The statements contained in this report with respect to our financial condition,
results of operations and business that are not historical facts are
forward-looking statements. Forward-looking statements can be identified by the
use of forward-looking terminology, such as "anticipate," "believe," "expect,"
"plan," "intend," "seek," "estimate," "project," "could," or the negative
thereof or other variations thereon, or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the readers that any such
forward-looking statements contained in this report reflect our current beliefs
with respect to future events and involve known and unknown risks, uncertainties
and other factors, including, but not limited to, economic, competitive,
regulatory, technological, key employees, and general business factors affecting
our operations, markets, growth, services, products, licenses and other factors,
some of which are described in this report and some of which are discussed in
our other filings with the Securities and Exchange Commission (the "SEC"). These
forward-looking statements are only estimates or predictions. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of risks facing our company, and actual events may
differ from the assumptions underlying the statements that have been made
regarding anticipated events.
These risk factors should be considered in connection with any subsequent
written or oral forward-looking statements that we or persons acting on our
behalf may issue. All written and oral forward-looking statements made in
connection with this report that are attributable to our company or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Given these uncertainties, we caution investors not to
unduly rely on our forward-looking statements. We do not undertake any
obligation to review or confirm analysts' expectations or estimates or to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events, except as required by applicable law or
regulation.
Business Overview & Recent Developments
We are principally engaged in the development, manufacture and marketing of
pharmaceutical products for human use in connection with a variety of
high-incidence and high-mortality diseases and medical conditions prevalent in
the People's Republic of China (the "PRC"). All of our operations are conducted
in the PRC, where our manufacturing facilities are located. We manufacture
pharmaceutical products in the form of dry powder injectables, liquid
injectables, tablets, capsules, and cephalosporin oral solutions. The majority
of our pharmaceutical products are sold on a prescription basis and all of them
have been approved for at least one or more therapeutic indications by the
National Medical Products Administration (the "NMPA", formerly China Food and
Drug Administration, or CFDA) based upon demonstrated safety and efficacy.
China's consistency evaluation of generic drugs continued to proceed in 2021.
The supporting policies from central and provincial governments were constantly
issued, including polices regarding consistency evaluation for injectable
products. We have always taken the task of promoting the consistency evaluation
as our top priority, and worked on them actively. However, due to the continuous
dynamic changes of the detailed policies; future market; expected investment;
and return of investment ("ROI") for each drug's consistency evaluation, the
whole industry, including us, has been making slow progress in terms of the
consistency evaluation. We have a product that passed biological equivalents
experiments of consistency evaluation in March 2021. And we've submitted
application documents to NMPA at the end of 2021.
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We have taken a more cautious and flexible attitude towards initiating and
progressing any project for existing products' consistency evaluation to cope
with the changing macro environment of drug sales in China. Since "4 + 7"
(refers to 11 selected pilot cities, including 4 municipalities and 7 other
cities) trial Centralized Procurement ("CP") activities initiated in 2018, six
rounds of CP activities have been carried out by the end of 2021, which
significantly reduced the price of the drugs that won the bids. In addition, the
consistency evaluation has been adopted as one of the qualification standards
for participating in the CP activities. As a result, we need to balance at least
the two factors above before making decisions for any products.
In addition, we continue to explore the field of comprehensive healthcare.
Comprehensive healthcare is a general concept proposed according to the
development of the times, social needs and changes in disease spectrum.
According to the Outline of "Healthy China 2030" issued by Chinese government in
October 2016, the total size of China's health service industry will reach more
than RMB 8 trillion (approximately $1.3 trillion) by 2020, and RMB 16 trillion
(approximately 2.5 trillion) by 2030. This industry focuses on people's daily
life, aging and disease, pays attention to all kinds of risk factors and
misunderstandings affecting health, calls for self-health management, and
advocates the comprehensive care throughout the entire process of life. It
covers all kinds of health-related information, products and services, as well
as actions taken by various organizations to meet the health needs. We launched
Noni enzyme, a natural, Xeronine-rich antioxidant food supplement at the end of
2018.We also launched wash-free sanitizers and masks, in 2020, to address the
market needs caused by COVID-19 in China. With the impact of COVID-19
continuing, masks and sanitizers have become long-time anti-epidemic materials.
We have sufficient production capacity for medical masks, surgical masks and
KN95 masks, which meets the personal needs for protection against the epidemic
outbreak.
We will continue to optimize our product structure and actively respond to the
current health needs of human beings.
Market Trends
As a generic drug company, we are presented with a huge domestic market. We
believe that through further upgrades and better conformity with Chinese
consistency evaluations based on European and American production standards, we
will be able to export our products to overseas markets. In China's market, we
believe that in the future, cost management and control ability will gradually
become an important factor in determining the competitiveness of generic
pharmaceutical enterprises. Although price control leads to a decline in the
profitability, the CP's winning enterprise has a good chance of achieving
price-for-volume in order to increase its market share and support its
continuous innovation transformation. On a separate note, consumption upgrading
in China drives the increase of optional consumption. With the improvement of
residents' quality of life, the healthcare demand is also changing. We believe
that there is a large number of unmet demands in comprehensive healthcare and
Internet healthcare sectors.
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In addition, the Office of the State Council issued "Pilot Plan for Marketing
Authorization Holders" on May 24, 2016, allowing eligible drug research and
development institutions and scientific researchers to become Marketing
Authorization Holders ("MAH") by obtaining drug marketing authorization and drug
approval numbers from the State Council. This policy uses a management model of
separating drug marketing authorization and drug production licenses, thereby
allowing an MAH to produce pharmaceuticals itself or to consign production to
other pharmaceutical manufacturers. This policy not only transitions our
production practices to meet the European and United States standards by
separating drug approval and production qualifications, thereby changing the
existing model of bundling drug approval numbers to pharmaceutical manufacturers
in China, but also serves as a supplement to the ongoing consistency evaluations
policy.
In general, demand for pharmaceutical products is still experiencing steady
growth in China. We believe the ongoing generic drug consistency evaluations and
reform of China's drug production registration and review policies will have
major effects on the future development of our industry and may change its
business patterns. We will continue to actively adapt to the national policy
guidance and further evaluate market conditions for our existing products then
adjust accordingly, and compete in the market in order to optimize our
development strategy.
Results of Operations for the Fiscal Year ended December 31, 2021
Revenue
Revenue was $9.6 million for the year ended December 31, 2021, which represented
a decrease of $1.2 million, as compared to $10.9 million for the year ended
December 31,2020. This was mainly due to the increase of our existing product
sales revenue in 2021 did not exceed the one-time foreign trade orders
recognized in 2020, which was approximately $1.7 million.
Set forth below are our revenues by product category in millions (USD) for the
years ended December 31, 2021 and 2020, excluding the one-time revenue from the
trading of COVID-19 testers for the year ended December 31, 2020:
Year Ended
December 31,
Product Category 2021 2020 Net Change % Change
CNS Cerebral & Cardio Vascular 2.68 2.03 0.65 32 %
Anti-Viral/ Infection & Respiratory 5.22 5.13 0.09
2 %
Digestive Diseases 0.37 0.40 -0.02 -6 %
Other 1.37 1.58 -0.21 -13 %
The most significant revenue increase in terms of dollar amount was in our "CNS
Cerebral & Cardio Vascular", which generated $2.68 million in sales revenue in
2021 compared to $2.03 million in 2020, an increase of $0.65 million. This
increase was mainly due to an increase in sales of our Alginic Sodium Diester
due to market fluctuation.
Sales revenue of our "Anti-Viral/ Infection & Respiratory" product category was
$5.22 million in 2021, compared to $5.13 million in 2020, which represented an
increase of $0.09 million. This increase was mainly due to an increase in sales
of our Cefaclor and Roxithromycin due to market fluctuation.
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Sales revenue in the "Other" category was $1.37 million in 2021, which
represented a decrease of $0.21 million compared to $1.58 million in 2020. This
decrease was mainly due to the sales decrease of Vitamin B6 in fiscal year 2021,
caused by the implementation of centralized procurement policy, a stricter drug
centralized procurement policy, as well as market fluctuation.
Our "Digestive Diseases" category generated $0.37 million of sales revenue in
2021, which represented a decrease of $0.02 million compared to $0.40 million in
2020. This decrease was mainly due to a decrease in sales of our Omeprazole,
caused by the implementation of centralized procurement policy, a stricter drug
centralized procurement policy, as well as market fluctuation.
Year Ended December 31,
Product Category 2021 2020
CNS Cerebral & Cardio Vascular 28 % 22 %
Anti-Viral/ Infection & Respiratory 54 % 56 %
Digestive Diseases 4 % 5 %
Other 14 % 17 %
For the year ended December 31, 2021, revenue breakdown by product category
experienced certain variances compared with that of the prior year. Sales in the
"Anti-Viral/Infection & Respiratory" product category represented 54% and 56% of
total sales in the years ended December 31, 2021 and 2020, respectively. The
"CNS Cerebral & Cardio Vascular" category represented 28% of total revenue in
2021, compared to 22% in 2020. The "Digestive Diseases" category represented 4%
and 5% of total revenue in 2021 and 2020, respectively. The "Other" category
represented 14% and 17% of revenues in 2021 and 2020, respectively.
Cost of Revenue
For the year ended December 31, 2021, our cost of revenue was $9.3 million, or
96.4% of total revenue, which represented an increase of $0.4 million from $8.9
million, or 82.0% of total revenue, in 2020. The increase in the proportion of
costs to revenue is mainly due to the decline in revenue.
Gross Profit and Gross Margin
Gross profit for the year ended December 31, 2021 was $0.3 million, compared to
$2.0 million in 2020. Our gross profit margin in 2021 was 3.6% compared to 18.0%
in 2020. The decrease in our gross profit margin was mainly due to that on one
hand, the one-time COVID-19 tester transaction we had in 2020 had a relatively
higher gross margin, and that on the other hand, the price decrease of our key
products and the cost increase in our main raw materials and some packaging
materials this year.
Selling Expenses
Our selling expenses for the year ended December 31, 2021 were $1.5 million, a
decrease of $0.7 million compared to $2.2 million for the year ended December
31, 2020. Selling expenses accounted for 15.5% of the total revenue in 2021
compared to 20.4% in 2020. Because of adjustments in our sales practices and
Chinese national centralized drug procurement, we reduced selling expenses to
efficiently support our sales and the collection of accounts receivable.
Especially in the context of the increasing impact of centralized drug
procurement, like other players in the industry, we have reduced the promotion
expenses.
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General and Administrative Expenses
Our general and administrative expenses for the year ended December 31, 2021
were $1.7 million, remained close to the amount of $1.8 million in 2020. General
and administrative expenses accounted for 17.1% and 16.8% of our total revenues
in 2021 and 2020, respectively.
Research and Development Expenses
Our research and development expenses for the year ended December 31, 2021 was
$0.32 million, compared to $0.38 million in 2020. Research and development
expenses accounted for 3.3% and 3.5% of our total revenues in 2021 and 2020,
respectively. These expenditures were mainly spent on the consistency evaluation
of our existing products.
Bad Debt Expenses (Benefit)
Our bad debt benefit for the year ended December 31, 2021 was $255,215, as
compared to bad debt expenses of $115,186 in 2020.
In general, our normal customer credit or payment terms are 90 days. This has
not changed in recent years. Due to the peculiar environment affecting the
Chinese pharmaceutical market, deferred payments to pharmaceutical companies by
state-owned hospitals and local medicine distributors are common.
The amount of net accounts receivable that were past due (or the amount of
accounts receivable that were more than 180 days old) was $0.11 million and
$0.06 million as of December 31, 2021 and 2020, respectively.
The following table illustrates our accounts receivable aging distribution in
terms of the percentage of the total accounts receivable as of December 31, 2021
and 2020:
December 31, December 31,
2021 2020
1 - 180 Days 3.17 % 2.38 %
180 - 360 Days 0.11 % 0.20 %
360 - 720 Days 0.24 % 0.44 %
> 720 Days 96.48 % 96.98 %
Total 100.00 % 100.00 %
Our bad debt allowance estimate practice is that we consider accounts receivable
balances aged within 180 days current, except for any individual uncollectible
account assessed by management. We account for the following respective
percentage as bad debt allowance based on age of the accounts receivables: 10%
of accounts receivable that are between 180 days and 365 days old, 70% of
accounts receivable that are between 365 days and 720 days old, and 100% of
accounts receivable that are greater than 720 days old.
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We recognize bad debt expenses per actual write-offs as well as changes of
allowance for doubtful accounts. To the extent that our current allowance for
doubtful accounts is higher than that of the previous period, we recognize a bad
debt expense for the difference during the current period, and when the current
allowance is lower than that of the previous period, we recognize a bad debt
credit for the difference. The allowance for doubtful account balances were
$18.3 million and $18.2 million as of December 31, 2021 and December 31, 2020,
respectively. The changes in the allowances for doubtful accounts during the
years ended December 31, 2021 and 2020 were as follows:
For the Fiscal Years Ended
December 31,
2021 2020
Balance, Beginning of Period $ 18,150,493 $ 17,575,100
Bad debt expense (255,215 ) 115,186
Accounts receivable written off (687,715 )
Foreign currency translation adjustment 417,429 1,147,922
Balance, End of Period $ 18,312,707 $ 18,150,493
Loss from Operations
Our operating loss for the year ended December 31, 2021 was $2.9 million,
compared to an operating loss of $2.6 million in 2020. The increase in Loss from
Operations was mainly due to the decrease in revenue in 2021.
Net Interest Expense
Net interest expense was $0.54 million for the year ended December 31, 2021 and
$0.29 million for the year ended December 31, 2020.
Net Loss
Net Loss for year ended December 31, 2021 was $3.4 million, compared to net loss
of $2.9 million for the year ended December 31, 2020. The increase in net loss
was mainly a result of the decrease in revenue.
Loss per basic and diluted common share was $0.07 for the year ended December
31, 2021 and 2020, respectively.
The number of basic and diluted weighted-average outstanding shares used to
calculate loss per share was 46,129,256 for 2021, as compared to 43,623,273 for
2020.
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Liquidity and Capital Resources
In April 2020, the Company obtained a line of credit from Postal Savings Bank of
China for an aggregate amount of RMB 10,000,000 (approximately $1.4 million), of
which RMB 5,000,000 (approximately $0.7 million) was advanced in April 2020, and
RMB 3,000,000 (approximately $0.4 million) was advanced in July 2020. The loan
bears interest at a rate of 4.25% per annum. Advances on the line of credit are
due two years from the date of the advance. A third party company has guaranteed
the loan as being a second priority creditor in the collateral in certain land
use rights and buildings next to the creditor of the construction loan facility
as discussed above. In addition, the Company's Chief Executive Officer and Chair
of the Board personally guaranteed the new line of credit. The Company has an
additional RMB 2,000,000 (approximately $0.3 million) available under the line,
subject to a risk review and approval by the third party guarantee company. The
Company repaid RMB 1,600,000 (approximately $0.25 million) during the year ended
December 31, 2021 as per the repayment schedule.
On June 30, 2020 the Company obtained a line of credit from Bank of
Communications for an aggregate amount of RMB 8,500,000 (approximately $1.2
million), all of which has been advanced. The loan bears interest at the rate of
4.05% per annum. The line of credit is due in one year on the anniversary date
of the line of credit. In addition, the Company's Chief Executive Officer and
Chair of the Board personally guaranteed the new line of credit and pledged
personal assets as collateral for the loan. On June 21, 2021 the Company paid
the balance in full. On June 25, 2021 the Company entered into a new loan
bearing an interest rate of 4.17%. The line of credit is due in one year on the
anniversary date of the line of credit. In addition, the Company's Chief
Executive Officer and Chair of the Board personally guaranteed the new line of
credit and pledged personal assets as collateral for the loan.
The Company obtained a line of credit of RMB 3,200,000 (approximately $0.5
million) from China CITIC Bank in September 2020 and obtained an advance of RMB
2,343,340 (approximately $0.3 million), and the remaining of RMB 856,660
(approximately $0.1 million) in October 2020 under this line. The loan bears
interest at the rate of 4.50% per annum. In September, 2021 the Company repaid
the line of credit in full, Also in September, 2021 the Company entered into a
new line a credit in the amount of RMB 3,200,000 (approximately $0.8 million) on
the same terms. The line of credit is due on September 2, 2022. In addition, the
Company's Chief Executive Officer and Chair of the Board personally guaranteed
the new line of credit and pledged personal assets as collateral for the loan.
On July 12, 2021, the Company obtained a short-term loan of RMB 3 million
(approximately US$460,000) from Haikou HaiHongXin microfinance Co., Ltd., with a
monthly interest rate of 1.5%. The company paid off the loan in September 2021.
This loan was guaranteed by Haikou Financing Guarantee Company.
On September 18, 2021 the Company obtained a line of credit for RMB 10,000,000
(approximately $1.54 million) from Bank of China. The loan bears interest at the
rate of 3.85% per annum. The line of credit is due September 18, 2022. The loan
is collateralized by the Company's new production facility and the included
production line equipment and machinery. In addition, the Company's Chief
Executive Officer and Chair of the Board personally guaranteed the new line of
credit.
As discussed more fully in Note 9 to the consolidated financial statements, on
November 17, 2021, the Company entered into a Securities Purchase Agreement (the
"Agreement") pursuant to which the Company issued an unsecured convertible
promissory note (the "Note") to an institutional accredited investor
Streeterville Capital, LLC (the "Investor"). The Note matures fifteen months
after the purchase price of the Note is delivered from the Investor to the
Company (the "Purchase Price Date"). The Note has the original principal amount
of $5,250,000 and Investor gave consideration of $5,000,000, reflecting original
issue discount of $250,000. The transaction contemplated under the Agreement was
closed on November 19, 2021 and the Company anticipates using the proceeds for
general working capital purposes.
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The Note is convertible into 3,500,000 shares of the Company's common stock at a
price of $1.50 through April 19, 2022. Thereafter, the Note is convertible into
1,750,000 shares at a price of $3.00 per share.
Interest accrues on the outstanding balance of the Note at 5% per annum
compounded daily. Upon the occurrence of an Event of Default as defined in the
Note, interest accrues at the lesser of 22% per annum or the maximum rate
permitted by applicable law. In addition, upon any Event of Default, the
Investor may accelerate the outstanding balance payable under the Note, which
will increase automatically upon such acceleration by 15% or 5%, depending on
the nature of the Event of Default.
Investor may redeem all or any part the outstanding balance of the Note, subject
to $500,000 per calendar month, at any time after one hundred twenty-one (121)
days from the Purchase Price Date upon three trading days' notice, in cash or
converting into shares of the Company's common stock, par value $0.001 (the
"Common Stock") at a price equal to 85% multiplied by the lowest daily volume
weighted average price during the ten trading days immediately preceding the
applicable redemption conversion, subject to certain adjustments and ownership
limitations specified in the Note. The Note provides for liquidated damages upon
failure to comply with any of the terms or provisions of the Note. The Company
may prepay the outstanding balance of the Note with the Investor's consent. At
inception, the Note was redeemable into 8,811,430 shares of the Common Stock
based on the lowest volume weighted average price of $0.595817 on the inception
date of November 19, 2021. As of December 31, 2021, the Note was convertible
into 11,975,447 shares of the Common Stock based on the lowest volume weighted
average price of $0.438397 on that date.
On March 21, 2022 the Investor redeemed $100,000 of the Note at the lowest
volume weighted average price of $0.3113 during the ten trading days immediately
preceding the applicable redemption conversion. Accordingly, the Company issued
a total of 321,233 shares of the Common Stock to the Investor on March 23, 2022.
Although the Company obtained the convertible note and additional lines of
credit in 2021, there can be no assurance that the Company will be able to
achieve its future strategic goal to accelerate the launch of nutrition
products. This raises substantial doubt about the Company's ability to continue
as a going concern. Although our Chairperson and Chief Executive Officer had
advanced funds for working capital during the year ended December 31, 2021,
there can be no assurances that this will be the case in the future. We may seek
additional debt or equity financing as necessary when we believe the market
conditions are the most advantageous to us and/or require us to reduce certain
discretionary spending, which could have a material adverse effect on our
ability to achieve our business objectives. There can be no assurance that any
additional financing will be available on acceptable terms, if at all.
Operating Activities
Net cash used in operating activities was $0.25 million in the year ended
December 31, 2021, compared to $0.04 million in 2020.
As of December 31, 2021, our net accounts receivable was $0.7 million, an
increase of $0.2 million from $0.5 million as of December 31, 2020.
As of December 31, 2021, total inventory was $3.3 million, compared to $3.7
million as of December 31, 2020.
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Investing Activities
During the year ended December 31, 2021, net cash used in investing activities
was $0.44 million, compared to $0.87 million for the year ended December 31,
2020. The payments in 2021 were mainly due to the purchase of equipment.
Financing Activities
Cash flow generated from financing activities was $4.60 million in the year
ended December 31, 2021; compared to $0.62 million in the year ended December
31, 2020. This change was mainly because of a convertible debt issued in 2021.
According to relevant PRC laws, companies registered in the PRC, including our
PRC subsidiary, Helpson, are required to allocate at least ten percent (10%) of
their after-tax net income, as determined under the accounting standards and
regulations in the PRC, to statutory surplus reserve accounts until the reserve
account balances reach fifty percent (50%) of the companies' registered capital
prior to their remittance of funds out of the PRC. Allocations to these reserves
and funds can only be used for specific purposes and are not transferrable to
the parent company in the form of loans, advances or cash dividends. For the
years ending December 31, 2021 and 2020, Helpson's net assets totaled $3,447,000
and $5,777,000, respectively. Due to the restriction on dividend distribution to
overseas shareholders, the amount of Helpson's net assets that was designated
for general and statutory capital reserves, and thus could not be transferred to
our parent company as cash dividends, was 50% of Helpson's registered capital,
which is $8,145,000 for each of the fiscal years ended December 31, 2021 and
2020. Since the amount that Helpson must set aside for the statutory surplus
fund only accounts for 236% and 141%, respectively, of its total net assets,
this reserve does not have a major impact on our liquidity. There were no
allocations to the statutory surplus reserve accounts during the year ended
December 31, 2021.
The Chinese government also imposes controls on the conversion of RMB into
foreign currencies and the remittance of currencies out of China. Our businesses
and assets are primarily denominated in RMB. All foreign exchange transactions
must take place at the exchange rates quoted by the People's Bank of
China. Either through the People's Bank of China or other banks authorized to
buy and sell foreign currencies, approval of foreign currency payments by the
People's Bank of China or other regulatory institutions requires the submission
of a payment application form together with certain invoices and executed
contracts. The currency exchange control procedures imposed by Chinese
government authorities may restrict Helpson, our Chinese subsidiary, from
transferring its net assets to our parent company through loans, advances or
cash dividends.
Off-Balance Sheet Arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements.
Critical Accounting Policies
Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP"). Our financial statements reflect the selection and
application of accounting policies which require management to make significant
estimates and judgments. Please refer to Note 1 to our consolidated financial
statements, "Organization and Significant Accounting Policies" for the
discussion of our critical accounting policies.
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