Concurrently with the execution of the Forbearance Agreement, the Investors and the Company have entered into the Lock-Up Agreements, Leak-Out Agreements and Mutual Releases.

 

47

 

 

Material Terms of the Agreements

 

Upon the execution of the Forbearance Agreements, the Investor shall Net all Restricted Principal outstanding under the Series B Note against the amounts outstanding under the Investor Note, after which the Investor Note, the Series B Note and the Series B Warrant shall no longer remain outstanding.

 

The Investors agreed, among other things, to the following:

 

to forbear from (i) taking any action to enforce their Redemption Notice with respect to certain existing defaults, and (ii) issuing any new demand for redemption of the Series A Note on the basis of certain additional defaults that the aggregate daily dollar trading volume of the Company’s ordinary shares does not exceed $1,500,000, and that the volume weighted average price of the Company’s ordinary shares on any two trading days during the thirty trading day period immediately preceding such date of determination fails to exceed $2.14;

 

not to exercise the Series A Warrant during the Forbearance Period;

 

to return the original share certificate representing the Pre-Delivered Shares to the Company for cancellation upon the Company’s payment of the full Forbearance Redemption Amounts;

 

to execute and deliver to the Company certain lock-up agreements with respect to the Pre-Delivered Shares, certain mutual release and to execute and deliver to the Company the Leak-Out Agreement;

 

not to make any hedge, swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Pre-Delivered Shares;

 

to not sell, dispose or otherwise transfer, directly or any Ordinary Shares issued if such sale exceed 20% of the daily composite trading volume of the Ordinary Shares.

 

In consideration for the above, the Company agreed to the followings:

 

the Company shall (I) pay to each Investor $500,000 on or prior to December 16, 2019, and (II) commencing on January 24th 2020, redeem the Series A Notes for an aggregate redemption price of $10,939,410;

 

if the Company fails to pay any New Installment Amount within 5 days of the applicable New Installment Date, the Investor may convert the applicable New Installment Amount as an Alternate Conversion and the Leak-Out Agreement being disregarded for such conversions;

 

the Company agreed to adjust the exercise price of the Series A Warrant from $8.38 to $2.50;

 

the Company shall cause all restrictive legends on the Pre-Delivered Shares to be removed and delivery of un-legended Pre-Delivery Shares into the Investor’s custodian’s account pursuant to the DWAC instructions set forth therein.

 

Please refer to Note 12 of our Consolidated Financial Statements included in this Form 20-F for details of accounting of the Convertible Notes.

 

Going Concern

 

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying audited consolidated financial statements, the Company had a net loss of $10,287,872 for year ended March 31, 2020, and an accumulated deficit of $7,204,000, which were mainly caused by the issuance and forbearance of the Convertible Notes. On the other hand, the net cash provided by operations was $934,247 for the year ended March 31, 2020, and the Company had a cash and cash equivalents balance of $7,287,032 and a working capital of $7,371,999. It is management’s opinion that these conditions do not raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issue date of this report. The Company is in the process in building its customer base and expects to generate increased revenues as well as cut some of its expenses, and the Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future.

 

48

 

 

Results of Operations for the Year Ended March 31, 2019 Compared to the Year Ended March 31, 2018

  

   For the Years Ended
March 31,
   Change 
   2019   2018   Amount   % 
                 
Revenues  $7,012,026    7,019,243   $(7,217)   0 
Cost of revenues   (2,400,491)   (3,617,748)   1,217,257    (34)
                     
Gross profit   4,611,535    3,401,495    1,210,040    36 
                     
Selling expenses   (1,605,497)   (512,482)   (1,093,015)   213 
General and administrative expenses   (1,236,546)   (1,256,747)   20,201    (2)
                     
Total operating expenses   (2,842,043)   (1,769,229)   (1,072,814)   61 
                     
Income from operations   1,769,492    1,632,266    137,226    8 
              -      
Finance cost   (5,174)   (779)   (4,395)   564 
Other income/(expenses)   27,141    (3,803)   30,944    (814)
                     
Total other expenses   21,967    (4,582)   26,549    (579)
                     
Income before income taxes expense   1,791,459    1,627,684    163,775    10 
Provision for income taxes   (252,232)   (440,103)   187,871    (43)
                     
Net Income  $1,539, 227     1,187,581   $351,646    30%

 

Revenues 

 

We generated revenues primarily from manufacture and sales of three types of traditional Chinese medicine pieces (the “TCMP”) products: Advanced TCMP, Fine TCMP and Regular TCMP.

 

The following table sets forth the breakdown of revenues by revenue source for each period presented:

 

   For the Years Ended
March 31,
   Change 
   2019   2018   Amount   % 
                 
Advanced TCMP  $3,631,663    2,388,676   $1,242,987    52 
                     
Fine TCMP   524,253    324,563    199,690    62 
                     
Regular TCMP   2,856,110    4,306,004    (1,449,894)   (34)
                     
   $7,012,026   $7,019,243   $(7,217)   0 

  

49

 

 

Advanced TCMP

 

Advanced TCMP is comprised of eight Directly Oral TCMP products (the “Directly-Oral-TCMP”) and eleven After-soaking-oral TCMP products (the “After-Soaking-Oral-TCMP”). Both Directly Oral TCMP and After-soaking-oral TCMP are new types of advanced TCMP.

 

The sales of advanced TCMP accounted for 52% and 34% of revenue recognized during the year ended March 31, 2019 and 2018, respectively. As compared with the year ended March 31, 2018, our sales of advanced TCMP increased by $1,242,987, or 52% for the year ended March 31, 2019. This is primarily attributable to combined effects of rapid growth of advanced TCMP market and our continuous efforts in the marketing and promotion of our new types of advanced TCMP as the Company identifies great advantages of advanced TCMP.

 

Fine TCMP

 

We currently produce over 20 fine TCMP products for drug stores and hospitals. Our fine TCMP products are manufactured manually from only high-quality authentic ingredients derived from their region of origin.

  

The sales of fine TCMP accounted for 7% and 5% of revenue recognized during the year ended March 31, 2019 and 2018. The small share of fine TCMP is mainly limited to its rareness of ingredients and higher selling prices. As a result of marketing and promotion and growing market acceptance of high-priced TCMP, the Company witnessed increased sales of fine TCMP by 62% from the year ended March 31, 2018 to the same period of 2019. This is primarily attributable to the Company’s strategy to concentrate on fine TCMP, which was identified great advantage over others.

 

Regular TCMP

 

We currently manufacture 427 regular TCMP products listed on China Pharmacopoeia (version 2015) Part I for hospitals and drug store in treatment of various diseases or serving as dietary supplements.

 

The sales of regular TCMP accounted for 41% and 61% of revenue recognized during the year ended March 31, 2019 and 2018, respectively. The company has shifted its focus towards the marketing and promotion of high-margin products, As a result, revenue recognized in regular TCMP decreased by 34% from the year ended March 31, 2018 to the same period of 2019.

 

Cost of revenue

 

Cost of revenues primarily include cost of materials, direct labors, overhead, and other related incidental expenses that are directly attributable to the Company’s principal operations. Cost of revenue decreased by $1,217,257, or 34%, from $3,617,748 for the year ended March 31, 2018 to $2,400,491 for the year ended March 31, 2019. The decrease of cost of revenue was primarily due to that we have significantly increased the sales of higher-margin advanced and fine TCMPs that cost less than low-margin regular TCMPs, the sale of which is 34% lower than last year, and the saving of labor costs as our workers become more skillful as well.

 

Selling expenses

 

Selling expenses primarily consisted of sales staff payroll and welfare expenses, travelling expenses, advertisement expenses, distribution expenses. The selling expenses increase from $512,482 for the year ended March 31, 2018 to $1,605,497 for the year ended March 31, 2019, representing an increase of $1,093,015, or 213%. The increase was mainly combined effects of an increase of $503,480 in distribution expenses as our new clients are more remote, an increase of $629,419 in advertisement and promotion expenses.

 

General and administrative expenses

 

General and administrative expenses primarily consisted of staff payroll and welfare expenses, research and development expenses, entertainment expenses, travelling expenses, depreciation and amortization expenses for administrative purposes, and office supply expenses. The general and administrative expenses decreased from $1,256,747 for the year ended March 31, 2018 to $1,236,546 for the year ended March 31, 2019, representing a decrease of $20,201, or 2%. The general and administration expenses remain stable compared with last year.

 

50

 

 

Income tax expense

 

Income tax expense represented current and deferred income tax expenses derived from income before taxes generated by Suxuantang, the variable interest entity of the Company. As compared with the year ended March 31, 2018, the income tax expense for the year ended March 31, 2019 decreased by $187,871, or 43%, mainly due to the income tax rate fell from 25% in 2018 to 15% in April 2018 since the Company was qualified as a high-technology company.

 

Net income

 

As a result of the foregoing, net income for the year ended March 31, 2019 was $1,539,227 representing an increase of $351,646, or 30% from net income of $1,187,581 for the year ended March 31, 2018.

 

Liquidity and Capital Resources

 

To date, we have financed our operations primarily through shareholder capital contributions, shareholder loans, and cash flow from operations. As a result of our total activities, we had cash and cash equivalents of $9,130,849 as of March 31, 2019 as compared to $560,252 as of March 31, 2018. We primarily hold our excess unrestricted cash in short-term interest-bearing bank accounts at financial institutions. With the proceeds from our initial public offering and anticipated cash flows from operating activities, we believe that our cash position is sufficient to meet our liquidity needs for at least the next 12 months.

  

   For the years ended
March 31,
 
   2019   2018 
         
Net Cash Provided by Operating Activities   239,192    1,920,161 
           
Net Cash Used in Investing Activities   (610,085)   (1,050,725)
           
Net Cash Provided by/(Used in) Financing Activities   9,042,083    (314,216)
           
Effect of Exchange Rate Changes on Cash   (37,024)   36,977 
           
Cash, cash equivalents and restricted cash at Beginning of Year   657,767    65,570 
           
Cash, cash equivalents and restricted cash at End of Year   9,291,933    657,767 

 

Cash Flow in Operating Activities 

 

For the year ended March 31, 2019, net cash provided by operating activities was $239,192, as compared to net cash provided by operating activities of $1,920,161 for the year ended March 31, 2018, representing a decrease of $1,680,969. The change in net cash provided by operating activities primarily resulted from the change of following accounts:

 

  a) The changes of accounts receivable for the year ended March 31, 2019 decreased by $2,195,512 as compared with changes for the year ended March 31, 2018. This was primarily attributable to longer credit terms offered to higher margin fine and advanced TCMPs customers as we gained higher sales in fine and advanced TCMPs.

 

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  b) The changes of accounts payable for the year ended March 31, 2019 decreased by $1,533,886 as compared with changes for the year ended March 31, 2018. This is primarily attributable to less costs of sales incurred in this year, and shorter credit terms granted by suppliers of high-end raw materials needed for high margin products as well.

 

  c) The changes of prepayments, receivables and other assets for the year ended March 31, 2019 increased by $954,460 as compared with changes for the year ended March 31, 2018. This is primarily attributable to the decrease in advance to staff.

 

  d) The changes of accrued expenses and other current liabilities for the year ended March 31, 2019 increased by $514,210 as compared with changes for the year ended March 31, 2018. This is primarily attributable to the increase in the payables to service suppliers.

 

Cash Flow in Investing Activities 

 

We had net cash used in investing activities of $610,085, for the year ended March 31, 2019, which primarily consisted of purchase of property and equipment of $535,825, Purchase of intangible assets of $11,279, capital expenditure in construction in process of $62,981.

 

We had net cash used in investing activities of $1,050,725 for the year ended March 31, 2018, which primarily consisted of purchase of property and equipment of $436,017, capital expenditure in construction in process of $593,676.

 

Cash Flow in Financing Activities 

 

For the year ended March 31, 2019, the net cash provided by financing activities was primarily attributable to net proceeds from our initial public offering of $6,490,494, For the year ended March 31, 2018, the net cash used in financing activities was primarily attributable to repayment of the short-term borrowing of $314,216.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Inflation

 

We do not believe our business and operations have been materially affected by inflation.

 

Related Parties and Material Related Party Transactions

 

Please refer to Note 17 of our Consolidated Financial Statements included in this Form 20-F for details of related parties and material related party transactions.

 

Critical Accounting Policies

 

Please refer to Note 2 of our Consolidated Financial Statements included in Form 20-F or details of our critical accounting policies.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.A. Directors, Executive Officers and Key Employees

 

 Set forth below is information concerning our directors, executive officers and other key employees. The following individuals are members of the Board and executive management of the Registrant.

 

Name   Age   Position(s)
Feng Zhou   28   Chief Executive Officer and Director
Jingzhen Deng   60   Chief Scientific Officer and Chief Operation Officer
Jun Zheng   43   Director
Junsong Li   56   Independent Director
Tulin Lu   57   Independent Director
Wenwei Fan   50   Independent Director

 

The following is a brief biography of each of our executive officers and directors:

 

Executive Officers:

 

Mr. Feng Zhou has been our CEO and director since July 4, 2017. He was the CEO of Taizhou Suxuantang, our VIE Entity from May 2017 to February, 2018. From January 2015 to May 2017, he was the vice manager of Taizhou Suxuantang. As vice manager of Taizhou Suxuantang, he was responsible for procurement and formulating a cost effective strategy for purchasing goods and services. Mr. Zhou graduated from Logistical Engineering University of PLA and majored in Business Administration. We believe that Mr. Zhou should serve as a member of our board of directors due to the perspective and experience he brings as our founder, Chairman, and CEO, and as our largest and controlling stockholder.

  

Dr. Jingzhen Deng has been our CSO since June 2013, our COO since March 2017 and was CEO of Taizhou Suxuantang from February, 2018 to December 31, 2019. He has been the vice president of Taizhou Suxuantang in June 2013 and rebuilt its R&D team. Dr. Deng has 16 years of experience at a university (University of Virginia as a postdoctoral scientist) and various pharmaceutical companies (Pinnacle Pharmaceuticals, Inc. and Drumetix Laboratories, as directors of R&D) specializing in natural products and new drug discovery in the USA, and more than 14 years at a Traditional Chinese Medicine (“TCM”) related university (China Pharmaceutical University), institute (Jiangxi Institute of TCM), and pharmaceutical company (RCT Pharmaceuticals, Inc. as CEO in Shanghai) in China. He established the general R&D strategy of using modern technology to revolutionize TCMP production, and continue developing newly advanced and non-decocting TCMP/TCM products capable of meeting the highest quality standard at the company. Dr. Deng received his Bachelor of Science from Jiangxi University of Traditional Chinese Medicine in 1982, Master and Doctoral degrees from China Pharmaceutical University in 1989 and 1992, respectively.

 

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Non-Management Directors

 

Mr. Jun Zheng has been appointed as our director upon closing of our IPO on December 31, 2018. Mr. Zheng was a sales area manager at Jiangxi Bo Shi Da Pharmaceutical Co., Ltd. from 1999 to 2004, and a department manager and deputy general manager at Taizhou Jiutian Pharmaceutical Co., Ltd. from the 2005 to 2012. Mr. Zheng served as a general manager at Taizhou Renji Chinese Traditional Medicine Pieces Co., Ltd. from 2013 to 2015 and a general manager at Jiangsu Health Pharmaceutical Investment Management Co., Ltd. from 2016 to 2017. Currently, Mr. Zheng is a vice president at Taizhou Suxuantang. Mr. Zheng received his bachelor’s degree from Jiangnan University (Wuxi Light Industry University) in 1999.

 

Mr. Junsong Li has been appointed as our independent director upon closing of our IPO on December 31, 2018. Mr. Li has over 20 year-experience in the TCM industry. Mr. Li has served as the researcher of Nanjing TCM University since 2009. From 1986 to 2003, Mr. Li worked as an associate professor of Nanjing TCM Hospital. Mr. Li graduated from Nanjing TCM University with a Bachelor of Arts in TCM in 1986 and a Master’s Degree in TCM in 2002. Mr. Li obtained his PhD from Shanghai TCM University in 2006. We believe Mr. Li is well-qualified to serve as a member of the board because of her extensive prior work experience and educational background in the TCM field.

 

Dr. Tulin Lu has been appointed as our independent director upon closing of our IPO on December 31, 2018. Currently, Dr. Lu is a Professor at Nanjing University of TCM. As a veteran in the TCM academia, Dr. Lu has also served as the Chief Director at the co-laboratory of TCM Processing of Ministry of Education of the P. R. China since 2012, the Deputy Director of the standard laboratory of TCM pieces at the State Administration of TCM of the P. R. China since 2008, the Deputy Director at Jiangsu Provincial Key Laboratory of the Processing of TCM since 2007, the Deputy Director of the department of Processing preparation of TCM at Nanjing University of TCM since 2016, and the Executive Deputy Director of TCM Pieces Quality Assurance Specialized Committee of China since 2014. Dr. Lu received his Ph. D, Master of Science, and Bachelor of Science degrees from Nanjing University of TCM in 1989, 1999, and 2003, respectively.

 

Mr. Wenwei Fan has been appointed as our independent director upon closing of our IPO on December 31, 2018. Mr. Fan currently is a Partner of a Chinese Certified Public Accountant firm, Beijing Huashen Accounting Firm, where he is in charge of supervising international auditing, including auditing financial statements for Chinese subsidiaries of several multinational companies. He started his career with ShiyongZhonghe Accounting firm, which was acquired by PricewaterhouseCoopers in 2000. Mr. Fan is a Certified Public Accountant and Certified Tax Agent in China. He graduated from Jiangsu University of Finance and Economics in 1992 with a bachelor’s degree.

 

Pursuant to our articles of association as amended, the minimum number of directors shall consist of not less than one person unless otherwise determined by the shareholders in a general meeting. Unless removed or re-appointed, each director shall be appointed for a term expiring at the next-following annual general meeting, if any is held. At any annual general meeting held, our directors will be elected by a majority vote of shareholders eligible to vote at that meeting. At each annual general meeting, each director so elected shall hold office for a one-year term and until the election of their respective successors in office or removed. 

 

For additional information see “Description of Share Capitals — Directors”.

 

Family Relationships

 

None of the directors or executive officers has a family relationship as defined in Item 401 of Regulation S-K.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years, been involved in any legal proceedings described in subparagraph (f) of Item 401 of Regulation S-K.

 

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Board of Directors

 

Our board of directors consists of 5 directors as of the date of this annual report.

 

Duties of Directors

 

Under British Virgin Islands law, our directors have a duty to act honestly and in good faith and in what the director believes to be in our best interests. Our directors also have a duty to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. See “Description of Ordinary Shares — Differences in Corporate Law” for additional information on our directors’ fiduciary duties under British Virgin Islands law. In fulfilling their duty of care to us, our directors must ensure compliance with our M&A. We have the right to seek damages if a duty owed by our directors is breached.

 

A director must exercise his powers as a director for a proper purpose and must not act, or agree to us acting, in a manner that contravenes the BC Act or the M&A. When exercising his powers or performing his duties as a director, a director is entitled to rely upon the register of members and upon books, records, financial statements and other information prepared or supplied, and on professional or expert advice given to him. However, such reliance is subject to the director acting in good faith, making proper enquiry where indicated by the circumstances and having no knowledge that reliance on the matter is not warranted. Under the BC Act, our directors have all the powers necessary for managing, and for directing and supervising, our business and affairs, including but not limited to exercising the borrowing powers of the company and mortgaging the property of the company, as well as executing checks, promissory notes and other negotiable instruments on behalf of the company.

 

Interested Transactions

 

A director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary to give special notice relating to any particular transaction.

 

Remuneration and Borrowing

 

The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors. Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.

 

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6.B. Compensation

 

Summary Compensation Table

 

The following table sets forth certain information with respect to compensation for the year ended March 31, 2020 and 2019 earned by or paid to our chief executive officer and principal executive officer, our principal financial officer, and our other most highly compensated executive officers in 2018 whose total compensation exceeded $100,000 (the “named executive officers”).

 

Summary Compensation Table

 

Name and Principal Position  Year  Salary
($)
   Bonus
($)
   Stock 
Awards
($)
   Option
Awards
($)
   Non-Equity 
Incentive
Plan
Compensation
   Deferred 
Compensation 
Earnings
   Other   Total
($)
 
Feng Zhou
CEO and interim
  2020   50,000    0    0    0            0             0    

0

    50,000 
CFO of SXT  2019   17,859    0    0    0    0    0    0    17,859 
                                            
Peter Chan(2)  2020   3,934    0    0    0    0    0    0    3,934 
CFO of SXT                                           
                                            
Yao Shi(1)
CFO of SXT and
  2020   46,858    0    0    0    0    0    0    46,858 
CFO of Taizhou  2019   26,796    0    0    0    0    0    0    26,796 
Suxuantang  2018   5,280    0    0    0    0    0    0    5,280 
                                            
Jingzhen Deng  2020   50,000    0    0    0    0    0    0    50,000 
COO and CSO of  2019   26,796    0    0    0    0    0    0    26,796 
SXT and CEO of
Taizhou Suxuantang (3)
  2018   14,559    0    0    0    0    0    0    14,559 

 

(1)Yao Shi resigned from his positions of CFO of SXT and CFO of Taizhou Suxuantang on March 8, 2020.

 

(2)Peter Chan assumed his positions of CFO of SXT and CFO of Taizhou Suxuantang on March 8, 2020 and resigned on July 8, 2020. Feng Zhou was appointed as the interim CFO effective on July 8, 2020.

 

(3)Jingzhen Deng resigned from his position of CEO of Taizhou Suxuantang on December 31, 2019.

 

Agreements with Named Executive Officers

 

On December 30, 2017, we entered into an employment agreement with our CEO, Mr. Feng Zhou, pursuant to which he receive an annual base salary of $50,000 Under this employment agreement, Mr. Zhou is employed as our CEO for a term of five years, which automatically renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination, and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are required to provide compensation to the executive officer, including severance pay equal to 12 months of base salary. The executive officer may terminate the employment at any time with a one-month advance written notice if there is any significant change in the executive officer’s duties and responsibilities or a material reduction in the executive officer’s annual salary. In such case, the executive officer will be entitled to receive compensation equivalent to 12 months of the executive officer’s base salary.

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On December 30, 2017, we entered into an employment agreement with our COO and CSO, Mr. Jingzhen Deng, pursuant to which he shall receive an annual base salary of $50,000 Under his employment agreement, Mr. Deng is employed as our COO and CSO for a term of five years, which automatically renews for additional one year terms unless previously terminated on three months written notice by either party. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or grossly negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. In such case, the executive officer will not be entitled to receive payment of any severance benefits or other amounts by reason of the termination, and the executive officer’s right to all other benefits will terminate, except as required by any applicable law. We may also terminate an executive officer’s employment without cause upon one-month advance written notice. In such case of termination by us, we are required to provide compensation to the executive officer, including severance pay equal to 3 months of base salary. The executive officer may terminate the employment at any time with a one-month advance written notice if there is any significant change in the executive officer’s duties and responsibilities or a material reduction in the executive officer’s annual salary. In such case, the executive officer will be entitled to receive compensation equivalent to 12 months of the executive officer’s base salary.

  

Each executive officer has agreed to hold, both during and after the termination of his employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment, any of our confidential information or proprietary information of any third party received by us and for which we have confidential obligations.

 

In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his employment and for one year following termination of the employment.

 

Compensation of Directors

 

For the fiscal years ended March 31, 2020 and 2019, we did not compensate our directors for their services other than to reimburse them for out-of-pocket expenses incurred in connection with their attendance at meetings of the Board of Directors. 

  

6.C. Board Practices

 

Terms of Directors and Executive Officers

 

Each of our directors holds office until a successor has been duly elected and qualified unless the director was appointed by the board of directors, in which case such director holds office until the next following annual meeting of shareholders at which time such director is eligible for reelection. All of our executive officers are appointed by and serve at the discretion of our board of directors.

 

Qualification

 

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by us in a general meeting. There are no other arrangements or understandings pursuant to which our directors are selected or nominated.

 

Committees of the Board of Directors

 

We established an audit committee, a compensation committee and a nominating and governance committee. Each of the committees of the Board have the composition and responsibilities described below.

 

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Audit Committee 

 

Mr. Wenwei Fan, Mr. Junsong Li and Mr. Tulin Lu are members of our Audit Committee, where Mr. Wenwei Fan, serves as the chairman. All members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees.

 

We adopted and approved a charter for the Audit Committee prior to consummation of our initial public offering. In accordance with our Audit Committee Charter, our Audit Committee shall perform several functions, including:

 

  evaluates the independence and performance of, and assesses the qualifications of, our independent auditor, and engages such independent auditor;

 

  approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services, and approves in advance any non-audit service to be provided by the independent auditor;

 

  monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;

 

  reviews the financial statements to be included in our Annual Report on Form 20-F and Quarterly Reports on Form 6-K and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;

 

  oversees all aspects our systems of internal accounting control and corporate governance functions on behalf of the board;

 

  reviews and approves in advance any proposed related-party transactions and report to the full Board on any approved transactions; and

 

  provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the Board, including Sarbanes-Oxley Act implementation, and makes recommendations to the Board regarding corporate governance issues and policy decisions.

  

It is determined that Mr. Wenwei Fan, possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC.

 

Compensation Committee

 

Mr. Junsong Li, Mr. Wenwei Fan, and Mr. Tulin Lu are members of our Compensation Committee and Junsong Li is the chairman. All members of our Compensation Committee are qualified as independent under the current definition promulgated by NASDAQ. We adopted a charter for the Compensation Committee prior to consummation of our initial public offering. In accordance with the Compensation Committee’s Charter, the Compensation Committee shall be responsible for overseeing and making recommendations to the Board regarding the salaries and other compensation of our executive officers and general employees and providing assistance and recommendations with respect to our compensation policies and practices.

 

Nominating and Governance Committee

 

Mr. Tulin Lu, Mr. Junsong Li, and Mr. Wenwei Fan are the members of our Nominating and Governance Committee where Mr. Tulin Lu serves as the chairman. All members of our Nominating and Governance Committee are qualified as independent under the current definition promulgated by NASDAQ. The Board of Directors adopted and approved a charter for the Nominating and Governance Committee prior to consummation of our initial public offering. In accordance with the Nominating and Governance Committee’s Charter, the Nominating and Corporate Governance Committee shall be responsible to identity and propose new potential director nominees to the Board of Directors for consideration and review our corporate governance policies.

 

Code of Conduct and Ethics

 

We intend to adopt a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and NASDAQ rules.

 

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6.D. Employees

 

See the section entitled “Employees” in Item 4 above.

 

6.E. Share Ownership

 

The following table sets forth information with respect to the beneficial ownership of our equity shares as of July 30, 2020 by each director and our senior management executives. There were 64,136,890 Ordinary Shares issued and 60,136,890 Ordinary Shares outstanding as of July 30, 2020. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to equity shares. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all equity shares beneficially owned.

 

Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of our Company at 178 Taidong Rd North, Taizhou, Jiangsu, China.

 

   Ordinary Shares
Beneficially Owned
As of July 30, 2020
 
   Number   Percent 
Directors and Executive Officers:        
Feng Zhou (1)   8,500,000    13.253%
Jingzhen Deng   0    - 
Jun Zheng   0    - 
Junsong Li   0    - 
Tulin Lu   0    - 
Wenwei Fan   0    - 
All directors and executive officers as a group (6 persons)   8,500,000    13.253%

 

(1)Feng Zhou is the 100% owner of Feng Zhou Management Limited and therefore shall be deemed as the beneficial owner of shares held by such entity.

 

As of July 30, 2020, our authorized share capital consists of unlimited Ordinary Shares, par value US$0.001 per share. Holders of Ordinary Shares are entitled to one vote per share.

 

We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our Company. 

 

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7.A. Major Shareholders

 

See Item 6.E., “Share Ownership,” for a description of our major shareholders.

 

7.B. Related Party Transactions

 

Nature of relationships with related parties

 

     
Name of related parties   Relationship with the Company
     
Feng Zhou   Major shareholder of the Company, Chief Executive Officer, Interim Chief Financial Officer and Director of the Company
Jianping Zhou   Father of major shareholders of the Company and two of Taizhou Suxuantang shareholders, controlling shareholder of Taizhou Suxuantang from its inception to May 8, 2017
Jianbin Zhou   Father of major shareholders of the Company and one of Taizhou Suxuantang shareholders
Taizhou Jiutian Pharmaceutical Co. Ltd.   An entity controlled by Jianping Zhou
Jiangsu Health Pharmaceutical Investment Co., Ltd.   An entity controlled by Jianping Zhou
Taizhou Su Xuan Tang Chinese Medicine Clinic   An entity controlled by Jianping Zhou
Taizhou Su Xuan Tang Chinese hospital Co., Ltd.   An entity controlled by Jianping Zhou

 

Related party balances

 

a. the amounts due from related parties as of March 31, 2020 and 2019 were as follows: 

 

   As of March 31, 
   2020   2019 
         
Jiangsu Health Pharmaceutical Investment Co., Ltd.  $768,341   $- 
Total  $768,341   $- 

 

The amounts due from related parties represented unsecured, due on demand and interest free borrowings to its related parties by the Company. The Company expects full payment from Jiangsu Health Pharmaceutical Investment Co., Ltd. by the end of September 2020.

 

b. the amounts due to related parties as of March 31, 2020 and 2019 were as follows: 

 

   As of March 31, 
   2020   2019 
         
Feng Zhou  $-   $1,542,828 
Jiangsu Health Pharmaceutical Investment Co., Ltd.   -    939,521 
Jianbin Zhou   -    745 
Total  $-   $2,483,094 

 

Material Transactions with Related Parties

 

For the years ended March 31, 2020 and 2019, the Company generated revenues of $251,749 and $8,942, respectively, from sales transactions with Taizhou Jiutian Pharmaceutical Co. Ltd.

 

For the years ended March 31, 2020 and 2019, the Company generated revenue of $52,643 and $24,315 respectively, from sales transactions with Taizhou Su Xuan Tang Chinese Medicine Clinic.

 

For the year ended March 31, 2020 and 2019, the Company generated revenues of $26,037 and $178,898 respectively, from sales transactions with Taizhou Su Xuan Tang Chinese hospital Co. Ltd.

 

For the year ended March 31, 2020, the Company repayed $3,180,171 to Feng Zhou, Jiangsu Health Pharmaceutical Investment Co., Ltd. and Jianbin Zhou.

 

For the year ended March 31, 2019, the Company borrowed from Feng Zhou and Jiangsu Health Pharmaceutical Investment Co., Ltd in the amount of $2,482,349, which is non-interest bearing and repaid on demand.

 

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The Company entered into certain financial guarantee agreements with two banks to be the guarantor of Taizhou Jiutian Pharmaceutical Co. Ltd.’s bank borrowings. The Company is obliged to pay on behalf the related party the principal, interest, penalty and other expenses if Taizhou Jiutian Pharmaceutical Co. Ltd. defaults in payment. The Company did not charge financial guarantee fees over Taizhou Jiutian Pharmaceutical Co. Ltd. (see FS, Note 18).

 

Employment Agreements

 

See Item 6.B “Agreements with Named Executive Officers.”

 

7.C. Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

Consolidated Statements and Other Financial Information

 

The financial statements required by this item may be found at the end of this report on 20-F, beginning on page F-1.

 

Legal Proceedings

 

See “Item 4. Information on the Company — B. Business Overview — Legal Proceedings.”

 

Dividends

 

We have never declared or paid any dividend on our ordinary shares and we do not anticipate paying any dividends on our ordinary shares in the future. We currently intend to retain all future earnings to finance our operations and to expand our business.

 

No Significant Changes

 

Except as disclosed elsewhere in this annual report, no other significant changes to our financial condition have occurred since the date of the annual financial statements contained herein.

 

ITEM 9. THE OFFER AND LISTING

 

9.A. Offer and Listing Details

 

Our ordinary shares are listed for trading on the NASDAQ Capital Market under the symbol “SXTC” The shares began trading on January 3, 2019 on the NASDAQ Capital Market.

 

9.B. Plan of Distribution

 

Not Applicable.

 

9.C. Markets

 

Our ordinary shares are currently traded on the NASDAQ Capital Market.

 

9.D. Selling Shareholders

 

Not Applicable.

 

9.E. Dilution

 

Not Applicable.

 

9.F. Expenses of the Issuer

 

Not Applicable.

 

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ITEM 10. ADDITIONAL INFORMATION

 

10.A. Share Capital

 

Not Applicable.

 

10.B. Memorandum and Articles of Association

 

China SXT Pharmaceuticals, Inc. is a BVI business company incorporated in the British Virgin Islands and our affairs are governed by the provisions of our Memorandum and Articles of Association, as amended and restated from time to time (“M&A”), and the BVI Business Companies Act, 2004 (the “BVI Act”), and the applicable laws of the BVI (including applicable common law).

 

Our M&A authorizes us to issue unlimited shares consisting of one class of Ordinary Shares of the Company.

 

The following description of our authorized shares and our constitutional rules under our M&A is qualified in its entirety by reference to our M&A, which have been filed as an exhibit to the annual report and incorporated herein by reference.

 

M&A

 

The following discussion describes our M&A:

 

Objects and Purposes, Register, and Shareholders. Subject to the BVI Act and our M&A, our objects and purposes are unlimited other than any object not prohibited by the BVI Act or any other law of the British Virgin Islands. Our register of members will be maintained by our registered agent. The entry of the name of a person in the register of members as a holder of a share in a BVI company is prima facie evidence that legal title in the share vests in that person. Under the BVI Act, a BVI company may treat the registered holder of a share as the only person entitled to (a) exercise any voting rights attaching to the share, (b) receive notices, (c) receive a distribution in respect of the share and (d) exercise other rights and powers attaching to the share. Consequently, as a matter of BVI law, where a shareholder’s shares are registered in the name of a nominee, the nominee is entitled to receive notices, receive distributions and exercise rights in respect of any such shares registered in its name. The beneficial owners of the shares registered in a nominee’s name will therefore be reliant on their contractual arrangements with the nominee in order to receive notices and dividends and ensure the nominee exercises voting and other rights in respect of the shares in accordance with their directions.

 

Directors’ Powers. Under the BVI Act, subject to any modifications or limitations in a company’s M&A, a company’s business and affairs are managed by, or under the direction or supervision of, its directors; and directors generally have all powers necessary to manage a company. A director must disclose any interest he has on any proposal, arrangement or contract not entered into in the ordinary course of business and on usual terms and conditions. An interested director may (subject to the M&A) vote on a transaction in which he has an interest. In accordance with, and subject to, our M&A, the directors may by resolution of directors exercise all the powers of the Company to incur indebtedness, liabilities or obligations and to secure indebtedness, liabilities or obligations whether of the Company or of any third party.

 

Rights, Preferences and Restrictions of Ordinary Shares. Subject to the restrictions described under the section titled “Dividend Policy” above, our directors may (subject to the M&A) authorize dividends at such time and in such amount as they determine. Each Ordinary Share is entitled to one vote. In the event of a liquidation or dissolution of the Company, the holders of Ordinary Shares are (subject to the M&A) entitled to share ratably in all surplus assets remaining available for distribution to them after payment and discharge of all claims, debts, liabilities and obligations of the Company and after provision is made for each class of shares (if any) having preference over the Ordinary Shares if any at that time. There are no sinking fund provisions applicable to our Ordinary Shares. Holders of our Ordinary Shares have no pre-emptive rights. Subject to the provisions of the BVI Act, we may, (subject to the M&A) with shareholder consent, repurchase our Ordinary Shares in certain circumstances provided always that the company will, immediately after the repurchase, satisfy the solvency test. The company will satisfy the solvency test, if (i) the value of the company’s assets exceeds its liabilities; and (ii) the company is able to pay its debts as they fall due.

 

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In accordance with the BVI Act:

 

  (i) the company may purchase, redeem or otherwise acquire its own shares in accordance with either (a) Sections 60, 61 and 62 of the BVI Act (save to the extent that those Sections are negated, modified or inconsistent with provisions for the purchase, redemption or acquisition of its own shares specified in the company’s M&A); or (b) such other provisions for the purchase, redemption or acquisition of its own shares as may be specified in the company’s M&A;

 

  (ii) where a company may purchase, redeem or otherwise acquire its own shares otherwise than in accordance with Sections 60, 61 and 62 of the BVI Act, it may not purchase, redeem or otherwise acquire the shares without the consent of the shareholder whose shares are to be purchased, redeemed or otherwise acquired, unless the company is permitted by the M&A to purchase, redeem or otherwise acquire the shares without that consent; and

 

  (iii) unless the shares are held as treasury shares in accordance with Section 64 of the BVI Act, any shares acquired by the Company are deemed to be cancelled immediately on purchase, redemption or other acquisition.

 

Variation of the Rights of Shareholders. As permitted by the BVI Act and in accordance with our M&A, the rights attached to shares of the Company may (subject to the M&A) only, whether or not the Company is being wound up, be varied with the consent in writing of the holders of not less than one third of the issued shares of that class and the holders of not less than one third of the issued shares of any other class which may be affected by such variation.

 

Shareholder Meetings. In accordance with, and subject to, our M&A, (a) any director of the Company may convene meetings of the shareholders at such times as the director considers necessary or desirable (and the director convening a meeting of shareholders may fix as the record date for determining those shareholders that are entitled to vote at the meeting the date notice is given of the meeting, or such other date as may be specified in the notice, being a date not earlier than the date of the notice); and (b) upon the written request of shareholders entitled to exercise thirty percent (30%) (or such lesser percentage that may be accepted by the directors in their absolute discretion) or more of the voting rights in respect of the matter for which the meeting is requested, the directors shall convene a meeting of shareholders. In accordance with, and subject to, our M&A, (a) the director convening a meeting shall give not less than seven (7) days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear as shareholders in the register of shareholders of the Company and are entitled to vote at the meeting; and the other directors; (b) a meeting of shareholders held in contravention of the requirement to give notice is valid if shareholders holding at least ninety percent (90%) of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver in relation to all of the Ordinary Shares that that shareholder holds; (c) a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than one third of the votes of the Ordinary Shares or class or series of Ordinary Shares entitled to vote on resolutions of shareholders to be considered at the meeting; and (d) if within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of the shareholders, shall be dissolved.

 

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Dividends. Subject to the BVI Act and our M&A, our directors may, by resolution, declare dividends at a time and amount as they think fit if they are satisfied, based on reasonable grounds, that, immediately after distribution of the dividend, the value of our assets will exceed our liabilities and we will be able to pay our debts as they fall due. There is no further BVI law restriction on the amount of funds which may be distributed by us by dividend, including all amounts paid by way of the subscription price for Ordinary Shares regardless of whether such amounts may be wholly or partially treated as share capital or share premium under certain accounting principles. Shareholder approval is not (except as otherwise provided in our M&As) required to pay dividends under BVI law. In accordance with, and subject to, our M&A, no dividend shall bear interest as against the Company (except as otherwise provided in our M&As).

 

Disclosure of the Securities and Exchange Commission’s Position on Indemnification for Securities Act Liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Transfer of Shares. Subject to any applicable restrictions or limitations arising pursuant to (i) our M&A; or (ii) the BVI Act, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer in the usual or common form or in any other form which our directors may approve (such instrument of transfer being signed by the transferor and containing the name and address of the transferee). Our M&A also (save as otherwise provided therein) provide that (i) where Ordinary Shares of the Company are listed on the Nasdaq Capital Market or any other stock exchange or automated quotation system on which the Ordinary Shares are then traded (the “Recognised Exchange”), shares may be transferred without the need for a written instrument of transfer if the transfer is carried out in accordance with the law, rules, procedures and other requirements applicable to shares listed on the Recognised Exchange or (ii) shares may be transferred by means of a system utilized for the purposes of holding and transferring shares in uncertified form (the “Relevant System”), and that the operator of the Relevant System (and any other person necessary to ensure the Relevant System is effective to transfer shares) shall act as agent and attorney-in-fact of the Shareholders for the purposes of the transfer of any shares transferred by means of the Relevant System (including, for such purposes, to execute and deliver an instrument of transfer in the name of and on behalf of any Shareholder who is transferring shares). 

 

Summary of Certain Significant Provisions of the BVI Act

 

The BVI Act differs from laws applicable to US corporations and their shareholders. Set forth below is a summary of certain significant provisions of the BVI Act applicable to us (save to the extent that such provisions have been, to the extent permitted under the BVI Act, negated or modified in our M&A in accordance with the BVI Act).

 

Mergers, Consolidations and Similar Arrangements. The BVI Act provides for mergers as that expression is understood under US corporate law. Common law mergers are also permitted outside of the scope of the BVI Act. Under the BVI Act, two or more companies may either merge into one of such existing companies, or the surviving company, or consolidate with both existing companies ceasing to exist and forming a new company, or the consolidated company. The procedure for a merger or consolidation between our Company and another company (which need not be a BVI company) is set out in the BVI Act. The directors of the BVI company or BVI companies which are to merge or consolidate must approve a written plan of merger or consolidation which must also be authorized by a resolution of shareholders (and the outstanding shares of every class of shares that are entitled to vote on the merger or consolidation as a class if the memorandum or articles of association so provide or if the plan of merger or consolidation contains any provisions that, if contained in a proposed amendment to the memorandum or articles, would entitle the class to vote on the proposed amendment as a class) of the shareholders of the BVI company or BVI companies which are to merge. A foreign company which is able under the laws of its foreign jurisdiction to participate in the merger or consolidation is required by the BVI Act to comply with the laws of that foreign jurisdiction in relation to the merger or consolidation. The BVI company must then execute articles of merger or consolidation, containing certain prescribed details. The plan and articles of merger or consolidation are then filed with the Registrar of Corporate Affairs in the BVI, or the Registrar. If the surviving company or the consolidated company is to be incorporated under the laws of a jurisdiction outside BVI, it shall file the additional instruments required under Section 174(2)(b) of the BVI Act. The Registrar then (if he or she is satisfied that the requirements of the BVI Act have been complied with) registers, in the case of a merger, the articles of merger or consolidation and any amendment to the M&A of the surviving company and, in the case of a consolidation, the M&A of the new consolidated company and issues a certificate of merger or consolidation (which is conclusive evidence of compliance with all requirements of the BVI Act in respect of the merger or consolidation). The merger or consolidation is effective on the date that the articles of merger or consolidation are registered by the Registrar or on such subsequent date, not exceeding thirty days, as is stated in the articles of merger or consolidation but if the surviving company or the consolidated company is a company incorporated under the laws of a jurisdiction outside the BVI, the merger or consolidation is effective as provided by the laws of that other jurisdiction.

 

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As soon as a merger or consolidation becomes effective (inter alia), (a) the surviving company or consolidated company (so far as is consistent with its amended M&A, as amended or established by the articles of merger or consolidation) has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies; (b) the M&A of any surviving company are automatically amended to the extent, if any, that changes to its amended M&A are contained in the articles of merger; (c) assets of every description, including choses-in-action and the business of each of the constituent companies, immediately vest in the surviving company or consolidated company; (d) the surviving company or consolidated company is liable for all claims, debts, liabilities and obligations of each of the constituent companies; (e) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against any shareholder, director, officer or agent thereof, is released or impaired by the merger or consolidation; and (f) no proceedings, whether civil or criminal, pending at the time of a merger or consolidation by or against a constituent company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by the merger or consolidation, but: (i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or consolidated company or against the shareholder, director, officer or agent thereof, as the case may be or (ii) the surviving company or consolidated company may be substituted in the proceedings for a constituent company but if the surviving company or the consolidated company is incorporated under the laws of a jurisdiction outside the BVI, the effect of the merger or consolidation is the same as noted foregoing except in so far as the laws of the other jurisdiction otherwise provide.

 

The Registrar shall strike off the register of companies each constituent company that is not the surviving company in the case of a merger and all constituent companies in the case of a consolidation (save that this shall not apply to a foreign company).

 

If the directors determine it to be in the best interests of us, it is also possible for a merger to be approved as a court approved plan of arrangement or as a scheme of arrangement in accordance with (in each such case) the BVI Act. The convening of any necessary shareholders meetings and subsequently the arrangement must be authorized by the BVI court. A scheme of arrangement requires the approval of 75% of the votes of the shareholders or class of shareholders, 75% in value of the creditors or class of creditors, as the case may be. If the effect of the scheme is different in relation to different shareholders, it may be necessary for them to vote separately in relation to the scheme, with it being required to secure the requisite approval level of each separate voting group. Under a plan of arrangement, a BVI court may determine what shareholder approvals are required and the manner of obtaining the approval.

 

Continuation into a Jurisdiction Outside the BVI. In accordance with, and subject to, our M&A, the Company may by resolution of Shareholders or by a resolution passed unanimously by all directors of the Company continue as a company incorporated under the laws of a jurisdiction outside the BVI in the manner provided under those laws. The Company does not cease to be a BVI company unless the foreign law permits continuation and the BVI company has complied with the requirements of that foreign law. Where a company is continued under the laws of a jurisdiction outside the BVI, (a) the Company continues to be liable for all of its claims, debts, liabilities and obligations that existed prior to its continuation, (b) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against the Company or against any shareholder, director, officer or agent thereof, is released or impaired by its continuation as a company under the laws of the jurisdiction outside the BVI, (c) no proceedings, whether civil or criminal, pending by or against the Company, or against any shareholder, director, officer or agent thereof, are abated or discontinued by its continuation as a company under the laws of the jurisdiction outside the BVI, but the proceedings may be enforced, prosecuted, settled or compromised by or against the Company or against the shareholder, director, officer or agent thereof, as the case may be; and (d) service of process may continue to be effected on the registered agent of the Company in the BVI in respect of any claim, debt, liability or obligation of the Company during its existence as a company under the BVI Act.

 

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Directors. In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any Ordinary Shares), (a) the directors are elected by resolution of shareholders or by resolution of directors for such term as the shareholders or directors determine; (b) each director holds office until his disqualification, death, resignation or removal; (c) a director may be removed from office by resolution of directors or resolution of shareholders; (d) a director may resign his office by giving written notice of his resignation to the Company and the resignation has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as may be specified in the notice and a director shall resign forthwith as a director if he is, or becomes, disqualified from acting as a director under the BVI Act; and (e) a director is not required to hold Ordinary Shares as a qualification to office.

 

In accordance with, and subject to, our M&A, (a) any one director of the Company may call a meeting of the directors by sending a written notice to each other director; (b) the directors of the Company or any committee thereof may meet at such times and in such manner as the directors may determine to be necessary or desirable; (c) a director shall be given not less than three (3) days’ notice of meetings of directors, but a meeting of directors held without three (3) days’ notice having been given to all directors shall be valid if all the directors entitled to vote at the meeting who do not attend waive notice of the meeting, and the inadvertent failure to give notice of a meeting to a director, or the fact that a director has not received the notice, does not invalidate the meeting; (d) a meeting of directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than such number as may be fixed by the directors and if not fixed shall be two (2), unless there are only one (1) director in which case the quorum is one; (e) a director may by a written instrument appoint an alternate who need not be a director and the alternate shall be entitled to attend meetings in the absence of the director who appointed him and to vote or consent in place of the director until the appointment lapses or is terminated; (f) a resolution of directors is passed if either (i) the resolution is approved at a duly convened and constituted meeting of directors of the Company or of a committee of directors of the Company by the affirmative vote of a majority of the directors present at the meeting who voted except that where a director is given more than one vote, he shall be counted by the number of votes he casts for the purpose of establishing a majority casting the vote; or (ii) in the form of written resolution by all of the directors or by all of the members of a committee of directors of the Company, as the case may be, unless (in either case) the BVI Act or our M&A require a different majority.

 

Indemnification of Directors. In accordance with, and subject to, our M&A (including the limitations detailed therein), the Company shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who (a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request of the Company, serving as a director of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise.

 

In accordance with, and subject to, our M&A (including the limitations detailed therein), the indemnity referred to above only applies if the liability does not arise as a result of actual fraud or willful default of the indemnified person.

 

In accordance with, and subject to, our M&A, the Company may purchase and maintain insurance in relation to any person who is or was a director, officer or liquidator of the Company, or who at the request of the Company is or was serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another company or a partnership, joint venture, trust or other enterprise, against any liability asserted against the person and incurred by the person in that capacity, whether or not the Company has or would have had the power to indemnify the person against the liability as provided in the articles.

 

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Directors and Conflicts of Interest. As noted above, pursuant to the BVI Act and the Company’s M&A, a director of a company who has an interest in a transaction and who has declared such interest to the other directors, may:

 

  (a) vote on a matter relating to the transaction;

 

  (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and

 

  (c) sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates to the transaction, and, subject to compliance with the BVI Act shall not, by reason of his office be accountable to the Company for any benefit which he derives from such transaction and no such transaction shall be liable to be avoided on the grounds of any such interest or benefit.

  

In accordance with, and subject to, our M&A, no director shall be disqualified by his office from contracting with the Company either as a buyer, seller or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested be voided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement, by reason of such director holding that office or by reason of the fiduciary relationship thereby established, provided such director shall, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by the Company, disclose such interest to the board. For the purposes noted foregoing, a disclosure to all other directors to the effect that a director is a member, director, officer or trustee of another named company or other person and is to be regarded as interested in any transaction which may, after the date of the entry or disclosure, be entered into with that entity or individual, is a sufficient disclosure of interest in relation to that transaction.

  

Shareholders’ Suits. The enforcement of the Company’s rights will ordinarily be a matter for its directors.

 

In certain circumstances, a shareholder has the right to seek various remedies against a BVI company in the event the directors are in breach of their duties under the BVI Act. Pursuant to Section 184B of the BVI Act, if a company or director of a BVI company engages, proposes to engage in, or has engaged in conduct that contravenes the provisions of the BVI Act or the M&A of the company, the BVI court may, on application of a shareholder or director of the company, make an order directing the company or director to comply with, or restraining the company or director from engaging in conduct that contravenes, the BVI Act or the memorandum or articles of association.

 

Furthermore, pursuant to Section 184I(1) of the BVI Act a shareholder of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any acts of the company have been, or are likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the BVI Court for an order which, inter alia, can require the company or any other person to pay compensation to the shareholder.

 

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The BVI Act provides for a series of remedies available to shareholders. Where a company incorporated under the BVI Act conducts some activity which contravenes the BVI Act or the company’s M&A, the court can issue a restraining or compliance order. Under Section 184G of the BVI Act, a shareholder of a company may bring an action against the company for breach of a duty owed by the company to him as a shareholder. A shareholder also pursuant to Section 184C of the BVI Act may, with the leave of the BVI court, bring proceedings or intervene in proceedings in the name of the company, in certain circumstances. Such actions are known as derivative actions. The BVI court may only grant leave to bring a derivative action where the following circumstances apply:

 

  the company does not intend to bring, diligently continue or defend or discontinue proceedings; and

 

  it is in the interests of the company that the conduct of the proceedings not be left to the directors or to the determination of the shareholders as a whole.

 

When considering whether to grant leave, the BVI court is also required to have regard to the following matters:

 

  whether the shareholder is acting in good faith;

 

  whether a derivative action is in the company’s interests, taking into account the directors’ views on commercial matters;

 

  whether the proceedings are likely to succeed;

 

  the costs of the proceedings; and

 

  whether an alternative remedy is available.

 

Any shareholder of a company may apply to the BVI court under the Insolvency Act, 2003 of the BVI (the “Insolvency Act”) for the appointment of a liquidator to liquidate the company and the court may appoint a liquidator for the company if it is of the opinion that it is just and equitable to do so.

 

Appraisal Rights. The BVI Act provides that any shareholder of a company is entitled to payment of the fair value of his shares upon dissenting from any of the following: (a) a merger if the company is a constituent company, unless the company is the surviving company and the shareholder continues to hold the same or similar shares; (b) a consolidation, if the company is a constituent company; (c) any sale, transfer, lease, exchange or other disposition of more than 50% in value of the assets or business of the Company if not made in the usual or regular course of the business carried on by the Company but not including: (i) a disposition pursuant to an order of the court having jurisdiction in the matter, (ii) a disposition for money on terms requiring all or substantially all net proceeds to be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition, or (iii) a transfer pursuant to the power of the directors to transfer assets for the protection thereof; (d) a compulsory redemption of 10% or fewer of the issued shares of the Company required by the holders of 90% or more of the votes of the outstanding shares of the Company pursuant to the terms of Section 176 of the BVI Act; and (e) an arrangement, if permitted by the BVI court.

 

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Generally any other claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the BVI or their individual rights as shareholders as established by the company’s M&A. There are common law rights for the protection of shareholders that may be invoked, largely derived from English common law. For example, under the rule established in the English case known as Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to seek to have the affairs of the company conducted properly according to law and the constituent documents of the company. As such, if those who control the Company have persistently disregarded the requirements of company law or the provisions of the company’s M&A, then the courts may grant relief. Generally, the areas in which the courts will intervene are the following:

 

  a company is acting or proposing to act illegally or beyond the scope of its authority;

 

  the act complained of, although not beyond the scope of the authority, could only be effected if duly authorized by more than the number of votes which have actually been obtained;

 

  the individual rights of the plaintiff shareholder have been infringed or are about to be infringed; or

 

  those who control the Company are perpetrating a “fraud on the minority.”

 

Share Repurchases and Redemptions. As permitted by the BVI Act and subject to our M&A, shares may be repurchased, redeemed or otherwise acquired by us with shareholder consent. Depending on the circumstances of the redemption or repurchase, our directors may need to determine that, immediately following the redemption or repurchase, we will be able to satisfy our debts as they fall due and the value of our assets exceeds our liabilities. Our directors may only exercise this power on our behalf, subject to the BVI Act, our M&A and to any applicable requirements imposed from time to time by the SEC, the NASDAQ or any other stock exchange on which our securities are listed.

 

Inspection of Books and Records. Under the BVI Act, members of the general public, on payment of a nominal fee, can obtain copies of the public records of a company available at the office of the Registrar, including the company’s certificate of incorporation, its M&A (with any amendments thereto), records of license fees paid to date, any articles of dissolution, any articles of merger, and a register of charges created by the company (if the Company has elected to file such a register or an applicable chargee has caused the same to be filed).

 

A shareholder of a company is entitled, on giving written notice to the company, to inspect:

 

  (a) the M&A;

 

  (b) the register of members;

 

  (c) the register of directors; and

 

  (d) the minutes of meetings and resolutions of shareholders and of those classes of shares of which he is a shareholder.

 

In addition, a shareholder may make copies of or take extracts from the documents and records referred to in (a) through (d) above. However, subject to the M&A of the Company, the directors may, if they are satisfied that it would be contrary to the Company’s interests to allow a shareholder to inspect any document, or part of any document, specified in (b), (c) or (d) above, refuse to permit the shareholder to inspect the document or limit the inspection of the document, including limiting the making of copies or the taking of extracts from the records. Where a company fails or refuses to permit a shareholder to inspect a document or permits a shareholder to inspect a document subject to limitations, that shareholder may apply to the High Court of the BVI for an order that he should be permitted to inspect the document or to inspect the document without limitation.

 

Our  registered agent is Sertus Incorporations (BVI) Limited, Sertus Chambers, P.O. Box 905, Quastisky Building, Road Town, Tortola, British Virgin Islands. A company is required to keep a copy of its register of members and register of directors at the offices of its registered agent in the BVI, and the Company is required to notify any changes to the originals of such registers (assuming the originals are held elsewhere) to the registered agent, in writing, within 15 days of any change; and to provide the registered agent with a written record of the physical address of the place or places at which the original register of members or the original register of directors is kept.

 

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Where the place at which the original register of members or the original register of directors of the Company is changed, the Company must provide the registered agent with the physical address of the new location of the records within 14 days of the change of location.

 

A company is also required to keep at the office of its registered agent or at such other place or places, within or outside the BVI, as the directors may determine the minutes of meetings and resolutions of shareholders and of classes of shareholders; and the minutes of meetings and resolutions of directors and committees of directors. If such records are kept at a place other than at the office of the Company’s registered agent, the Company is required to provide the registered agent with a written record of the physical address of the place or places at which the records are kept and to notify the registered agent, within 14 days, of the physical address of any new location where such records may be kept.

 

Dissolution; Winding Up. As permitted by the BVI Act and subject to our M&A, we may be voluntarily liquidated and dissolved under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities.

 

We also may be wound up and dissolved in circumstances where we are insolvent in accordance with the terms of the Insolvency Act.

 

Anti-Money Laundering Laws. In order to comply with legislation and regulations aimed at the prevention of money laundering we are required to adopt and maintain anti-money laundering procedures, and may require subscribers to provide evidence to verify their identity. Where permitted, and subject to certain conditions, we also may delegate the maintenance of our anti-money laundering procedures (including the acquisition of due diligence information) to a suitable person. We reserve the right to request such information as is necessary to verify the identity of a subscriber. In the event of delay or failure on the part of the subscriber in producing any information required for verification purposes, we may refuse to accept the application, in which case any funds received will be returned without interest to the account from which they were originally debited.

 

If any person resident in the BVI knows or suspects that another person is engaged in money laundering or terrorist financing and the information for that knowledge or suspicion came to his or her attention in the course of his or her business the person will be required to report his belief or suspicion to the Financial Investigation Agency of the BVI, pursuant to the Proceeds of Criminal Conduct Act 1997 (as amended). Such a report shall not be treated as a breach of confidence or of any restriction upon the disclosure of information imposed by any enactment or otherwise.

 

Exchange controls. We know of no BVI laws, decrees, regulations or other legislation that limit the import or export of capital or the payment of dividends to shareholders holders who do not reside in the BVI.

 

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Material Differences in BVI Law and our Amended and Restated M&A and Delaware Law

 

Our corporate affairs are governed by our amended and restated M&A and the provisions of applicable BVI law, including the BVI Act and BVI common law. The BVI Act differs from laws applicable to US corporations and their shareholders. The following table provides a comparison between certain statutory provisions of the BVI Act (together with the provisions of our M&A) and the Delaware General Corporation Law relating to shareholders’ rights.

 

Shareholder Meetings

 

BVI   Delaware
         
In accordance with, and subject to, our M&A, (a) any director of the company may convene meetings of the shareholders at such times and in such manner as the director considers necessary or desirable; and (b) upon the written request of shareholders entitled to exercise thirty percent (30%) or more of the voting rights in respect of the matter for which the meeting is requested the directors shall convene a meeting of shareholders   May be held at such time or place as designated in the charter or the by-laws, or if not so designated, as determined by the board of directors
         
May be held inside or outside the BVI   May be held inside or outside Delaware
         
In accordance with, and subject to, our M&A, (a) the director convening a meeting shall give not less than 7 days’ notice of a meeting of shareholders to those shareholders whose names on the date the notice is given appear as shareholders in the register of members of the company and are entitled to vote at the meeting; and the other directors; and (b) the director convening a meeting of shareholders may fix as the record date for determining those shareholders that are entitled to vote at the meeting the date notice is given of the meeting, or such other date as may be specified in the notice, being a date not earlier than the date of the notice   Whenever shareholders are required to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, and the means of remote communication, if any
         
Shareholder’s Voting Rights      
         
BVI   Delaware
         
In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) a shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder; and (b) the instrument appointing a proxy shall be produced at the place designated for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. The notice of the meeting may specify an alternative or additional place or time at which the proxy shall be presented.   Any person authorized to vote may authorize another person or persons to act for him by proxy

 

In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) a meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than one third of the votes of the Ordinary Shares or class or series of Ordinary Shares entitled to vote on resolutions of shareholders to be considered at the meeting; and (b) if within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of shareholders, shall be dissolved.   The charter or bylaws may specify the number to constitute a quorum but in no event shall a quorum consist of less than one-third of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares shall constitute a quorum

 

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In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), (a) at any meeting of the shareholders, a resolution put to the vote of the meeting shall be decided on a show of hands by a simple majority, unless a poll is (before or on the declaration of the result of the show of hands) demanded by the Chairman; or one or more shareholders present in person or by proxy entitled to vote and who together hold not less than 10 percent of the total voting share issued and having the right to vote on such resolution. Unless a poll is so demanded, a declaration by the Chairman that a resolution has, on a show of hands, been carried, or carried unanimously, or by a particular majority, or lost, and an entry to that effect in the book of the proceedings of the Company, shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution; (b)if a poll is duly demanded it shall be taken in such manner as the Chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn, at the discretion of the Chairman; (c) on a poll, every holder of a voting share present in person or by proxy shall have one vote for every voting share of which he is the holder which confers the right to a vote on the resolution; and (d) in the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the meeting at which the show of hands takes place, or at which the poll is demanded, shall not be entitled to a second or casting vote. In accordance with the BVI Act, a shareholder resolution is passed if approved by a majority of in excess of 50% or, if a higher majority is required by the M&A, that higher majority, of the votes of those shareholders entitled to vote and voting on the resolution; unless (in either case) the BVI Act or our M&A require a different majority.      
         
In accordance with, and subject to, our M&A, (a) the rights attached to Ordinary Shares as specified in the M&A may only, whether or not the company is being wound up, be varied with the consent in writing of the holders of not less than one third of the issued shares of that class and the holders of not less than one third of the issued shares of any other class which may be affected by such variation., except where some other majority is required under our M&A or the BVI Act.   Except as provided in the charter documents, changes in the rights of shareholders as set forth in the charter documents require approval of a majority of its shareholders
         
In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any shares), the company may amend its memorandum or articles by a resolution of shareholders or by a resolution of directors, save that no amendment may be made by a Resolution of directors: (i) to restrict the rights or powers of the shareholders to amend the memorandum or articles; (ii) to change the percentage of shareholders required to pass a Resolution of Shareholders to amend the memorandum or articles; (iii) in circumstances where the memorandum or articles cannot be amended by the shareholders.   The certificate of incorporation or bylaws may provide for cumulative voting

 

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Directors

 

BVI   Delaware
         
In accordance with, and subject to, our M&A, the minimum number of directors shall be one   Board must consist of at least one member
         
In accordance with, and subject to, our M&A (including, for the avoidance of any doubt, any rights or restrictions attaching to any Ordinary Shares), (a) the directors are elected by resolution of shareholders or by resolution of directors for such term as the shareholders or directors determine; (b) each director holds office until his disqualification, death, resignation or removal; (c) a director may be removed from office by resolution of directors or resolution of shareholders; (d) a director may resign his office by giving written notice of his resignation to the Company and the resignation has effect from the date the notice is received by the Company at the office of its registered agent or from such later date as may be specified in the notice and a director shall resign forthwith as a director if he is, or becomes, disqualified from acting as a director under the BVI Act; and (e) a director is not required to hold Ordinary Shares as a qualification to office.   Number of board members shall be fixed by the by laws, unless the charter fixes the number of directors, in which case a change in the number shall be made only by amendment of the charter
         
Directors do not have to be independent.   Directors do not have to be independent

 

Fiduciary Duties

 

BVI   Delaware
         
Directors owe duties at both common law and under statute including as follows:   Directors and officers must act in good faith, with the care of a prudent person, and in the best interest of the corporation
         
Duty to act honestly and in good faith and in what the director believes to be in the best interests of the company;   Directors and officers must refrain from self-dealing, usurping corporate opportunities and receiving improper personal benefits
         
Duty to exercise powers for a proper purpose and directors shall not act, or agree to the Company acting, in a manner that contravenes the BVI Act or the M&A;      
         
The BVI Act provides that a director of a company shall, forthwith after becoming aware of the fact that he is interested in a transaction entered into, or to be entered into, by the company, disclose the interest to the board of the company. However, the failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the transaction was not required to be disclosed because the transaction is between the company and the director himself and is in the ordinary course of business and on usual terms and conditions. Additionally, the failure of a director to disclose an interest does not affect the validity of the transaction entered into by the company if (a) the material facts of the interest of the director in the transaction are known by the shareholders entitled to vote at a meeting of shareholders and the transaction is approved or ratified by a resolution of shareholders or (b) the company received fair value for the transaction   Directors may vote on a matter in which they have an interest so long as the director has disclosed any interests in the transaction

 

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Shareholder’s Derivative Actions

 

BVI   Delaware
         
Generally speaking, the company is the proper plaintiff in any action. A shareholder may, with the leave of the BVI court, bring proceedings or intervene in proceedings in the name of the company, in certain circumstances. Such actions are known as derivative actions. The BVI court may only grant leave to bring a derivative action where the following circumstances apply:   In any derivative suit instituted by a shareholder of a corporation, it shall be averred in the complaint that the plaintiff was a shareholder of the corporation at the time of the transaction of which he complains or that such shareholder’s stock thereafter devolved upon such shareholder by operation of law
         
the company does not intend to bring, diligently continue or defend or discontinue the proceedings; and   Complaint shall set forth with particularity the efforts of the plaintiff to obtain the action by the board or the reasons for not making such effort
         
it is in the interests of the company that the conduct of the proceedings not be left to the directors or to the determination of the shareholders as a whole when considering whether to grant leave, the BVI court is also required to have regard to the following matters:   Such action shall not be dismissed or compromised without the approval of the Delaware Court of Chancery

 

  i. whether the shareholder is acting in good faith;    
         
  ii. whether a derivative action is in the interests of the company, taking into account the directors’ views on commercial matters;    
         
  iii. whether the action is likely to succeed;    
         
  iv. the costs of the proceedings in relation to the relief likely to be obtained; and    
         
  v. whether an alternative remedy to the derivative claim is available    

 

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10.C. Material Contracts 

 

The following descriptions of the material provisions of the referenced agreements do not purport to be complete and are subject to, and qualified in their entirety by reference to the agreements which have been filed as exhibits to this report.

 

Securities Purchase Agreement

 

As disclosed in the Form 6-K filed with SEC on April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Original Purchase Agreement”) with certain unaffiliated institutional investors identified therein (each an “Investor”, or “Holder” and collectively “Investors” or “Holders”) on April 17, 2019 relating to a private placement by the Company of (1) Senior Convertible Notes in the aggregate principal amount of $15 million (each, a “Note” and collectively, the “Notes”), consisting of (i) a Series A Senior Convertible Note in the principal amount of $10 million, and (ii) a Series B Senior Secured Convertible Note in the principal amount of $5 million and (2) Warrants (“Series A Warrants”) to purchase 596,658 of the Company’s ordinary shares equal to 50% of the shares issuable upon conversion of the Series A Notes, exercisable for a period of five years at an initial exercise price of $8.38, and (3) Warrants (“Series B Warrants”) to purchase 298,330 of the Company’s ordinary shares equal to 50% of the shares issuable upon conversion of the Series B Notes, exercisable for a period of five years at an exercise price of $8.38. In exchange for the above securities, the Company received consideration consisting of (i) an aggregate cash payment of $10,000,000, and (ii) secured promissory notes payable by the Investors to the Company (the “Investor Notes”) in the aggregate principal amount of $5 million. Among other terms, pursuant to the Original Purchase Agreement, at the closing, the Investors and Feng Zhou Management Limited (the “Pledgor”) will enter into a Share Pledge Agreement (the “Share Pledge Agreement”) in order to induce the Investors to purchase, severally and not jointly, the Notes and Warrants as provided for in the Original Securities Purchase Agreement, the Pledgor has agreed to grant the Investors security interest in and to four million Ordinary Shares owned by the Pledgor in order to secure the prompt and complete payment, observance and performance of all liabilities and obligations by the Company to the Investors arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Original Securities Purchase Agreement, the Notes, the Warrants or any of the other transaction documents and other secured obligations as set forth in the Share Pledge Agreement.

 

Registration Rights Agreement

 

At the closing of the Private Placement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Investors under which the Company agreed to register for resale the Ordinary Shares issuable upon conversion of the Notes and upon exercise of the Warrants plus an additional number of shares so that the total number of Ordinary Shares registered equals 200% of the sum of (i) the maximum number of shares issuable upon conversion of the Notes (using the Alternate Conversion Price (as defined in the Notes)) and (ii) the maximum number of shares issuable upon exercise of the Warrants. The Registration Rights Agreement requires the Company to file the registration statement within 20 days after the closing and to have the registration statement declared effective 75 days after the closing, or 100 days if the registration statement is subject to full review by the SEC.

 

Under the Registration Rights Agreement, the Company agreed to pay each Investor cash liquidated damages of 1% of the sum of the aggregate original principal amount stated in such Investor’s Notes at the closing upon the Company’s failure to (i) file the registration statement in the time required, (ii) have the registration statement declared effective in the time required, (iii) maintain the effectiveness of the registration statement, or (iv) keep current public information in the marketplace. The Company is obligated to make such liquidated damages payments upon the occurrence of one of the described events and every 30 days thereafter until cured (or, in the case of the current public information failure, until such time that such public information is no longer required pursuant to Rule 144).

 

The Company agreed to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the Investors may sell all of the Common Stock issuable pursuant thereto without restriction pursuant to Rule 144, or (ii) the date on which all of the Common Stock covered by the registration statement have been sold.

 

The Registration Rights Agreement also provides for piggyback registration rights under certain circumstances.

 

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Investor Note Purchase Agreement

 

On May 2, 2019, pursuant to the Original Purchase Agreement, the Company and the Investors entered into enter into separate Note Purchase Agreements (each, an “NPA”) pursuant to which each Investor agreed to issue to the Company such Investor’s Investor Note.

 

Master Netting Agreement

 

On May 2, 2019, the Company and the Investors entered into a Master Netting Agreement (the “Master Netting Agreement”) for the purpose of clarifying for each party its right to offset obligations that may arise under the Purchase Agreement, the Investor Notes and the Series B Notes upon the occurrence of certain events, including as described above.

 

Placement Agent

 

FT Global Capital, Inc. acted as the exclusive placement agent for the transaction (the “Placement Agent”) pursuant to the terms of an Engagement Letter, dated March 1, 2019, between the Company and the Placement Agent (the “Engagement Letter”). At the closing of the Private Placement, the Company paid the Placement Agent an aggregate cash fee of $120,000. In connection with the transaction, the Company also reimbursed the Placement Agent’s expenses up to $30,000 and the Placement Agent’s legal expenses of up to $25,000.

 

At the closing of the Private Placement, the Company sold to the Placement Agent for a sum of $100 for certain warrant (the “Placement Agent Warrant”) to purchase 178,997 Ordinary Shares, pursuant to the terms of the Engagement Agreement. The Placement Agent Warrant will have substantially the same terms as the Warrants, as described above.

 

Additionally, the Company has agreed to indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Placement Agent may be required to make because of those liabilities. The Placement Agent has the right to act as lead underwriter or lead placement agent for any future equity or debt offering the Company may undertake within six month of the closing of the transaction.

 

Amendment to the Original Purchase Agreement

 

As disclosed in our Form 6-K filed with SEC on May 3, 2019, on May 2, 2019, the Company entered into certain amendment (the “Amendment”, and the Original Purchase Agreement, as amended, the “Purchase Agreement”) to the Original Purchase Agreement in accordance with the terms of the Original Purchase Agreement. Under the Amendment, the Pledgor and the Investors will not enter into the Share Pledge Agreement. As substitute to the pledge, the Company shall pre-deliver four million Ordinary Shares of the Company (“Pre-Delivery Shares”) to the Investors issuable upon conversion of the Notes (“Conversion Shares”). Notwithstanding the foregoing, the parties also agreed that if the Notes are converted or redeemed, as applicable, in full and any Pre-Delivery Shares are not used to satisfy conversion under the Note, such remaining Pre-Delivery Shares shall be returned to the Company for cancellation. The Pre-Delivery Shares, upon issuance, shall be restricted securities that initially may not be freely traded by an Investor until and unless a resale exemption from registration becomes available to such Investor or the resale of the Pre-Delivery Shares by such Investor is registered by the Company pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission, in each case, pursuant to the rules and regulations of the Securities Act of 1933, as amended.

 

Forbearance Agreement

 

Upon negotiation with the Investors, on December 13, 2019, (the “Effective Date”) the Company entered into certain Forbearance and Amendment Agreements (each a “Forbearance Agreement”, collectively, the “Forbearance Agreements”) with each Investor.

 

Upon the execution of the Forbearance Agreements, the Investor shall Net (as defined in the Series B Note) all Restricted Principal (as defined in the Series B Note) outstanding under the Series B Note against the amounts outstanding under the Investor Note (as defined in the Series B Note), after which the Investor Note, the Series B Note and the Series B Warrant shall no longer remain outstanding.

 

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Pursuant to the Forbearance Agreement, commencing on the Effective Date till the earlier of (1) 5:00PM, New York city time on October 15, 2020, (or, if earlier, such date when all the Forbearance Redemption Amounts (as defined therein) are fully paid) and (2) the time of any breach by the Company of any term or provision of this Agreement or the occurrence of any Event of Default that is not an “Existing Default” as set forth in the Schedule I of the Forbearance Agreements or an “Additional Forborne Default” as set forth in the Schedule II of the Forbearance Agreement (such earlier date, the “Forbearance Expiration Date”, such period from the Effective Date to the Forbearance Expiration Date, the “Forbearance Period”), the Investors agreed, among other things, to the following:

 

(a) to forbear from (i) taking any action to enforce their Redemption Notice with respect to certain existing defaults (the “Existing Defaults”) including but not limited to such defaults as described in the Redemption Notices, and (ii) issuing any new demand for redemption of the Series A Note on the basis of certain additional defaults (the “Additional Forborne Defaults”), including but not limited to the occurrence of the event that the aggregate daily dollar trading volume of the Company’s ordinary shares does not exceed $1,500,000, and that the volume weighted average price of the Company’s ordinary shares on any two trading days during the thirty trading day period ending on the trading day immediately preceding such date of determination fails to exceed $2.14.

 

(b) not to effect any conversions of the Series A Note or Alternate Conversions except for conversions or Alternate Conversions of the Series A Note and/or exercises of the Series A Warrant, in each case, on any Trading Day where the trading price of the Ordinary Shares is at least $2.50 (as adjusted for share splits, share dividends, share combinations, recapitalizations and similar events on or after the date hereof) (such price, a “Forbearance Conversion Floor” and each such conversion, a “Permitted Transaction”); provided, that any Ordinary Shares issued in a Permitted Transaction (other than Applied Pre-Delivery Shares or any Ordinary Shares issued upon conversion of any Forbearance Redemption Amount that the Company has failed to pay in cash either prior to, or during, the applicable Payment Grace Period (as defined in Schedule II of the Forbearance Agreement) with respect thereto)(collectively, the “Excluded Leak-Out Shares”)) shall be subject to the Leak-Out Agreement. If the Company or its agents do not deliver conversion shares pursuant to such aforementioned conversion, the Investor may apply any remaining Pre-Delivered Shares to satisfy such obligations (on a share-for-share basis, against the Ordinary Shares not timely delivered in such aforementioned conversion)

  

(c) not to effect any Installment Conversion, Installment Redemption, Disclosure Delay Payments or Event of Default Redemption (as defined in the Notes, solely with respect to the Existing Defaults and Additional Forborne Defaults) prior to the Forbearance Expiration Date other than as permitted under this Agreement

 

(d) not to exercise the Series A Warrant during the Forbearance Period (other than exercises of the Series A Warrant in Permitted Transactions);

 

(e) to return the original share certificate representing the Pre-Delivered Shares (other than Applied Pre-Delivery Shares (as defined below)) to the Company for cancellation upon the Company’s payment of the full Forbearance Redemption Amounts (as defined below),

 

(f) to execute and deliver to the Company certain lock-up agreements with respect to the Pre-Delivered Shares (each a “Lock-Up Agreement”, collectively “Lock-Up Agreements”), certain mutual release (each a “Mutual Release”, collectively, the “Mutual Releases”) and to execute and deliver to the Company the Leak-Out Agreement (as defined below)

 

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In consideration for the above, the Company agreed to the followings:

 

(a) in lieu of the payment of the redemption price as stated in each Redemption Notices respectively, the Company shall (I) pay to each Investor $500,000 (the “Initial Forbearance Fee”) on or prior to December 16, 2019, and (II) commencing on January 24th 2020, redeem the Series A Notes for an aggregate redemption price of $10,939,410.21  (the “Forbearance Redemption Price”), in accordance with Section 8 of the Series A Note, but replacing the applicable Installment Dates and Installment Amounts (including, Principal Amounts, Interest and Make-Whole Amounts with respect thereto) with the dates (each a “New Installment Date”) and amounts (each, a “New Installment Amount”), respectively and (III) pay the aggregate amount of any payment obligations of the Company arising after the date hereof pursuant to the Sections 3(c)(ii), 20 or 24(c) of the Series A Note, 9(k) of the Securities Purchase Agreement, and/or Sections 2(e), 6 and 7 of the Registration Rights Agreement, (each such amounts, an “Ancillary Redemption Amount”, and together with the New Installment Amounts, each an “Additional Forbearance Redemption Amount”, and together with the Initial Forbearance Fee, each a “Forbearance Redemption Amount”)

 

(b) If the Company fails to pay any New Installment Amount within 5 days of the applicable New Installment Date pursuant to the Installment Notice (as defined in Section 8 of the Series A Note), the Investor may convert the applicable New Installment Amount in one or multiple conversion notices as an Alternate Conversion pursuant to Section 3(e) of the Series A Note with the Forbearance Conversion Floor and the Leak-Out Agreement being disregarded for such conversions and such conversions deemed a Permitted Transaction for the purposes of this Agreement and any sales of such Ordinary Shares shall not be included in the applicable Daily Limit (as defined in the Leak-Out Agreement) with respect thereto. In the event that the Company or its agents do not deliver applicable Conversion Shares pursuant to any conversion in accordance with Section 3 of the Series A Note, the Investor may apply any remaining Pre-Delivered Shares to satisfy such obligations (on a share-for-share basis, against the Ordinary Shares not timely delivered in such aforementioned conversion) (each an “Applied Pre-Delivery Share”).

 

(c) the Company shall cause all restrictive legends on the Pre-Delivered Shares to be removed and delivery of un-legended Pre-Delivery Shares into the Investor’s custodian’s account pursuant to the DWAC instructions set forth therein; and

  

Concurrently with the execution of the Forbearance Agreement, the Investors and the Company have entered into the Lock-Up Agreements, Leak-Out Agreements and Mutual Releases.

 

Lock-Up Agreement

 

Pursuant to the Lock-Up Agreement, except that investors may pledge the Pre-Delivered Shares in connection with a bona fide margin account or other loan or financing arrangement secured by the Pre-Delivered Shares, the Investors agreed not to make any hedge, swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Pre-Delivered Shares (excluding the Applied Pre-Delivery Shares, the “Locked Shares”). The investor also agreed to provide, up to three (3) times during the forbearance period, evidence reasonably satisfactory to the Company within two (2) Business Days after receipt of the Company’s written request, showing that the Locked Shares remain in the account of the Investor. In the event that prior to the expiration of the Forbearance Period, the aggregate number of Ordinary Shares held in the brokerage account of such Investor is less than the Locked Shares, the undersigned shall within one (1) Business Day of the Company’s written request, return the Locked Shares to the Company for cancellation by directing the Investors’ broker to initiate a DWAC withdrawal of the Pre-Delivered Shares and delivering duly executed cancellation instructions along with the original certificates (if any) evidencing the Pre-Delivered Shares, original stock power with medallion guaranteed and corporate resolution approving such cancellation to the Company’s transfer agent.

 

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Leak-Out Agreement

 

Pursuant to the Leak-Out Agreements, each investor (together with certain of its affiliates) has agreed to not sell, dispose or otherwise transfer, directly or indirectly (including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent to any sales or short positions) any Ordinary Shares issued in any Permitted Transaction (collectively, the “Restricted Securities”), on any Trading Day (as defined in Series A Notes) (each date of determination, each a “Measuring Date”), if such sale, together with all prior sales of Restricted Securities by the Investor on such Measuring Date, exceed 20% of the daily composite trading volume of the Ordinary Shares (as reported by Bloomberg, LP for such Measuring Date) (the “Daily Limit”); provided that any other sales of Restricted Shares on such Measuring Date (excluding any sales of Restricted Securities) shall not be included in the Daily Limit calculation above.

 

Further, this restriction will not apply to sales or transfers of any such shares of Restricted Shares in transactions with any Person (an “Assignee”); provided, that as a condition to any such sale or transfer an authorized signatory of the Company and such Assignee duly execute and deliver a leak-out agreement in the form of this Leak-Out Agreement with respect to such transferred Restricted Securities (or such securities convertible or exercisable into Restricted Securities, as applicable) (an “Assignee Agreement”) and sales of the Investor and all Assignees shall be aggregated for all purposes of this Leak-Out Agreement and all Assignee Agreements.

 

Mutual Release

 

In accordance with the Mutual Release, both parties agree not to bring any and all charges, complaints, liabilities, claims and demands of any nature whatsoever solely with respect to the Notes and the Warrants against each other effective upon the full payment of the forbearance redemption amounts.

 

Amended Leak-Out Agreement

 

Due to the Company’s failure to obtain timely approval from State Administration of Foreign Exchange in People’s Republic of China to redeem Series A Notes in cash as previously contemplated, we separately amended and restated the Leak-Out Agreements (each an “Amended Leak-Out Agreement”) with each Investor on March 3, 2020 (“Amended Leak-Out Effective Date”).

 

Pursuant to the Amended Leak-Out Agreements, each Investor (together with certain of its affiliates) has agreed to not sell, dispose or otherwise transfer, directly or indirectly (including, without limitation, any sales, short sales, swaps or any derivative transactions that would be equivalent to any sales or short positions) any Series A Conversion Shares converted during the period commencing on the Amended Leak-Out Effective Date and ending on the later of (x) the date the Series A Note issued to the Investor no longer remains outstanding and (y) such date as the Investor (and/or its Affiliates) shall have sold all Series A Conversion Shares, (collectively, the “Restricted Securities”), on any Trading Day (as defined in Series A Notes) (each date of determination, each a “Measuring Date”), if such sale, together with all prior sales of Restricted Securities by the Investor on such Measuring Date, exceed 20% of the daily composite trading volume of the Ordinary Shares (as reported by Bloomberg, LP for such Measuring Date) (the “Daily Limit”); provided that the sales of any other shares of Ordinary Shares (excluding any sales of Restricted Securities) on such applicable Measuring Date shall not be included in the Daily Limit calculation above.

 

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In addition, if the Investor on a given date desires to convert the Series A Note, in whole or in part, and the aggregate of the Conversion Amount of all conversions from December 13, 2019 through, and including, such date of determination (including the Conversion Amount of the proposed conversion) exceeds the sum of (x) the aggregate New Installment Amounts (as set forth in the Forbearance Agreement) and (y) any other unpaid amounts under the Forbearance Agreement (including, without limitation, the Initial Forbearance Fee), in the aggregate, that have become due and payable (or would have become due and payable, assuming the Forbearance Agreement remained in full force and effect through, and including, such date of determination) in accordance with the Forbearance Agreement on or prior to such date of determination, the Investor shall be prohibited from effecting such conversion (the “Conversion Limit”).

 

Notwithstanding the foregoing Conversion Limit, as of any time of determination, if both (x) the daily average composite trading volume of the Ordinary Share (as reported by Bloomberg, LP for such Measuring Date) exceeds 1.5 million and (y) the trading price of the Ordinary Share as of such time of determination exceeds the Closing Bid Price (as defined in the Series A Note) of the Ordinary Share as of the Trading Day immediately prior to such Measuring Date, the Investor shall be permitted to convert, in one or more conversions on such Measuring Date, up to an additional aggregate amount (which shall be excluded from the Conversion Limit) not to exceed the lesser of (i) 500,000 shares of Ordinary Share and (ii) 20% of the daily average composite trading volume of the Ordinary Shares.

 

10.D. Exchange Controls

 

British Virgin Islands

 

There are currently no exchange control regulations in the British Virgin Islands applicable to us or our shareholders.

 

The PRC

 

China regulates foreign currency exchanges primarily through the following rules and regulations:

 

  Foreign Currency Administration Rules of 1996, as amended; and

 

  Administrative Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.

 

As we disclosed in the risk factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion of Renminbi is permitted in China for routine current-account foreign exchange transactions, including trade and service related foreign exchange transactions, payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account items, such as direct investments, investments in PRC securities markets and repatriation of investments, however, is still subject to the approval of SAFE.

 

Pursuant to the above-mentioned administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as presentment of valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts and outbound investment in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested enterprises outside China are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of Commerce or SAFE.

 

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10.E. Taxation

 

People’s Republic of China Enterprise Taxation

 

The following brief description of Chinese enterprise laws is designed to highlight the enterprise-level taxation on our earnings, which will affect the amount of dividends, if any, we are ultimately able to pay to our shareholders. See “Dividend Policy.”

 

We are a holding company incorporated in the British Virgin Islands and we gain substantial income by way of dividends paid to us from our PRC subsidiaries. The EIT Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential tax rate or a tax exemption.

 

Under the EIT Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. Although the implementation rules of the EIT Law define “de facto management body” as a managing body that actually, comprehensively manage and control the production and operation, staff, accounting, property and other aspects of an enterprise, the only official guidance for this definition currently available is set forth in SAT Notice 82, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although SXT Pharmaceuticals, Inc. does not have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of SAT Notice 82, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in SAT Notice 82 to evaluate the tax residence status of SXT Pharmaceuticals, Inc. and its subsidiaries organized outside the PRC.

 

According to SAT Notice 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the places where senior management and senior management departments that are responsible for daily production, operation and management of the enterprise perform their duties are mainly located within the territory of China; (ii) financial decisions (such as money borrowing, lending, financing and financial risk management) and personnel decisions (such as appointment, dismissal and salary and wages) are decided or need to be decided by organizations or persons located within the territory of China; (iii) main property, accounting books, corporate seal, the board of directors and files of the minutes of shareholders’ meetings of the enterprise are located or preserved within the territory of China; and (iv) one half (or more) of the directors or senior management staff having the right to vote habitually reside within the territory of China.

 

We believe that we do not meet some of the conditions outlined in the immediately preceding paragraph. For example, as a holding company, the key assets and records of SXT Pharmaceuticals, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that SXT Pharmaceuticals and its offshore subsidiaries should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in SAT Notice 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status.

 

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The implementation rules of the EIT Law provide that, (i) if the enterprise that distributes dividends is domiciled in the PRC or (ii) if gains are realized from transferring equity interests of enterprises domiciled in the PRC, then such dividends or gains are treated as China-sourced income. It is not clear how “domicile” may be interpreted under the EIT Law, and it may be interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we are considered as a PRC tax resident enterprise for PRC tax purposes, any dividends we pay to our overseas shareholders which are non-resident enterprises as well as gains realized by such shareholders from the transfer of our shares may be regarded as China-sourced income and as a result become subject to PRC withholding tax at a rate of up to 10%. We are unable to provide a “will” opinion because Docvit, our PRC counsel, believes that it is more likely than not that the Company and its offshore subsidiaries would be treated as a non-resident enterprise for PRC tax purposes because they do not meet some of the conditions out lined in SAT Notice. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that has been deemed a PRC “resident enterprise” by the PRC tax authorities as of the date of this annual report. Therefore we believe that it is possible but highly unlikely that the income received by our overseas shareholders will be regarded as China-sourced income.

 

See “Risk Factors — Risks Related to Doing Business in China — Under the enterprise Income Tax Law, we may be classified as a “Resident enterprise” of China.”

 

Our company pays an EIT rate of 25% for Taizhou Suxuantang, and 15% for Taizhou Suxuantang since April 2018 since it was qualified as a high-technology company. The EIT is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards. If the PRC tax authorities determine that Taizhou Suxuantang a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. In addition, non-resident enterprise shareholders may be subject to a 10% PRC withholding tax on gains realized on the sale or other disposition of our Ordinary Shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to dividends or gains realized by non-PRC individuals, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise. There is no guidance from the PRC government to indicate whether or not any tax treaties between the PRC and other countries would apply in circumstances where a non-PRC company was deemed to be a PRC tax resident, and thus there is no basis for expecting how tax treaty between the PRC and other countries may impact non-resident enterprises.

 

British Virgin Islands Taxation

 

Under British Virgin Islands law as currently in effect, there is no tax applicable to a holder of Ordinary Shares who is not a resident of the British Virgin Islands on dividends paid with respect to the Ordinary Shares and none of the holders of Ordinary Shares are liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.

 

There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered under the BVI Act or persons not resident in the British Virgin Islands. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.

 

There is no income tax treaty currently in effect between the United States and the British Virgin Islands or between Taiwan and the British Virgin Islands.

 

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United States Federal Income Taxation

 

WE URGE POTENTIAL PURCHASERS OF OUR ORDINARY SHARES TO CONSULT THEIR OWN TAXADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAXCONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR ORDINARY SHARES.

 

The following does not address the tax consequences to any particular investor or to persons in special tax situations such as:

 

  banks;
     
  financial institutions;
     
  insurance companies;
     
  regulated investment companies;
     
  real estate investment trusts;
     
  broker-dealers;
     
  traders that elect to mark-to-market;
     
  U.S. expatriates;
     
  tax-exempt entities;
     
  persons liable for alternative minimum tax;
     
  persons holding our Ordinary Shares as part of a straddle, hedging, conversion or integrated transaction;
     
  persons that actually or constructively own 10% or more of our voting shares (including by reason of owning our Ordinary Shares);
     
  persons who acquired our Ordinary Shares pursuant to the exercise of any employee share option or otherwise as compensation; or
     
  persons holding our Ordinary Shares through partnerships or other pass-through entities.

 

Prospective purchasers are urged to consult their own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our Ordinary Shares. 

 

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Taxation of Dividends and Other Distributions on our Ordinary Shares

 

Subject to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the Ordinary Shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the Ordinary Shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is no income tax treaty between the United States and the British Virgin Islands, clause (1) above can be satisfied only if the Ordinary Shares are readily tradable on an established securities market in the United States. Under U.S. Internal Revenue Service authority, Ordinary Shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the NYSE MKT. You are urged to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our Ordinary Shares, including the effects of any change in law after the date of this annual report

 

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our Ordinary Shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

 

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your Ordinary Shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

 

Taxation of Dispositions of Ordinary Shares

 

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in U.S. dollars) in the Ordinary Shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the Ordinary Shares for more than one year, you will be eligible for (a) reduced tax rates of 0% (for individuals in the 10% or 15% tax brackets), (b) higher tax rates of 20% (for individuals in the 39.6% tax bracket) or (c) 15% for all other individuals. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States source income or loss for foreign tax credit limitation purposes.

 

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Passive Foreign Investment Company

 

A non-U.S. corporation is considered a PFIC for any taxable year if either:

 

  at least 75% of its gross income is passive income; or
     
  at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

 

Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash we raise in our initial public offering will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined based on the market value of our Ordinary Shares from time to time, which could cause the value of our non-passive assets to be less than 50% of the value of all of our assets (including the cash raised in our initial public offering) on any particular quarterly testing date for purposes of the asset test.

 

We must make a separate determination each year as to whether we are a PFIC. The proceeds from our initial public offering, together with any other assets held for the production of passive income, it is possible that, for our 2016 taxable year or for any subsequent year, more than 50% of our assets may be assets held for the production of passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we are treating Taizhou Suxuantang as being owned by us for United States federal income tax purposes, not only because we control their management decisions, but also because we are entitled to the economic benefits associated with Taizhou Suxuantang, and as a result, we are treating Taizhou Suxuantang as our wholly-owned subsidiary for U.S. federal income tax purposes. In particular, because the value of our assets for purposes of the asset test will generally be determined based on the market price of our Ordinary Shares and because cash is generally considered to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of our Ordinary Shares and the amount of cash we raised in our initial public offering. Accordingly, fluctuations in the market price of the Ordinary Shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised in our initial public offering. We are under no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the value of our assets will depend upon material facts (including the market price of our Ordinary Shares from time to time and the amount of cash we raise in our initial public offering) that may not be within our control. If we are a PFIC for any year during which you hold Ordinary Shares, we will continue to be treated as a PFIC for all succeeding years during which you hold Ordinary Shares. However, if we cease to be a PFIC and you did not previously make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime by making a “purging election” (as described below) with respect to the Ordinary Shares.

 

If we are a PFIC for any taxable year during which you hold Ordinary Shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the Ordinary Shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the Ordinary Shares will be treated as an excess distribution. Under these special tax rules:

 

  the excess distribution or gain will be allocated ratably over your holding period for the Ordinary Shares;
     
  the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
     
  the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

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The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the Ordinary Shares cannot be treated as capital, even if you hold the Ordinary Shares as capital assets.

 

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market election for the first taxable year which you hold (or are deemed to hold) Ordinary Shares and for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the fair market value of the Ordinary Shares as of the close of your taxable year over your adjusted basis in such Ordinary Shares, which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any, of the adjusted basis of the Ordinary Shares over their fair market value as of the close of the taxable year. However, such ordinary loss is allowable only to the extent of any net mark-to-market gains on the Ordinary Shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Ordinary Shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual sale or disposition of the Ordinary Shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such Ordinary Shares. Your basis in the Ordinary Shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income discussed above under “— Taxation of Dividends and Other Distributions on our Ordinary Shares” generally would not apply.

 

The mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined in applicable U.S. Treasury regulations), including the NASDAQ. If the Ordinary Shares are regularly traded on the NASDAQ and if you are a holder of Ordinary Shares, the mark-to-market election would be available to you were we to be or become a PFIC.

 

Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold Ordinary Shares in any year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year and provide certain annual information regarding such Ordinary Shares, including regarding distributions received on the Ordinary Shares and any gain realized on the disposition of the Ordinary Shares.

 

If you do not make a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold our Ordinary Shares, then such Ordinary Shares will continue to be treated as stock of a PFIC with respect to you even if we cease to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging election” creates a deemed sale of such Ordinary Shares at their fair market value on the last day of the last year in which we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis (equal to the fair market value of the Ordinary Shares on the last day of the last year in which we are treated as a PFIC) and holding period (which new holding period will begin the day after such last day) in your Ordinary Shares for tax purposes.

 

You are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our Ordinary Shares and the elections discussed above.

 

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Information Reporting and Backup Withholding

 

Dividend payments with respect to our Ordinary Shares and proceeds from the sale, exchange or redemption of our Ordinary Shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual shareholders. However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes (including backup withholding), and such brokers or intermediaries may be required by law to withhold such taxes.

 

Under the Hiring Incentives to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our Ordinary Shares, subject to certain exceptions (including an exception for Ordinary Shares held in accounts maintained by certain financial institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return for each year in which they hold Ordinary Shares.

 

10.F. Dividends and Paying Agents

 

Not Applicable.

 

10.G. Statement by Experts

 

Not Applicable.

 

10.H. Documents on Display

 

The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements and other information with the SEC. The Company’s reports, registration statements and other information can be inspected on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference facilities maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. You may also visit us on the World Wide Web at www.sxtchina.com. However, information contained on our website does not constitute a part of this annual report.

 

10.I. Subsidiary Information

 

Not Applicable.

 

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Financial instruments that expose us to concentrations of credit risk primarily consist of cash and accounts receivables. The maximum amount of loss due to credit risk in the event of other parties failing to perform their obligations is represented by the carrying amount of each financial asset as stated in our consolidated balance sheets.

 

As of March 31, 2020, 2019 and 2018, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, we have not experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank accounts.

 

We are exposed to various types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course of business.

 

Interest rate risk

 

We are subject to risks resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest rate risk.

 

Commodity price risk

 

Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities in the normal course of business. We do not speculate on commodity prices.

 

Foreign exchange risk

 

The RMB is not a freely convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Inflation risk

 

Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of inflation may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.

 

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable. 

 

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PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

The information contained in the Forms 6-K filed with the SEC on July 31, 2019 (File No. 001-38773) is incorporated herein by reference.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

There are no material modifications to the rights of security holders.

 

Use of Proceeds 

 

The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number: 333-231839), or the Form F-1, in relation to our IPO of 2,500,000 to 3,750,000 ordinary shares, at an initial offering price of US$4.00 per share. The Form F-1 was declared effective by the SEC on September 28, 2018. Our IPO closed on December 31, 2019. Boustead Securities, LLC acted as sole underwriter and the book-runner for the offering.

 

The total expenses incurred for our company’s account in connection with our IPO, including underwriting discounts and commissions of approximately US$700,000 and other expenses of approximately US$0.9 million. None of the fees and expenses were directly or indirectly paid to the directors, officers, general partners of our company or their associates, persons owning 10% or more of our ordinary shares, or our affiliates.

 

After deducting the total expenses, we received net proceeds of approximately US$6.49 million from our IPO. We used the net proceeds we receive from this offering for the following purposes:

 

    Use of net proceeds  
Expand manufacturing facility   US$ 0.69 million approximately  
Recruit additional employees to enhance corporate governance   US$ 1.12 million approximately  
Research and development of new products   US$ 0.40 million approximately  
General working capital   US$ 4.28 million approximately  

 

None of the net proceeds from our initial public offering were directly or indirectly paid to the directors, officers, general partners of our company or their associates, persons owning 10% or more of our ordinary shares, or our affiliates.

 

ITEM 15. CONTROLS AND PROCEDURES

 

  (a) Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

 

Based upon that evaluation, our management has concluded that, as of March 31, 2020, our disclosure controls and procedures were not effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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  (b) Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2020. The assessment was based on criteria established in the framework Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of March 31, 2020, our internal control over financial reporting was not effective due to the existence of the following significant deficiencies and material weaknesses:

 

  The Company had inadequate accounting personnel who is capable of US GAAP and bilingual, and that it did not supply adequate training to new staff in a timely manner.

 

  The Company has inadequate segregation of duties in certain accounting processes, including the payroll, cash receipts and disbursements processes in its accounting system, partly because of its limited size and accounting staff.

 

To remediate the material weakness and significant deficiencies described above, the management is currently planning to undertake the following actions: 

 

  To continue to engage bilingual accounting consultant who is familiar with US GAAP while provide ongoing US GAAP training to in-house accounting staff.

 

  To retain additional accounting personnel and continue to enhance our internal finance and accounting organizational structure.

 

  To strengthen the direct management oversight of transactions, along with the use of legal and accounting professionals.

 

  (c) Attestation Report of Independent Registered Public Accounting Firm

 

Not applicable.

 

  (d) Changes in Internal Control over Financial Reporting

 

The management is committed to improving the internal controls over financial reporting and will undertake consistent improvements or enhancements on an ongoing basis. Except as described above, there were no changes in our internal controls over financial reporting during our fiscal year ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 16. RESERVED

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

Mr. Wenwei Fan, Mr. Junsong Li and Mr. Tulin Lu are members of our Audit Committee, where Mr. Wenwei Fan, serves as the chairman. All proposed members of our Audit Committee satisfy the independence standards promulgated by the SEC and by NASDAQ as such standards apply specifically to members of audit committees. It is determined that Mr. Wenwei Fan, possesses accounting or related financial management experience that qualifies him as an “audit committee financial expert” as defined by the rules and regulations of the SEC.

 

ITEM 16B. CODE OF ETHICS

 

We adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws and NASDAQ rules.

 

90

 

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by our principal external auditors, for the periods indicated.

 

  

Year Ended

March 31, 
2020

  

Year Ended

March 31, 
2019
 

 
         
Audit fees(1)  $176,000   $206,000 
Audit related fees(2)   -      
Tax fees(3)   -    - 
All other fees(4)   -    - 
TOTAL  $176,000   $206,000 

  

(1) “Audit fees” means the aggregate fees billed for each of the fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.
   
(2) “Audit related fees” means the aggregate fees billed for each of the fiscal years for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under paragraph (1).

 

(3) “Tax Fees” represents the aggregate fees billed in each of the fiscal years listed for the professional tax services rendered by our principal auditors.

 

(4) “All Other Fees” represents the aggregate fees billed in each of the fiscal years listed for services rendered by our principal auditors other than services reported under “Audit fees,” “Audit-related fees” and “Tax fees.”

 

The policy of our audit committee and our board of directors is to pre-approve all audit and non-audit services provided by our principal auditors, including audit services, audit-related services, and other services as described above, other than those for de minimis services which are approved by the audit committee or our board of directors prior to the completion of the services.

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not Applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

Not Applicable.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

None.

 

ITEM 16G. CORPORATE GOVERNANCE

 

Our ordinary shares are listed on the NASDAQ Capital Market, or NASDAQ. As such, we are subject to corporate governance requirements imposed by NASDAQ. Under NASDAQ rules, listed non-US companies such as ourselves may, in general, follow their home country corporate governance practices in lieu of some of the NASDAQ corporate governance requirements. A NASDAQ-listed non-US company is required to provide a general summary of the significant differences to its US investors either on the company website or in its annual report distributed to its US investors.

 

Other than as described in this section, our corporate governance practices do not differ from those followed by domestic companies listed on the NASDAQ Capital Market. NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20% or more of the company’s common stock or voting power for less than the greater of market or book value (ii) resulting in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval requirements. The British Virgin Islands laws do not require shareholder approval prior to any of the foregoing types of issuances. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above. The Board of Directors of the Company has elected to follow the Company’s home country rules as to such issuances and will not be required to seek shareholder approval prior to entering into such a transaction.

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.

91

 

 

PART III

 

ITEM 17. FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 18. FINANCIAL STATEMENTS

 

The consolidated financial statements and related notes required by this item are contained on pages F-1 through F-27.

 

ITEM 19. EXHIBITS 

 

        Incorporated by Reference    

Exhibit

Number

  Description of Documents   Form   Exhibit No.   Filing Date   Filed
Herewith
                     
1.1   Memorandum and Articles of Association (1)   F-1/A   3.1   April 20, 2018    
                     
1.2   Amended and Restated Memorandum and Articles of Association               X
                     
2.1   Series A Senior Convertible Note, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Alto Opportunities Master Fund, SPC – Segregated Master Portfolio B (5)   F-1/A   4.1   June 21, 2019    
                     
2.2   Series A Senior Convertible Note, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Hudson Bay Master Fund Ltd. (5)   F-1/A   4.2   June 21, 2019    
                     
2.3   Series B Senior Secured Convertible Note, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Alto Opportunities Master Fund, SPC – Segregated Master Portfolio B (5)   F-1/A   4.3   June 21, 2019    
                     
2.4   Series B Senior Secured Convertible Note, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Hudson Bay Master Fund Ltd. (5)   F-1/A   4.4   June 21, 2019    
                     
2.5   Secured Promissory Notes, dated May 2, 2019, issued from Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B to the Company under the Note Purchase Agreement (5)   F-1/A   4.5   June 21, 2019    
                     
2.6   Secured Promissory Notes, dated May 2, 2019, issued from Hudson Bay Master Fund Ltd. to the Company under the Note Purchase Agreement (5)   F-1/A   4.6   June 21, 2019    
                     
2.7   Series A Investor Warrant, dated May 2, 2019 issued to Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B (5)   F-1/A   4.7   June 21, 2019    
                     
2.8   Series A Investor Warrant, dated May 2, 2019 issued to Hudson Bay Master Fund Ltd. (5)   F-1/A   4.8   June 21, 2019    
                     
2.9   Series B Investor Warrant, dated May 2, 2019 issued to Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B (5)   F-1/A   4.9   June 21, 2019    
                     
2.10   Series B Investor Warrant, dated May 2, 2019 issued to Hudson Bay Master Fund Ltd. (5)   F-1/A   4.10   June 21, 2019    

 

92

 

 

2.11   Series A Placement Agent Warrant, dated May 2, 2019 issued to FT Global Capital, Inc. (5)   F-1/A   4.11   June 21, 2019    
                     
2.12   Series B Placement Agent Warrant, dated May 2, 2019 issued to FT Global Capital, Inc. (5)   F-1/A   4.12   June 21, 2019    
                     
4.1   Exclusive Business Cooperation Agreement, dated October 13, 2017, between WFOE and Suxuantang (2)   F-1   10.6   December 4, 2017    
                     
4.2   Share Pledge Agreement dated October 13, 2017, between WFOE, Di Zhou, Ziquan Zhou, Feng Zhou and Suxuantang (2)   F-1   10.7   December 4, 2017    
                     
4.3   Exclusive Option Agreement dated October 13, 2017, between WFOE, Di Zhou, Ziquan Zhou, Feng Zhou and Suxuantang (2)   F-1   10.8   December 4, 2017    
                     
4.4   Form of Power of Attorney dated October 13, 2017, between WFOE, Di Zhou, Ziquan Zhou, Feng Zhou and Suxuantang (2)   F-1   10.9   December 4, 2017    
                     
4.5   Form of Escrow Agreement (1)   F-1/A   10.10   April 20, 2018    
                     
4.6   Securities Purchase Agreement, dated April 15, 2019, among China SXT Pharmaceuticals, Inc. and the investor parties thereto (5)   F-1/A   10.1   June 21, 2019    
                     
4.7   Amendment No. 1 to Securities Purchase Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and the investors thereto (5)   F-1/A   10.2   June 21, 2019    
                     
4.8   Registration Rights Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and the investors under the Securities Purchase Agreement (5)   F-1/A   10.3   June 21, 2019    
                     
4.9   Note Purchase Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B under the Securities Purchase Agreement (5)   F-1/A   10.4   June 21, 2019    
                     
4.10   Note Purchase Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Hudson Bay Master Fund Ltd. under the Securities Purchase Agreement (5)   F-1/A   10.5   June 21, 2019    
                     
4.11   Master Netting Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Alto Opportunity Master Fund, SPC – Segregated Master Portfolio B under the Securities Purchase Agreement (5)   F-1/A   10.6   June 21, 2019    
                     
4.12   Master Netting Agreement, dated May 2, 2019, by and among China SXT Pharmaceuticals, Inc. and Hudson Bay Master Fund Ltd. under the Securities Purchase Agreement (5)   F-1/A   10.7   June 21, 2019    
                     
4.13   Limited Partnership Agreement, dated June 10, 2019, by and among China SXT Pharmaceuticals, Inc. and certain partners thereto*   20-F/A   4.13   August 19, 2019    
                     
4.14   Supplement Agreement No.1 to the Limited Partnership Agreement, dated June 10, 2019, by and among China SXT Pharmaceuticals, Inc. and certain partners thereto*   20-F/A   4.14   August 19, 2019    
                     
4.15   Supplement Agreement No.2 to the Limited Partnership Agreement, dated June 10, 2019, by and among China SXT Pharmaceuticals, Inc. and certain partners thereto*   20-F/A   4.15   August 19, 2019    

 

93

 

 

4.16   Supplement Agreement No.3 to the Limited Partnership Agreement, dated June 10, 2019, by and between China SXT Pharmaceuticals, Inc. and Huangshan Panjie Investment Management Co., Ltd.*   20-F/A   4.16   August 19, 2019    
                     
4.17   Form of Forbearance Agreement enter dated December 13, 2019, by and between China SXT Pharmaceuticals, Inc. and investors   6-K   10.1   December 16, 2019    
                     
4.18   Form of Lock-Up Agreement, dated December 13, 2019, by and between China SXT Pharmaceuticals, Inc. and investors   6-K   10.2   December 16, 2019    
                     
4.19   Form of Leak-Out Agreement, dated December 13, 2019, by and between China SXT Pharmaceuticals, Inc. and investors   6-K   10.3   December 16, 2019    
                     

4.20

  Form of Mutual Release, dated December 13, 2019, by and between China SXT Pharmaceuticals, Inc. and investors   6-K   10.4   December 16, 2019    
                     
4.21   Form of Amended Leak Out Agreement, dated March 3, 2020, by and between China SXT Pharmaceuticals, Inc. and investors   6-K   10.1   March 4, 2020    
                     
8.1   List of Subsidiaries and Consolidated Variable Interest Entities   F-1   21.1   December 4, 2017    
                     
12.1   CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002               X
                     
12.2   CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002               X
                     
13.1   CEO and CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002               X
                     
23.1   Consent of Independent Auditors               X
                     
101.INS   XBRL Instance Document               X
                     
101.SCH   XBRL Taxonomy Extension Schema Document               X
                     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document               X
                     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               X
                     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document               X
                     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document               X

 

* Filed as an exhibit hereto.
   
(1) Incorporated by reference to our Registration Statement on Form F-1/A, filed on April 20, 2018.
(2) Incorporated by reference to our Registration Statement on Form F-1, filed on December 4, 2017.
(3) Incorporated by reference to our Form 6-K, filed on April 17, 2019.
(4) Incorporated by reference to our Form 6-K, filed on May 3, 2019.
(5) Incorporated by reference to our Form F-1/A, filed on June 21, 2019.

 

94

 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

  China Pharmaceuticals, Inc.
   
  /s/ Feng Zhou
  Name: Feng Zhou
  Title: Chief Executive Officer
   
Date: July 31, 2020  

 

95

 

 

CHINA SXT PHARMACEUTICALS, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 

 

Consolidated Financial Statements   Pages 
     
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets as of March 31, 2020 and 2019   F-3
     
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the years ended March 31, 2020, 2019 and 2018   F-4
     
Consolidated Statements of Changes in Shareholders’ Equity for the years ended March 31, 2020, 2019 and 2018   F-5
     
Consolidated Statements of Cash Flows for the years ended March 31, 2020, 2019 and 2018   F-6
     
Notes to Consolidated Financial Statements   F-7 – F-36

 

F-1

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors of

 

China SXT Pharmaceuticals, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of China SXT Pharmaceuticals, Inc. and subsidiaries and variable interest entities (the “Company”) as of March 31, 2020 and 2019, and the related statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years period ended March 31, 2020, and the related notes and schedules (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years period ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ ZH CPA, LLC
 
We have served as the Company’s auditor since 2018.
 
Denver, Colorado
 
July 31, 2020

 

F-2

 

 

CHINA SXT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In US$, except for number of shares data)

 

   As of March 31, 
   2020   2019 
ASSETS        
Current Assets        
Cash and cash equivalents  $7,287,032   $9,130,849 
Restricted cash   -    161,084 
Accounts receivable, net   3,819,437    4,180,559 
Notes receivable   17,744    81,265 
Inventories   892,767    1,007,918 
Advance to suppliers   154,135    319,088 
Loan receivable and accrued interest   1,567,500    - 
Deferred cost   510,617    - 
Amounts due from related parties   768,341    - 
Prepayments, receivables and other current assets   4,618,740    707,337 
Total Current Assets   19,636,313    15,588,100 
           
   Property, plant and equipment, net   1,574,602    1,158,898 
   Construction in progress   328,372    649,235 
   Intangible assets, net   50,052    61,096 
   Deferred tax assets, net   112,839    13,504 
Total Non-current Assets   2,065,865    1,882,733 
TOTAL ASSETS  $21,702,178   $17,470,833 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities          
Bank loans – current portion  $43,902   $27,817 
Short-term convertible note   6,643,463    - 
Notes payable   -    233,336 
Accounts payable   1,941,151    1,685,419 
Refund liabilities   113,611    78,317 
Advance from customers   298,042    57,553 
Amounts due to related parties   -    2,483,094 
Accrued expenses and other liabilities   2,237,305    691,522 
Income tax payable   986,840    1,064,314 
Total Current Liabilities   12,264,314    6,321,372 
           
   Bank loans – non-current portion   36,511    41,706 
Total Non-current Liabilities   36,511    41,706 
TOTAL LIABILITIES   12,300,825    6,363,078 
           
COMMITMENTS AND CONTINGENCIES   -    - 
           
SHAREHOLDERS’ EQUITY          
Ordinary shares, $0.001 par value, unlimited shares authorized, 38,667,707 shares issued and 34,667,707 shares outstanding as of March 31, 2020; 22,706,701 shares issued and outstanding as of March 31, 2019)   34,667    22,706 
Additional paid-in capital   17,161,346    7,950,782 
Retained earnings/(Deficits)   (7,204,000)   3,083,872 
Accumulated other comprehensive Income/(loss)   (590,660)   50,395 
Total Shareholders’ Equity   9,401,353    11,107,755 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $21,702,178   $17,470,833 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

 

 

CHINA SXT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME/(Loss) AND COMPREHENSIVE INCOME/(Loss)
(IN U.S. DOLLARS, EXCEPT SHARES DATA)

 

   For the years ended March 31, 
   2020   2019   2018 
             
Revenues  $5,162,268   $7,012,026   $7,019,243 
   Revenues generated from third parties   4,831,838    6,799,871    5,702,207 
   Revenue generated from related parties   330,430    212,155    1,317,036 
Cost of revenues   (2,458,566)   (2,400,491)   (3,617,748)
Gross profit   2,703,702    4,611,535    3,401,495 
                
Operating expenses:               
    Selling and marketing   (1,583,284)   (1,605,497)   (512,482)
General and administrative   (2,461,535)   (1,236,546)   (1,256,747)
Total operating expenses   (4,044,819)   (2,842,043)   (1,769,229)
                
Operating Income (Loss)   (1,341,117)   1,769,492    1,632,266 
                
Other income (expenses):               
Interest income(expense), net   (3,348,790)   (5,174)   (779)
Loss on debt extinguishment   (5,625,916)   -    - 
Other income (expenses), net   (73,771)   27,141    (3,803)
Total other income (expenses), net   (9,048,477)   21,967    (4,582)
                
Income (Loss) before income taxes   (10,389,594)   1,791,459    1,627,684 
Income tax recovery (provision)   101,722    (252,232)   (440,103)
                
Net income (loss)   (10,287,872)   1,539,227    1,187,581 
                
Other comprehensive income (loss):               
Foreign currency translation adjustment   (641,055)   (206,978)   245,548 
Comprehensive income (loss)   (10,928,927)   1,332,249    1,433,129 
                
Earnings per ordinary share               
Basic and diluted  $(0.416)  $0.075   $0.059 
Weighted average number of ordinary shares outstanding               
Basic and diluted   24,728,655    20,568,630    20,000,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

 

 

CHINA SXT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED March 31, 2020 and 2019

(IN U.S. DOLLARS, EXCEPT SHARES DATA)

 

   Shares   Amount   Additional
paid-in
capital
  

Retained
earnings
(Accumulated
deficits)

   Accumulated
other
comprehensive
income (loss)
   Total equity 
                         
Balance at March 31, 2017   20,000,000   $20,000   $1,463,757   $357,064   $11,825   $1,852,646 
                               
Net income   -    -    -    1,187,581    -    1,187,581 
Foreign currency translation gain   -    -    -    -    245,548    245,548 
Balance at March 31, 2018   20,000,000    20,000    1,463,757    1,544,645    257,373    3,285,775 
                               
Net income                  1,539,227    -    1,539,227 
Net Proceeds from the initial public offering   2,706,701    2,706    6,487,025    -    -    6,489,731 
Foreign currency translation gain (Loss)   -    -    -    -    (206,978)   (206,978)
Balance at March 31, 2019   22,706,701    22,706    7,950,782    3,083,872    50,395   $11,107,755 
                               
Net Income (Loss)   -    -    -    (10,287,872)   -    (10,287,872)
Equity portion and warrants of the convertible notes             2,796,868              2,796,868