ITEM 1. BUSINESS
Overview
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, CFDA) based upon demonstrated safety
and efficacy.
As of December 31, 2022, we
manufactured 19 pharmaceutical products for a wide variety of diseases and medical indications, each of which may be classified into one
of three general categories:
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Basic generic drugs, which are common drugs in the PRC for which there is a very large market demand; |
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First-to-market generic drugs, which are generic western drugs that are new to the PRC marketplace; or |
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Modern Traditional Chinese Medicines, which are generally comprised of non-synthetic, plant-based medicinal compounds that have been widely used in the PRC for thousands of years. We apply modern production techniques to produce pharmaceutical products in different formulations, such as tablets, capsules or powders. |
In selecting generic drugs
to develop and manufacture, we consider several factors, including the number of other manufacturers currently producing this particular
drug, the size of the market for that drug, the proposed or required method of distribution, the existing and expected pricing for that
particular drug in the marketplace, the costs of manufacturing that drug, and the costs of acquiring or developing the formula for that
drug. We believe that generic drugs we have always been selecting to manufacture have large addressable markets and higher profit margins
relative to other generic drugs manufactured and distributed in the PRC.
In addition, we manufactured
comprehensive healthcare products and protective products.
We currently own and
operate two production facilities in Haikou, Hainan Province, PRC. One has a construction area of 663.94 square meters, the other
factory has two buildings with production area of 20,282.42 square meters and 6,593.20 square meters. We implement quality control
procedures in this facility in compliance with the PRC’s Good Manufacturing Practices, or GMP standards, and applicable NMPA
regulations to ensure consistent quality in our products.
The NMPA promulgated Good
Manufacturing Practices for Pharmaceutical Products (2010 revised version) on February 12, 2011 (effective as of March 1, 2011) (the
“Year 2011 GMP Standards”). The Year 2011 GMP Standards outlines the basic principles and standards for the manufacturing
of pharmaceutical products and the management of quality controls in the pharmaceutical products manufacturing industry in the PRC. All
of our production lines: tablets, capsules, dry powder, liquid injectables, solid oral solution Cephalosporins (specifically designated),
are in full compliance with the Year 2011 GMP Standards. A newly revised Drug Administration Law (the “New Law”) came into
effect on December 1, 2019. The New Law cancelled the GMP certification but impose the pilot inspection mechanism in the event that if
any production line(s) does not satisfy any pilot inspection under the New Law, the production on such production line(s) could be suspended.
We market and sell our products
through 16 sales offices covering all major cities and provinces in the PRC. To comply with applicable Chinese laws relating to sales
of prescription drugs to certain hospitals and clinics, we also use a distribution system comprised of over 1,000 independent provincial-level,
city-level, and county-level distributors. Our sales system has further developed and expanded with the expansion of Chinese healthcare
reform, and our 16 provincial offices deliver our products to basic health care institutions as well as tier two and tier three hospitals
through the above mentioned distributors.
Our corporate organizational
chart is set forth below.
Industry Background and Market Opportunities
According to the relevant
data of the pharmaceutical manufacturing industry released by the National Bureau of Statistics of the People's Republic of China (“NBS”),
as of July 2022, the cumulative value of the operating revenue of the pharmaceutical manufacturing industry in China was RMB1,609 billion, down
1.8% from the same period last year; The accumulated value of profit was RMB247 billion, down 30.7% from the same period last year. In
the first half of 2022, due to the pressure of industry revenue affected by the COVID-19, thee costs was not reduced and the profit pressure
was greater.
While fully enjoying the benefit
of rigid demand, the development of the pharmaceutical industry is also under the pressure of medical insurance fee control. According
to the data of NBS, the proportion of China’s population over the age of 65 has reached 14.9% by the end of 2022. With the gradual
deepening of population aging, the demand continues to be strong, but the ensuing medical insurance pressure has also become the main
theme of industrial policy changes in recent years.
On one hand, more and more
people use medical insurance funds; on the other hand, fewer and fewer people pay premiums. Under this circumstance, population aging
has become one of the main factors aggravating the imbalance of medical insurance fund. According to the latest Statistical Bulletin
on the Development of National Medical Insurance in 2021 issued by NBS, the number of people participating in national basic medical
insurance reached 1.36 billion in 2021, and the participation rate remained stable at more than 95%. According to the national medical
security plan for the 14th five-year-plan issued by the General Office of the State Council of China on September 29, 2021,
personal health expenditure only occupied 27.7% of the total health expenditure in 2020, and it is planned to remain to be at around 27%
by 2025. This means that the vast majority of medical and health expenditure is being borne by the government and society. Under the background
of medical insurance adjustment, domestic drug sales have also experienced great changes. The use of adjuvant drugs has gradually fallen
out of favor, giving up the share of medical insurance funds for specialized drugs and tumor drugs with more clinical efficacy. Under
such policies, pharmaceutical enterprises have to carry out innovation and transform. And the overall environment of deepening medical
reform has greatly reduced the profits of generic pharmaceutical enterprises in China.
China National Healthcare
Security Administration (“NHSA”) has gradually promoted volume-based procurement for the entire national market, therefore,
pharmaceutical manufacturers have greatly reduced the price in order to win the bid. Since the start of procurement piloting in 11 cities
in 2018, there have been eight rounds of practices, showing the following trend:
The market scale gradually
expanded: from 11 pilot cities to 31 provincial regions in China.
The number and category of
drugs involved increased: each batch expanded from about 30 in the early stage to about 60.
According to the
information of the State Medical Security Administration, the seventh batch of national centralized procurement involves 60 drugs,
and the average price of the selected drugs is expected to be reduced by 48%. According to the agreed purchase volume, it is
estimated that a cost of RMB 18.5 billion can be saved per year. This has significantly reduced the price of drugs, thus
significantly reducing the expenditure of the medical insurance fund. On February 21, 2023, the filling and reporting of drug
information related to the eighth batch of national drug centralized procurement was officially launched. According to the published
scope of drug filling, there are 41 varieties and 181 specifications of drugs entering this round.
We also have observed the
continuous improvement in medical demand and consumption level in recent years, and the value of high-quality medicine with innovation
and consumption attributes has become prominent. In addition, China’s State Council issued Some Policies and Measures on Accelerating
The Characteristic Development of Traditional Chinese Medicine in February 2021. This policy proposes to follow the development law
of traditional Chinese medicine (TCM);conscientiously sum up the experience and practice in preventing and treating of COVID-19 using
TCM; promote the complementary and coordinated development of TCM and Western medicine.
Impact from the New Coronavirus Global Pandemic
(“COVID-19”)
We continued to operate under
the strict control and quarantine policies due to COVID-19 in 2022. Many places, including Haikou, the city where our headquarter and
production facility is located, have experienced compulsory government quarantines and lock-down. In this environment, our ordinary production,
procurement, sales, and logistics activities were under heavy negative pressure.
As the epidemic has entered
the era of Omicron mutant, its infectivity has been greatly enhanced, but its pathogenicity has been significantly weakened. In addition,
vaccination has been popularized and prevention and control experience has been accumulated. Some countries around the world have significantly
loosed the epidemic prevention and control, and moved to a new stage of coexistence with the virus. Recently, China's epidemic prevention
and control guidance has also been continuously optimized, which includes the end of zero-case policy.
On December 14, 2022, Director
General of the World Health Organization (WHO) Tan Desai said that it was expected that the COVID-19 epidemic would no longer constitute
a global health emergency sometime in 2023. From December 25, 2022, the China's National Health Commission of China will no longer release
daily epidemic information. On December 26, 2022, the National Health Commission issued the Plan for "Class B disease and Class B
Control" of COVID-19 Infection (the “Plan”). The Plan clearly points out that the "COVID-19 infection" will
be adjusted from " Class B disease and Class A Control " to " Class B disease and Class B Control " from January 8,
2023, which is a major adjustment of China's COVID-19 epidemic prevention and control policy. At the same time, the Plan points out that
quarantine infectious disease management measures will no longer be taken for people and goods entering the country. This means that China's
prevention and control will focus on "protecting health and preventing severe diseases" to minimize the impact of the epidemic
on economic and social development.
Consistency Evaluation for Generic Drugs
According to the disclosure
of the State Drug Administration of China in May 2022: China's modern pharmaceutical industry started relatively late, and drug production
is dominated by imitation. More than 95% of the chemical drugs approved for marketing are generic drugs, covering nearly 30 treatment
fields such as cardio-cerebrovascular system, respiratory system, anti-tumor, anti-infection, etc., which basically satisfy public drug
demand.
According to the requirements
of the relevant documents of the State Council of China, in the reform of the review and approval system of drugs and medical devices,
the state has listed the improvement of the quality of generic drugs as one of the important reform objectives. For the generic drugs
that have been approved for marketing, the consistency evaluation shall be carried out in stages and batches according to the principle
of consistency with the quality and efficacy of the original drug.
On January 17, 2019, the State
Council released the “Pilot Program for the Centralized Procurement and Use of Drugs by the State Organization” (“the
Program”). According to the Program, the trial drugs are selected from the generic drugs that have passed the consistency evaluation,
and the state organizes the centralized purchase of drugs to reduce the drug price and reduce the burden of drug expenses on patients.
Our company has actively promoted
the Evaluation process of several important products in 2022.
The PRC’s medical insurance system
National Healthcare Security Administration
(“NHSA”) issued the Statistical Bulletin on the Development of National Medical Security in 2021 (the
“Bulletin”) on June 8, 2022. The Bulletin showed the total income of the national basic medical insurance (including
maternity insurance) fund was RMB2.87 trillion in 2021, which represented an increase of 15.6% over the previous year. According to
the Bulletin, 1.36 billion people had participated in the national basic medical insurance (hereinafter referred to as the basic
medical insurance) by the end of 2021, and the participation rate was stable at more than 95%.
China's medical insurance system
reform has gone through a long process. At present, it has gradually realized a comprehensive and multi-level medical insurance
system. After 2018, the establishment of the NHSA opened the prelude to a new stage of reform, and the rules and procedures of the
adjustment of the medical insurance catalogue and the national medical insurance negotiation have been gradually improved. From the
beginning of the negotiation in 2017, five rounds of negotiation access have been completed by December 2022, and then once a year.
Medical insurance is the largest medical
service purchaser in China. Entering the Medical Insurance Catalogue (the “MIC” or the “Catalogue”) will
greatly help speed up the large-scale sales of drugs. The list of the MIC drugs was born in the first edition of the list in 2000,
revised for the first time in 2004, adjusted for the second time in 2009, and then remained unchanged for 8 years, significantly
affecting the availability of drugs and the efficiency of fund use. The Ministry of Human Resources and Social Security issued the Notice
on Publicly Soliciting Opinions and Suggestions on Establishing and Perfecting the Dynamic Adjustment Mechanism of the Drug Catalog
of Basic Medical Insurance, Industrial Injury Insurance and Maternity Insurance in April 2017, which gradually established the
dynamic adjustment mechanism. Starting from 2020, it is planned to update the MIC every year. The
average time interval between obtaining approval and completing the formalities for entering the medical insurance list through
negotiation was 6.5 years in 2017, while it was reduced to 1.3 years in 2021.The frequency of products entering the MIC has greatly
accelerated. In the face of increasing medical and health demand and increasing medical insurance pressure, how to efficiently use
medical insurance funds has become the focus of the adjustment of the Catalogue in recent years. The latest version of the MIC was
officially implemented on March 1, 2023. 111 new drugs were added to the Catalogue, and the average price of drugs newly admitted
through negotiation and bidding decreased by 60.1% compared to the average price of drugs before the entering of MIC. The total
number of drugs in the latest version of the Catalogue reached 2,967, including 1,586 western medicines and 1,381 traditional
Chinese patent medicines and simple preparations; There are still 892 kinds of traditional Chinese medicine without
adjustment.
National medical insurance negotiation: In 2015, China first proposed
the general idea of centralized and classified drug procurement, and the drug price negotiation was also started. The negotiation for
the pilot procurement led by the National Health and Family Planning Commission was launched at the end of the same year, which also provided
practical experience for the subsequent national health insurance negotiation. After the establishment of the NHSA in 2018, the NHSA will
formulate and implement the rules of the medical insurance catalog access negotiation. Up to now, five batches of national medical insurance
negotiations have been completed, and the sixth negotiation in 2022 was completed on January 2023. Compared with previous years, the number
of drugs participating in this medical insurance negotiation has increased significantly. According to the list previously released by
the NHSA, 343 drugs have passed the formal review this year, including 198 new varieties of drugs outside the Catalogue and 145 new varieties
of drugs in the Catalogue. In addition, there are many kinds of anti-cancer drugs, high-value rare disease drugs and other major disease
drugs participating in this year's negotiations.
We believe that under the
background of national medical insurance cost control, centralized procurement of drugs and medical insurance negotiation should be the
new norm.
Centralized Procurement of
Drugs (CPD)
Since November 2018, China's
national centralized procurement with volume has basically maintained the pace of two batches a year, and eight batches have been carried
out. Six batches of chemical drugs have been completed, one batch of biological drugs (insulin) has been completed, and the batch of traditional
Chinese medicine is still in progress. With the continuous promotion of the reform of CPD, the price of medicine has been squeezed. The
average price of the first six batches of centralized purchase was reduced by 53%, and the cumulative decrease in drug costs was more
than RMB260 billion.
In 2022, the policy of "Increasing the
Speed and Expanding the Coverage" will continue to be promoted in the field of centralized drug procurement: it is required to
strive for the number of drug varieties to reach "100+" in each province, and the number of generic names of drugs
purchased by the state and local governments in each province will reach "350+". Under the new requirements, both national
and local volume-based procurement are accelerating, and the seventh batch of national procurement has been successfully completed
and implemented. The average price of the seventh batch of CDP was reduced by 48%, which is expected to decrease drug cost by
RMB18.5 billion annually.
Our Strategy
We believe that the pursuit
of innovation is imperative for providing the basic medical solutions needed by the majority of patients. We are passionate about protecting
human health, and we always adhere to the highest standards of ethics and integrity to fulfill our firm commitment to our customers and
patients.
We believe we are well-positioned
in a comparatively steadily growing industry in one of the fastest-growing economies in the world. With China’s per capita GDP exceeding
US$12,000 in 2022, consumption structure upgrade, and the establishment of a high-quality health care system has become one of the most
important tasks. We currently manufacture a number of off-patent branded generic drugs. Our diverse portfolio of products and 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. We launched several epidemic prevention products such as medical masks, surgical
masks, KN95 masks, and N95 masks, and wash-free sanitizers since the outbreak of COVID-19 at year end 2019. In addition, we continue to
explore comprehensive healthcare market after the launch of Noni enzymes in 2018. China has entered a post epidemic era with the end of
the dynamic zero-COVID policy since December 2022. we will actively explore various health solutions for long-COVID in this environment.
Consistency evaluation of
our current existing major products will be the focus of our strategy in the near future. The consistency evaluation of generic drugs
will improve Chinese generic drugs quality and eliminate unqualified enterprises, so that high-quality generic drug companies are expected
to benefit from it. Consistency evaluation, together with the centralized drug procurement, are optimizing the competitive landscape of
the Chinese pharmaceutical industry. We believe that the market space and growth potential for Chinese generic drugs are huge.
A series of medical reform
policies introduced in recent years has profound and far-reaching impact on pharmaceutical companies. Therefore, early considerations
of the transformation and upgrading, as well as product positioning become very important. Based on more than twenty-year experience in
R&D, production and marketing experiences, and our market insights, we have decided to gradually adjust our strategy to produce generic
and innovative drugs with high value in pharma-economics, good clinical efficacy and market differentiation. These include drugs that
treat chronic diseases prevalent in China, such as geriatric diseases, cancers, and nutritional products.
In addition, as another direction
of strategic development, we will actively explore digital interactive healthcare solutions on the Internet. After the advent of the Internet
era, marketing is no longer a vertical down logical relationship, but a decentralized form of interconnection. We will proactively adjust
our business focus and allocate resources to meet market development preferences, provide a more convenient user experience, better standard
treatment plans, and bring higher patient satisfaction.
Our objective is to leverage
our expertise in the PRC for the development, manufacture and commercialization of pharmaceutical products. We intend to achieve this
objective by:
Promoting Our Existing Brands to Increase
Our National Recognition. We intend to support and grow the existing recognition and reputation of our brands and to maintain our
branded pricing strategy through continued sales and marketing efforts through our production lines. To achieve this goal, we plan to
promote the efficacy and safety profile of our established prescription pharmaceutical products to physicians at hospitals and clinics
in all provinces of PRC through the efforts of our sales force, independent distributors and educational physician conferences and seminars.
Promoting the progress of consistency
evaluation of our current existing main products. We intend to cope with the latest policies and the GPO requirements. We aim to make
efficient use of our existing human and material resources, and strive to create favorable conditions for product sales and international
development through gaining a favorable result in the consistency evaluation.
Exploring on the consumption healthcare
market. Consumption healthcare generally refers to products or services that have certain medical features and can bring health improvement
to consumers, but are mainly paid by individuals (less dependent on medical insurance) and have brand effect. We have observed that it
has become a high growth field in recent years. It is not limited by medical insurance, and has low penetration rate and high growth.
It covers the fields of consumption of traditional Chinese medicine, physical examination, health care, rehabilitation and so on. We will
continue to actively explore this niche market.
Expanding Our Distribution Network
to Increase Market Penetration. We intend to expand our reach beyond our current 16 offices in the PRC to drive additional growth
of our existing and future products. We currently contract with over 1,000 distributors in the PRC and plan to expand on these relationships
to target new markets. We will continue our conservative sales strategy of increased cooperation with customers with reliable accounts
receivable collection performance. In addition, 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 presence. Over the long term, we also intend
to expand our presence beyond the PRC to international markets by working with international pharmaceutical companies to cross-sell our
products.
Explore CDMO services. Since
the State Council of China issued The Pilot Scheme of Drug Marketing License Holder System in 2016, we have been actively exploring
the CDMO market, especially in the field of high-end manufacturing. We will focus on developing CDMO of pharmaceutical preparations required
in the whole life cycle from preclinical, clinical trials, scale-up manufacturing to drug marketing. Make full use of our more than two
decades of whole process experience in China’s pharmaceutical industry to engage in pharmaceutical formula research, development,
NMPA production application, industrialization and commercialization. We strive to achieve internal and external coordination and complement
each other’s resources and advantages.
Acquiring Complementary Products
Lines, Technologies, Distribution Networks and Companies. We intend to selectively pursue strategic acquisition opportunities that
we believe will grow our customer base, expand our product lines and distribution network, enhance our manufacturing and technical expertise
or otherwise complement our business or further our strategic goals. Pursuing strategic acquisitions is a significant component of our
growth strategy. The Company has not identified any strategic acquisition opportunities as of the date of this report on Form 10-K.
Products
We currently have a product
portfolio of 22 products, including 19 pharmaceutical products that address a wide variety of diseases and medical indications, and the
remaining are comprehensive healthcare and protective products. All of our pharmaceutical products have demonstrated safety and efficacy
in clinical trials sufficient to obtain approval by the NMPA and are sold on a prescription basis. The following table summarizes the
approved indications for our marketed products and the year in which each of such products was first marketed to our customers.
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Year of |
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Commercial |
Product |
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Indication |
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Launch |
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Central Nervous System (CNS) and Cerebral-Cardiovascular Diseases |
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CerebroproteinHydroloysate Injection |
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Memory decline and attention deficit disorder caused by the sequela of craniocerebral trauma and cerebrovascular diseases. |
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1996 |
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Gastrodin Injection |
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Tiredness, loss of concentration, poor sleep, and traumatic syndromes of the brain, including vertigo, neuralgia and headaches. |
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2005 |
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Propylgallate for Injection |
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Cerebral thrombosis, coronary heart disease and complications after surgery such as thrombus deep phlebitis. |
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2006 |
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Ozagrel Sodium for Injection |
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Acute thrombotic cerebral infarction and dyskinesia associated with cerebral infarction |
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2006 |
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Alginic Sodium Diester Injection |
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Ischemic heart disease, cerebrovascular diseases (cerebral thrombosis, cerebral embolism and coronary heart disease) and high lipoprotein blood disease. |
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2006 |
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Bumetanide for Injection |
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Various edema diseases (including those associated with heart failure, hepatic cirrhosis, nephropathy, and pulmonary edema), hypertension, acute renal failure, hyperkalemia, hypercalcemia and for the rescue from acute drug poisoning. |
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2007 |
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Candesartan |
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Hypertension |
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2013 |
Anti-infection and Respiratory Diseases |
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Roxithromycin Dispersible Tablets |
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Pharyngitis and tonsillitis caused by Streptococcus pyogenes; sinusitis, tympanitis, acute and chronic bronchitis caused by acute bacterial infection, Mycoplasma pneumonia and Chlamydia pneumoniae; urethritis and cervical infection caused by chlamydia trachomatis; skin soft tissue infection caused by sensitive bacteria. |
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1995 |
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Cefaclor Dispersible Tablets |
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Tympanitis, lower respiratory tract infection, urinary tract infections and skin/skin tissue infection. |
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2002 |
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Cefalexin Capsules |
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Acute tonsillitis caused by sensitive fungi, airway infections, such as pharyngitis, otitis media, nasal sinusitis and bronchitis; pneumonia, respiratory tract infection, urinary tract infections and skin soft tissue infections. |
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2002 |
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Andrographolide |
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Detoxification, antibacterial and anti-inflammatory. For sore throat caused by upper respiratory tract infection |
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2003 |
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Clarithromycin Granules and Capsules |
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Nasopharynx infection, lower respiratory tract infection, skin tissue infection, acute tympanitis and mycoplasma pneumonia caused by clarithromycin susceptible organisms; urethritis and cervical infection caused by chlamydia trachomatis; and the treatment of legionella infection, mycobacterium avium complex (MAC) infection and helicobacter pylori infection. |
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2004 |
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Naproxen Sodium and PseudophedrineHydrochlorida Sustained Release Tablet |
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Relieves cold, sinus and flu symptoms, blocked nose caused by anaphylaxis rhinitis, runny nose, fever, sore throat, symptoms of myalgia in the limbs and pain around the joints. |
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2005 |
Digestive Diseases |
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Hepatocyte Growth-promoting Factor for Injection |
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Serious viral hepatitis symptoms caused by various viral hepatitis types (acute, subnormal temperature, chronic serious disease early or middle period of hepatitis). |
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2005 |
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Tiopronin |
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Acute and chronic Hepatitis B, and for the relief of drug-induced liver injury. |
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2009 |
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Compound Ammonium Glycyrrhetate S for Injection |
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Liver dysfunction caused by acute and chronic hepatitis; supplemental treatment to toxic/trauma hepatitis, liver cancer; also for the indication of food/drug poisoning, and drug allergy. |
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2009 |
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Omeparzole |
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Gastroesophageal reflux disease, and other conditions caused by excess acidic formulations in the stomach, including gastric ulcers, recurrent duodenal ulcers and Zollinger-Ellison Syndrome. |
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2009 |
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Others |
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Vitamin B6 for Injection |
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Vitamin supplement. |
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2005 |
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Granisetron Hydrochloride Injection |
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Nausea and vomiting caused by radiotherapy and chemotherapy during the treatment of malignant tumors. |
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2006 |
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Comprehensive Healthcare and Protective Products |
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Noni Enzyme |
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natural, healthy and nutritionrich
a natural, healthy and nutrition-rich food supplement |
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2018 |
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Sanitizer |
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75% alcohol wash-free sanitizer |
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2020 |
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Masks |
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KN95 Particulate Respirator, Disposable Medical Mask, Particle Filtering Mask, N95 Medical Protective Mask |
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2020 to 2023 |
Set forth below are our revenues
by product category in millions (USD) for the years ended December 31, 2022 and 2021:
| |
Twelve Months Ended December 31, | | |
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2022 | | |
2021 | | |
Net Change | | |
| |
Product
Category | |
(in millions) | | |
(in millions) | | |
(in millions) | | |
% Change | |
CNS Cerebral & Cardio Vascular | |
$ | 1.70 | | |
$ | 2.68 | | |
| -0.98 | | |
| -37 | % |
Anti-Viral' Infection & Respiratory | |
$ | 4.94 | | |
$ | 5.22 | | |
| -0.28 | | |
| -5 | % |
Digestive Diseases | |
$ | 0.40 | | |
$ | 0.37 | | |
| 0.03 | | |
| 11 | % |
Other | |
$ | 1.06 | | |
$ | 1.37 | | |
| -0.31 | | |
| -23 | % |
Total | |
$ | 8.10 | | |
$ | 9.64 | | |
| -1.54 | | |
| 16 | % |
Due to the nature of the pharmaceutical
industry, we continually strive to change our product portfolio to respond to changes in market demand. Based on a foundation established
by a number of our widely-recognized prescription products, such as Cefaclor and Roxithromycin, we have launched and will continue to
launch a variety of pharmaceuticals. The core criteria for our selection of potential pipeline products is strong market demand, proven
efficacy, and safety. In an effort to gain an advantage in the marketplace, we often seek to improve the production process of the new
generic products we elect to manufacture or to improve the quality of a proposed product to increase its efficacy.
We also adjust the delivery
systems and marketing for each of our products based on the product’s target patient group. We believe that maintaining a variety
of delivery systems (e.g. tablets, capsules, injectables and dry powders) for certain of our products targeted at different groups enhances
our competitive position in the marketplace. As a result, our sales and marketing personnel work closely with management and our research
and development personnel to determine which of our products can successfully be marketed for more than one delivery system and which
generic drugs in the marketplace may be good candidates for us to manufacture and distribute using different delivery systems.
Product Development
Research & development
and innovation represent the core competitive advantage for a company’s sustainable growth. For pharmaceutical companies, products
with proprietary intellectual property are not only strategic resources for comprehensive strength, but also important tools to engage
in social responsibility. We have been focusing on the research and development of both first generic drugs and innovative drugs. Additionally,
we also have actively worked to meet unfulfilled medical needs by sticking to a market-oriented approach and continuously improving the
effectiveness and ease of use of our drugs, which are supported by our well-designed system for intellectual property management.
The PRC State Council issued
“Opinions on Carrying out Consistency Evaluation on Quality and Efficacy of Generic Drugs” on March 5, 2016, requiring
all manufacturers of generic chemical pipeline products to carry out Consistency Evaluations before they may obtain final registration
approval. Drugs failing to meet these requirements may not be re-registered.
Currently, due to this newly
issued NMPA production approved standards and experimental requirements, as with all other Chinese generic pharmaceutical companies, almost
all of our pipeline products have undergone major adjustments.
The Company’s recent
research and development work is mainly aimed at promoting the consistency evaluation of several major products already on the market,
as well as the continued exploration of comprehensive health product categories.
The Company is to release
to the market a product for the treatment of dysmenorrhea, which Ms. Li, Chairman and CEO of the Company, is one of the inventors. In
addition, the Company has launched N95 Medical Protective masks in early 2023. Since China ended its zero-case policy and no longer requires
shutdown or quarantine in December 2022, the market demand for prevention materials, such as masks has surged.
Distribution and Customers
We believe we have a well-established
sales network. As our current pharmaceutical product portfolio is comprised mainly of prescription drugs, our major sales targets are
hospitals. As of December 31, 2022, we have 16 sales offices covering all major provinces of China, and over 1,000 sales representatives
who assist in managing the delivery of pharmaceutical products, and our promotion and service with hospitals, doctors and local drug distributors.
Due to the nature of our products
and current governmental regulations, all of our customers are located in the PRC. We have established long-standing relationships with
most of our key customers through our operating subsidiary, Hainan Helpson Medical & Biotechnology Co., Ltd. (Helpson), which was
formed in 1993.
Production Facilities
We manufacture and package
our products at our manufacturing facility in the Haikou Free Trade Zone in Haikou, Hainan Province. Our old manufacturing facility, which
was built in 2002, is approximately 8,000 square meters (approximately 12.4 million square feet); and our new building, approximately
20,000 square meters (approximately 31 million square feet), was completed in 2013. We have production lines conforming with the 2011
version of GMP certificates for different forms of our products including: tablets, capsules, dry power, liquid injectables, solid oral
solution Cephalosporins (specifically designated); other than that, we also have production lines for health care products and various
types of masks that meet national standards.
All of our existing production
lines have met the GMP Standards which became effective as of March 1, 2011. On December 1, 2019, the newly revised Drug Administration
Law (the “New Law”) came into effect, which cancelled the GMP certification but impose the pilot inspection mechanism.
Raw Materials
We require a supply of a wide
variety of raw materials to manufacture our products. We employ purchasing staff with extensive knowledge of our products who work with
our product development, and formulations and quality control personnel to source raw materials for our products. Currently, we rely on
numerous suppliers in the PRC and overseas to deliver our required raw materials and believe we have at least three principal suppliers
for each of our most critical raw materials. Historically, we have not had difficulty obtaining raw materials from suppliers. For the
year ended December 31, 2022, our purchases of raw material purchases from our three top suppliers accounted for 21.7%, 11.1%, and 8.9%,
respectively. For the year ended December 31, 2021 suppliers accounted for 24.8%, 12.7%, and 11.8%, respectively.
Competition
We believe we have established
a commercially competitive position in the highly-fragmented pharmaceutical industry in China through our core competitive advantages,
as described below:
We have a highly-efficient commercialization
process for new products, including significant experience with the NMPA registration process.
We have over 20 years of product-development
experience during which time we have implemented processes to efficiently introduce and market new and existing products to the Chinese
market.
We have a market-oriented product portfolio
and product lines.
Our product focuses on developing
and manufacturing medicines that help large patient groups, such as the infectious disease and cardio vascular disease patient groups.
Our diversified GMP-certified manufacturing facility includes various production lines targeting a variety of delivery mechanisms, such
as tablets, capsules, cephalosprine tablets, cephalosprine capsules, liquid-injectables and dry powder injectables, which enables us to
effectively manufacture a broad range of new drugs; other than that, we also have production lines for health care products and various
types of masks that meet national standards.
We have product diversification to target specific
sub-markets.
We attempt to differentiate
our products from those of our competitors by changing, and, in many cases, improving certain physical aspects of our products to market
under different market segments. For example, to make our Cefaclor product more patient friendly to children and patients with swallowing
problems, we added an enteric coating to make our tablets easier to swallow.
We have a national sales network and a highly-trained
marketing team.
Our experienced sales team
has industry knowledge and know-how to synergistically combine our strong market insight with successful commercialization platforms.
We have developed high-quality relationships
with leading hospital and clinic administrators and physicians.
While sales of our pharmaceutical
products to hospitals are made through our distributors, we believe we have established long-term cooperation relationships with leading
hospitals and healthcare clinics throughout China resulting from our long-term promotional efforts and periodic physician seminars, so
that to improve the perception of our products in the marketplace and help us identify and select high-volume drugs to develop into new
generic products relatively early in the process.
Notwithstanding such favorable
positioning, we are subject to intense competition. There are both local and overseas pharmaceutical enterprises that are engaged in the
manufacture and sale of potential substitute or similar pharmaceutical products in the PRC. These competitors may have more capital, better
research and development resources, better manufacturing and marketing capability, and more experience than we do.
Our profitability may be adversely affected if:
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the number of our competitors increases; |
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competitors engage in increased price competition; or |
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competitors develop new products or product substitutes having comparable medicinal applications or therapeutic effects that are more effective, less costly and/or have more perceived benefits than those produced by us. |
In addition, imported products
and China’s admission as a member of the World Trade Organization (“WTO”) creates increased competition. The PRC became
a member of the WTO in December 2001. As a result, competition in the pharmaceutical industry in the PRC intensified generally in two
respects. First, with lower import tariffs, imported pharmaceutical products manufactured overseas may become increasingly competitive
in terms of pricing. Second, we believe that well-established foreign pharmaceutical manufacturers may set up production facilities in
the PRC and compete with domestic manufacturers directly. With the expected increased supply of competitively-priced pharmaceutical products
in the PRC, we may face increased competition from foreign pharmaceutical products, especially in terms of high-end pharmaceutical products,
including certain types of products manufactured by U.S. manufacturers.
Intellectual Property
We regard our packaging
designs, trademarks, trade secrets, patent and similar intellectual property as parts of our core competence that are critical to
our success. We rely on patent, trademark and trade secret law, as well as confidentiality agreements with certain of our employees,
distributors and others to protect our intellectual property rights.
In November 2008, we purchased
the patented medical formula and the manufacturing processes for a cerebral/cardio-vascular indication from a third party laboratory.
In connection with that acquisition, we obtained the title of the patent. This patent expires in 2025.
In 2012, we acquired another
patent related to a medical formula for the treatment of cerebral/cardio-vascular diseases. This patent expires in 2029.
In 2022, we acquired a utility
model patent and an invention patent application regarding the creation of an ophthalmic oxygen enriched atomization therapeutic apparatus
through Helpson, our wholly owned subsidiary, from Chengdu Bonier Medical Technology Development Co., Ltd. (“Bonier”). Based
on the technology transfer agreement, Helpson will receive the utility model patent right of the technical invention and the patent application
right of the invention, and Bonier will provide relevant technical services.
As of December 31, 2022, we
owned 18 registered trademarks, including marks for eight of the 19 pharmaceutical products we manufacture, including the tradenames Fukexing,
Beisha, Shiduotai, Xinuo, Pusenlitai, Pusenouke, Shuchang, Shenkaineng, XERONINE, and Aronino, as well as marks for our AFGF logo, our
HPS logo, our two HELPSON logos and four other logos. The registration numbers of the 18 registered trademarks are as follows: No.1500459,
No.1511770, No.1535416, No.1537828, No.1535420, No.1272792, No.1272760, No.1330294, No.1327731, No.1330295, No.3993785, No. 4074317, No.4074321,
No. 4315247, No. 32445705, No. 32437940, No. 34711564, and No. 34711561.
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 do not anticipate that it will occur in the future, but no assurance can be given in
this regard.
Regulations
Regulations Relating to
Pharmaceutical Manufacture Industry. The pharmaceutical manufacture 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 Medicinal Product Administration Law of the People’s
Republic of China 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.
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. A series of policies on consistency evaluation and drug review process have been issued in recent years,
and potentially more reforms and adjustments are underway in order to promote the pharmaceutical industry in China in line with the international
standards. In this context, we believe that the uncertainties in the timetables for obtaining NMPA production approvals for products under
research are increasing. 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 to manufacture after clinical trials are completed.
New Medicine. If a
new medicine is approved by the NMPA, the NMPA will issue a new medicine certificate to the manufacturer and impose a monitoring period
from 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 it during the monitoring period. We currently have the new medicine certificates for our Pusenouke,
Cefaclor dispersible tablets and Roxithromycin dispersible tablets and Bumetanide for injection products.
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 production. The NMPA has no statutory timeline 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.
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, imposition
of operating restrictions, partial suspension or complete shutdown of production and criminal prosecution.
Pharmaceutical Product Manufacturing
Permits and Licenses for
Pharmaceutical Manufacturers. 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 NMPA, will expire on November 8, 2025. We are confident the permit could
be renewed before its expiration.
Good Manufacturing Practice.
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.
Prior to December 1, 2019, if a manufacturer meets the GMP standards, the NMPA 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 NMPA will issue a GMP certificate with only a one-year validity period. The Year 2011 GMP Standards became
effective on March 1, 2011, and pharmaceutical manufacturers (except for manufacturers of injectables, blood products or vaccines, which
had a three-year grace period) had a five-year grace period to upgrade existing facilities to comply with the revisions.
All of our existing
production lines have met the Year 2011 GMP Standards. On December 1, 2019, the newly revised Drug Administration Law (the
“New Law”) came into effect. One of the major amendments is the cancellation of GMP certification. The New Law
eliminated the requirement that drug administration authorities shall assess drug manufacture enterprises and drug trading
enterprises, and issue assessment certificates. Instead, it requires that drug manufacturing enterprises and drug trading
enterprises establish and improve the quality management systems of manufacture and trade of drugs, and ensure that the process of
manufacturing and trading of drugs always meets all legal requirements. This means a stricter form of supervision is implemented
comparing to the prior GMP certificates system。 Our
production lines are subject pilot inspection under the New Law.
We believe that GMP inspection
only switches to another form, which includes flight inspection, drug production license inspection (for on-site management and quality
system), as well as product inspection.
Product Liability and Consumers Protection
Product liability claims may
arise if any of our pharmaceutical products have a harmful effect on a consumer, who may make a claim for damages or compensation as an
injured party. The General Principles of the Civil Law of the PRC, which became effective in January 1987, stated that manufacturers and
sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries. The Civil Code
of the PRC, which came into force on January 1, 2021, stipulates that if damage is caused to others due to defects in products, the infringed
can claim compensation from the manufacturer of the products or the seller of the products. If the defect is caused by the producer, the
seller shall have the right to recover compensation from the producer. If the product is defective due to the fault of the seller, the
producer shall have the right to recover from the seller after making compensation.
The Product Quality Law of
the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’ rights and
interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings
from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability.
The Law of the PRC on the
Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on January 1, 1994 to protect
consumers when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell
goods and/or provide services to customers. In extreme situations, pharmaceutical product manufacturers and distributors may be subject
to criminal liability if their goods or services lead to the death or injuries of customers or other third parties.
Other Regulations
In addition to the regulations
relating to pharmaceutical industry in China, Helpson is subject to the regulations applicable to a foreign invested enterprise in China.
Foreign Currency Exchange.
Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and various regulations issued by the
State Administration of Foreign Exchange, or the SAFE, and other relevant PRC government authorities, Renminbi is freely convertible only
to the extent of current account items, such as trade-related receipts and payments, interests and dividends. Capital account items, such
as direct equity investments, loans and repatriation of investment, require the prior approval from the SAFE or its local counterpart
for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions
that take place within the PRC must be made in Renminbi. Unless otherwise approved, PRC companies other than foreign investment enterprises
(FIEs) must convert foreign currency payments they receive from abroad into Renminbi. On the other hand, FIEs may retain foreign currency
in accounts with designated foreign exchange banks, subject to a cap set by the SAFE or its local counterpart.
Dividend Distribution.
Under the PRC regulations governing dividend distributions by wholly foreign-owned enterprises and Sino-foreign equity joint ventures,
wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required
to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable
as cash dividends.
Employees
As of December 31, 2022, we
had 244 employees, among which 234 employees were full-time employees and 10 employees were temporary employees. None of our employees
is represented by a labor union and, in general, we consider our relationship with our employees to be good.
As required by applicable
Chinese law, we have entered into employment contracts with substantially all of our officers, managers and employees. We are working
towards entering into employment contracts with those employees who do not currently have employment contracts with us. The PRC enacted
a new Labor Contract Law, which became effective on January 1, 2008. We have updated our employment contracts and employee handbook and
are in compliance with such law.
ITEM 1A. RISK FACTORS
Risk Factor Summary
The following are some material risks, any
of which could have an adverse effect on our business financial condition, operating results, or prospects.
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Risks Related to our Business and our Industry |
| o | If our products do not attain
market acceptance among the medical community, our operations and profitability would be adversely affected; |
| o | If we fail to meet standards
pursuant to the newly revised Drug Administration Law, certain production lines will be suspended and our profitability would be adversely
affected; |
| o | We may be subject from time
to time to product recalls initiated by us or by the NMPA. Product recalls could impose significant costs on us and adversely affect
our ability to generate revenue; |
| o | If we fail to develop new products
with high profit margins and our high-profit-margin products are replaced by competitors’ products, then our gross will be adversely
affected; |
| o | Most of our products are off-patent
branded generics that can be manufactured and sold by other pharmaceutical manufacturers in the PRC which may increase the competition
we face; |
| o | If we are not able to maintain
and enhance our brand recognition to maintain our competitive advantage, our reputation, business and operating results may be harmed; |
| o | Reimbursement may not be available
for our products, which could diminish our sales; |
| o | The growth and success of our
business depend on our ability to successfully market our principal products to hospitals and their selection for medicine purchases; |
| o | Our future research and development
projects may not be successful; |
| o | We cooperate with research
institutions and universities in the PRC for the research and development of certain new products and any failure of such research institutions
to meet our timing and quality standards may pose impairment loss on our financial results and our failure to continue such collaborative
arrangement could adversely affect our ability to develop new pharmaceuticals and our overall business prospects; |
| o | We may not be able to obtain
regulatory approval for any of the new products and failure to obtain these approvals could materially harm our business; |
| o | New product development in
the pharmaceutical industry is time-consuming and costly and has a low rate of successful commercialization; |
| o | We may not be able to successfully
identify and acquire new products or businesses; |
| o | We rely on distributors for
all of our revenues and failure to maintain relationships or to otherwise expand our distribution network would materially and adversely
affect our business; |
| o | We rely on a limited number
of distributors for the majority of sales of our products; |
| o | Our operations may be affected
if we could not pass the Consistency Evaluation requirement issued by the State Council for any of our current existing products; |
| o | We face risks related to health
pandemics that could impact our sales and operating results; |
| o | Our operations may be affected
if we could not obtain raw materials from our current key suppliers on acceptable terms; |
| o | We may not be able to effectively
manage our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely affected
by actions taken by our distributors and third party marketing firms; |
| o | We have limited insurance coverage
and may incur losses resulting from product liability claims, business interruptions or claims that could be covered by D&O Insurance; |
| o | Our future liquidity needs
are uncertain and we may need to raise additional funds in the future. |
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Risks Related to Doing Business in China |
| o | Adverse changes in political
and economic policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could
reduce the demand for our services and materially and adversely affect our competitive position; |
| o | The PRC legal system has inherent
uncertainties that could limit our legal protections available to us; |
| o | You may experience difficulties
in bringing original actions in the PRC against our company or our management based on U.S. or other foreign laws; |
| o | Because we receive substantially
all of our revenue in Renminbi, which currently is not a freely convertible currency, we are subject to changes in the PRC’s political
and economic decisions; |
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We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially for foreign exchange transactions; |
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We are subject to the environmental protection laws of the PRC that may be costly to comply with and may adversely affect our manufacturing operations; |
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Compliance with China’s new Data Security Law, Measures on Cybersecurity Review, Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business; |
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We are not required to submit an application to CSRC pursuant to the
M&A Rules, nor are we subject to the cybersecurity review. However, based on the recent promulgation of the Trial Measures, which
are set to be effective on March 31, 2023, we may be required to complete the filing requirements when we have re-financing or any additional
offerings in future; |
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Although the audit report included in this prospectus was issued by U.S. auditors who are currently inspected by the PCAOB, if it is later determined that the PCAOB is unable to inspect or investigate our auditor completely, investors would be deprived of the benefits of such inspection and our ordinary shares may be delisted or prohibited from trading; |
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Risks Related to our Common Stock |
| o | We may be held in default on our convertible note, which could trigger
penalties that worsen our financial condition and potentially disqualify us from listing on the stock exchange where we are currently
listed; |
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o |
The market price for our common stock may be volatile; |
| o | If we issue additional shares
of our capital stock, our stockholders will experience dilution in their respective percentage ownership in the company; |
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o |
A large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders are able to influence and ultimately control the outcome of stockholder votes on various matters; |
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o |
We are likely to remain subject to “penny stock” regulations and as a consequence there are additional sales practice requirements and additional warnings issued by the SEC; |
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o |
There is substantial doubt about our ability to continue as a going concern; |
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We do not anticipate paying cash dividends on our common stock; |
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o |
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies. |
Risks Related to our Business and our
Industry
The commercial success of our products depends
upon the degree of their market acceptance among the medical community. If our products do not attain market acceptance among the medical
community, our operations and profitability would be adversely affected.
The commercial success of
our products depends upon the degree of market acceptance they achieve within the medical community, particularly among physicians and
hospital administrators. Physicians may not prescribe or recommend our products to patients and procurement departments of hospitals may
not purchase our products if physicians or hospital pharmacists do not find our products attractive. The acceptance and use of our products
among the medical community will depend upon a number of factors, including:
| ● | perception of physicians, patients
and others in the medical community as to the safety and effectiveness of our products; |
| ● | the prevalence and severity
of any side effects; |
| ● | the pharmacological benefit
of our products relative to competing products and products under development; |
| ● | the efficacy and potential advantages
of our products relative to competing products and products under development; |
| ● | the relative convenience and
ease of administration of our products; |
| ● | the methods by which our pharmaceutical
products may be delivered to patients; |
| ● | the effectiveness of our education,
marketing and distribution efforts and those of our distributors; |
| ● | publicity concerning our products
or competing products and treatments; and |
| ● | the price of our products and
competing products. |
If we fail to meet standards pursuant to
the newly revised Drug Administration Law, the production at certain of our production lines will be suspended and our operations and
profitability would be adversely affected.
All of our existing production
lines have met the GMP Standards which became effective as of March 1, 2011. On December 1, 2019 the newly revised Drug Administration
Law (the “New Law”) came into effect. One of the major amendments of the New Law is the cancellation of GMP certification.
The New Law eliminated the requirement that drug administration authorities shall assess drug manufacture enterprises and drug trading
enterprises, and issue assessment certificates. Instead, it requires that drug manufacturing enterprises and drug trading enterprises
establish and improve the quality management systems of manufacture and trade of drugs, and ensure that the process of manufacturing and
trading of drugs always meets all legal requirements. This means a stricter form of supervision is implemented comparing to the prior
GMP certificates system.
While all of our existing
product lines are in full compliance with the GMP standards issued in 2011, in the event we fail to continually meet the requirements
of the GMP and receive the deficiency feedback from any pilot inspection under the New Law, the production on such production line(s)
could be suspended and our operations and profitability could be adversely affected.
We may be subject from time to time to product
recalls initiated by us or by the NMPA. Product recalls could impose significant costs on us and adversely affect our ability to generate
revenue.
In our business, we must comply
with a variety of product safety and product testing regulations. In particular, our products are subject to, among other statutes and
regulations, those issued by the NMPA. If the NMPA issues any notices to cease the production, sale and use of any of our products, we
must comply with such requirements. As a result, we may incur significant costs in complying with cessation requirements, and our financial
results could be materially and adversely affected. Furthermore, concerns about potential liability or potential future changes in product
safety regulations may lead us to voluntarily recall or otherwise discontinue selling selected products, which could materially and adversely
affect our results of operations.
In March 2013, NMPA issued
a nationwide notice (the “NMPA Notice”) for the cessation of the production, sale and use of Buflomedil effective immediately.
The NMPA Notice was a result of the reevaluation done by the NMPA based on the indications from the recent Chinese and international research
materials, which found that the risks of side effects to the nervous system and the cardiovascular system from Buflomedil have surpassed
its clinical treatment benefits. The NMPA Notice was applicable to all the manufacturers and distributors in China who are in the business
of the production and sale of Buflomedil related products. As a result, we no longer produce Buflomedil after 2013.
Recalls may also harm our
reputation, increase our costs and reduce our net sales. Governments and regulatory agencies in the markets where we manufacture and sell
products may enact additional regulations relating to product safety and consumer protection in the future or take other actions that
may adversely impact our business. The NMPA has the authority to revoke drug approvals previously granted and remove previously approved
products from the market for various reasons.
If we fail to develop new products with
profit margins and our high-profit-margin products are replaced by competitors’ products, then our gross and net profits margins
will be adversely affected.
We had gross profit margins
of -4.7% for the year ended December 31, 2022, compared to gross profit margins of 3.6% for the year ended December 31, 2021. The pharmaceutical
market in the PRC remains very competitive, and there may be pressure to reduce sale prices of products without a corresponding decrease
in the cost of sold products. To the extent that we fail to develop new products with high profit margins and our high-profit-margin products
are replaced by our competitors’ products, our gross profit margins and net profit margins will be adversely affected. In addition,
three of our products are included in the National Essential Drug List (the “EDL”), which are subject to strict governmental
price controls. Therefore, our gross profit margin and net profit margins could be adversely affected notwithstanding any increase in
our revenues.
Our products face substantial competition.
Other companies may discover, develop, acquire or commercialize products earlier or more successfully than we do.
We operate in a highly competitive
environment. Our products compete with other products or treatments for diseases that treat similar medical conditions. Many of our products
may compete against products that have lower prices, superior performance, greater ease of administration or other advantages. We would
face enhanced competition if competitive products are added to the National Medical Insurance Program. Our inability to compete effectively
could reduce sales or margins, which could have a material adverse effect on our results of our operations.
Some of our competitors are
actively engaging in research and development in areas in which we have products or in which we are developing new product or new indications
for existing products. In the future, we expect that our products will compete with new drugs currently in development, drugs approved
for other indications that may be approved for the same indications as those of our products and drugs approved for other indications
that are used off-label. If alternatives to our products are dispensed or prescribed to patients, the volume of our products sold may
decline or we may be required to lower the prices of our products to remain competitive, either of which could negatively impact our sales.
In addition, an increasing number of foreign pharmaceutical companies have introduced their pharmaceutical products into the Chinese market.
Competitive products introduced by these companies can also negatively impact our sales and results of operations.
Large Chinese state-owned
and privately owned pharmaceutical companies and foreign-invested or foreign pharmaceutical companies may have greater clinical, research,
regulatory, manufacturing, marketing, financial and human resources than we do. In addition, some of our competitors may have technical
or competitive advantages over us with respect to the development of technologies and processes. These resources may make it difficult
for us to compete with them to successfully discover, develop and market new products and for our current products to compete with new
products or new product indications that these competitors may bring to market. There may also be significant consolidation in the pharmaceutical
industry among our competitors. Alliances may develop among competitors, and these alliances may rapidly acquire significant market share.
Furthermore, in order to gain
market share in China, competitors may significantly increase their advertising expenditures and promotional activities or even engage
in irrational or predatory pricing behavior. In addition, our competitors may engage in inappropriate competition or illegal acts, such
as bribery. Third parties may actively engage in activities designed to undermine our brand name and product quality or to influence customer
confidence in our products. Increased competition may result in price reductions, reduced margins and loss of market share, any of which
could materially adversely affect our profit margins. We may not be able to compete effectively against current and future competitors.
Most of our products are off-patent branded
generics that can be manufactured and sold by other pharmaceutical manufacturers in the PRC which may increase the competition we face
and reduce our business profitability.
Most of our products are off-patent
branded generic pharmaceuticals and are not protected by intellectual property rights. As a result, other pharmaceutical companies may
sell equivalent products at a lower cost, and this might result in a commensurate loss in sales of our branded generic products or require
us to lower our prices to compete. If other pharmaceutical companies sell pharmaceutical products that are similar to our unprotected
products, we may face additional competition and our business and profitability may be adversely affected.
Our business depends in part on our well-known
Helpson brand name, and if we are not able to maintain and enhance our brand recognition to maintain our competitive advantage, our reputation,
business and operating results may be harmed.
We believe that market awareness
of our Helpson brand has contributed significantly to the success of our business. We also believe that maintaining and enhancing the
Helpson brand is critical to maintaining our competitive advantage. Although our sales and marketing staff will continue to further promote
our brand to remain competitive, we may not be successful. If we are unable to further enhance our brand recognition and increase awareness
of our products, or if we are compelled to incur excessive marketing and promotion expenses in order to maintain our brand awareness,
our business and results of operations may be materially and adversely affected. Furthermore, our sales and results of operations could
be adversely affected if the Helpson brand or our reputation is impaired by recalls or negative publicity for one of our branded products,
or certain actions taken by our distributors, competitors, third-party marketing firms or relevant regulatory authorities.
Reimbursement may not be available for our
products, which could diminish our sales or affect our ability to sell our products profitably.
Market acceptance and sales
of our products also depend on a large extent on the reimbursement policies of the PRC government. The Ministry of Labor and Social Security
of the PRC or provincial or local labor and social security authorities, together with other government authorities, review the inclusion
or removal of drugs from the national medical insurance catalog or provincial or local medical insurance catalogs for the National Medical
Insurance Program every other year, and catalogs under which a drug will be classified affect the amounts reimbursable to program participants
for their purchases of those medicines. These determinations are made based on a number of factors, including price and efficacy. Generally,
there are two catalogs, the National Insurance Catalogue (“NIC”) and the EDL on which a product can be included. The products
selected for the EDL generally are selected from the NIC. A consumer can be reimbursed for the full cost of a medicine on the EDL and
can be reimbursed from 80% to 90% of the cost of a medicine listed on the NIC. Our Cefalexin, Clarithromycin and Omeprazole products are
currently included in the EDL. If government authorities decide to remove these products from the medicine catalogs, such removal may
reduce the affordability of our products and change the public perception regarding our products, which, in turn, would adversely affect
the sales of these products and reduce our net revenue. Furthermore, if we are unable to obtain approval from the relevant government
authorities to include our new products in the national, provincial or local medicine catalogs, sales of our new products maybe materially
and adversely affected.
The growth and success of our business depend
on our ability to successfully market our principal products to hospitals and their selection in tender processes used by hospitals for
medicine purchases.
Our future growth and success
significantly depend on our ability to successfully market our principal products to hospitals as prescription medicines. Approximately
80% of the end-customers of our products are hospitals. Hospitals may make bulk purchases of a medicine included in the national and provincial
medicine catalogs only if that medicine is selected under a government-administered tender process. A hospital’s interest in a particular
medicine is evidenced by:
| ● | the inclusion of this medicine
on the hospital’s formulary, which establishes the scope of medicines physicians at this hospital may prescribe to their patients,
and |
| ● | the willingness of physicians
at a hospital to prescribe this medicine to their patients. |
We believe effective marketing
efforts are critical in ensuring that hospitals and physicians are interested in purchasing our products. If our marketing efforts are
not effective, hospital administrators may not want to include our products in their formularies or may remove them from their formularies,
or physicians may not be interested in prescribing our products to their patients. As a result, we may find it difficult to maintain the
existing level of sales of our products, and our revenues and profitability may decline.
Our future research and development projects
may not be successful.
The successful development
of pharmaceutical products can be influenced by many factors. Products that appear to be promising in their early phases of research and
development may fail to be commercially viable for various reasons, such as failing to obtain the necessary regulatory approvals. Additionally,
the research and development process for new products for which we may obtain an approval certificate is long. The process of conducting
basic research and various stages of tests and trials of a new product before obtaining an approval certificate and commercializing the
product may require ten years or longer. A few of our product candidates are in the early stages of pre-clinical study and clinical trials
and we must conduct a significant number of additional clinical trials before we can seek the regulatory approvals necessary to begin
commercial production and sales of these products. We cannot guarantee that our future research and development projects will be successful
or completed within their anticipated time frames or budgets, or that we will receive the necessary approvals from the relevant authorities
for the production of these products, or that these newly-developed products will achieve commercial success.
Our competitors may obtain
approval for a competitive product before our product we are developing is approved. If this occurs, we may be precluded from getting
approval until the competitor’s monitoring period expires and realize little to no benefit from our research and development investment.
Even if such products can
be successfully commercialized, they may not achieve the level of market acceptance that we expect. Additionally, the pharmaceutical industry
is characterized by rapid changes in technology, constant enhancements of industry know-how and the frequent emergence of new products.
Future technological improvements and continual product developments in the pharmaceutical market may render our existing products obsolete
or affect their viability and competitiveness. Therefore, our future success will largely depend on our development capability, including
our ability to improve our existing products, diversify our product range and develop new and competitively-priced products that meet
the requirements of the changing market. Should we fail to respond to these frequent technological advances by failing to improve our
existing products, develop new products in a timely manner, or have these products reach a desirable level of market acceptance, our business
and profitability will be materially and adversely affected.
We cooperate with research institutions
and universities in the PRC for the research and development of certain new products and any failure of such research institutions to
meet our timing and quality standards may pose impairment loss on our financial results and our failure to continue such collaborative
arrangement or enter into such new arrangements could adversely affect our ability to develop new pharmaceuticals and our overall business
prospects.
Our business strategy includes
collaborating with third parties for the research and development of new products. We have maintained long-term cooperative relationships
with a number of research institutions and universities in the PRC. These research institutions and universities used to collaborate with
us in a number of research projects and certain of our products with approval certificates were developed by such research institutions.
Any failure of such research institutions to meet the required quality standards and timetables set forth in their research agreements
with us, or our inability to enter into additional research agreements with these research institutions on terms acceptable to us in the
future, may have an adverse effect on our ability to develop new medicines and on our business prospects.
While the Company may resume
the development of these formulas in the future if sufficient funding and other favorable conditions arise, we cannot guarantee that we
will be able to enter into agreements with new parties on terms acceptable to us. Our inability to enter into such agreements or our failure
to maintain such arrangements could limit the number of new products that we develop and ultimately decrease our sources of future revenue.
We may not be able to obtain regulatory
approval for any of the new products and failure to obtain these approvals could materially harm our business.
All new medicines must be
approved by the NMPA before they can be marketed and sold in the PRC. The NMPA requires successful completion of clinical trials and demonstrated
manufacturing capability before it grants approval. It often takes a number of years before a medicine can be ultimately approved by the
NMPA. In addition, the NMPA and other regulatory authorities may apply new standards for safety, manufacturing, packaging, and distribution
of future product candidates.
Complying with such standards
may be time-consuming and expensive and could result in delays in obtaining NMPA approval for our future product candidates, or possibly
preclude us from obtaining NMPA approval altogether. For example, due to the enhanced criteria introduced during the implementation process
of the trial of one of our products in the dried powder injectable and granule production lines in our old plant, the clinical trials
lasted longer than originally expected. Furthermore, our future products may not be effective or may prove to have undesirable or unintended
side effects, toxicities or other characteristics that may preclude us from obtaining regulatory approval and prevent or limit their commercial
use. The NMPA and other regulatory authorities may not approve the products that we develop and even if we do obtain regulatory approvals,
such regulatory approvals may be subject to limitations on the indicated uses for which we may market a product, which may limit the size
of the market for such product.
New product development in the pharmaceutical
industry is time-consuming and costly and has a low rate of successful commercialization.
Our success depends in part
on our ability to improve our existing products and to develop new products. The development process for pharmaceutical products is complex
and uncertain, as well as time-consuming and costly. Relatively few research and development programs can finally develop a commercial
product. A product candidate that appears promising in the early phases of development may fail to reach the market for a number of reasons,
such as:
| ● | the failure to demonstrate safety
and efficacy in preclinical and clinical trials; |
| ● | the failure to obtain approvals
for intended use from relevant regulatory bodies, such as the NMPA; |
| ● | our inability to manufacture
and commercialize sufficient quantities of the product economically; and |
| ● | proprietary rights, such as
patent rights, held by others to our product candidates and their refusal to sell or license such rights to us on reasonable terms, or
at all. |
Delays in any part of the
development process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting
or delaying our introduction of new products. Even if we successfully commercialize new products, these products may compete with our
mature products and may result in a reduction in the sales volume of our mature product or vice versa. Failure to develop, obtain necessary
regulatory clearances or approvals for or successfully commercialize or market potential new products or technologies could have a material
adverse effect on our financial condition and results of operations.
We may not be able to successfully identify
and acquire new products or businesses.
In addition to our own product
development efforts, our growth strategy also relies on our acquisitions of new product candidates, products or businesses from third
parties. Any future growth through acquisitions will be dependent upon the continued availability of suitable acquisition candidates at
favorable prices and favorable terms and conditions. Even if such opportunities present themselves, we may not be able to successfully
identify them. Moreover, other companies, many of which may have substantially greater financial, marketing and sales resources, are competing
with us for the right to acquire such product candidates, products or businesses.
We rely on distributors for all of our revenues
and failure to maintain relationships with our distributors or to otherwise expand our distribution network would materially and adversely
affect our business.
We sell our products exclusively
to pharmaceutical distributors in the PRC and rely on distributors for all of our revenues. We have business relationships with over 1,000
distributors in the PRC. For the year ended December 31, 2022, no customer accounted for more than 10.0% of sales, and three customers
accounted for 52.9%, 11.4%, and 10.4% of accounts receivable. In line with industry practices in the PRC, we enter into written sales
agreements with our distributors. However, such sales agreements are not in substance equivalent to a typical distribution agreement in
the United States. Each sales agreement is more in the form of a sales order and specifies one or several purchases of one or more products
without any continuing obligation to purchase any additional amount of products. In the event certain distributors choose not to continue
their relationship with us after completing their existing sales agreements, they can do so without breaching any contract or agreement,
our financial results could be adversely affected if we cannot find the substantially similar distributors in time under such circumstances.
In addition, some of our distributors may sell products that compete with our products. We compete for desired distributors with other
pharmaceutical manufacturers, many of which may have higher visibility, greater name recognition, financial resources, and broader product
selection than we do. Consequently, maintaining relationships with existing distributors and replacing distributors may be difficult and
time-consuming. Any disruption of our distribution network, including our failure to renew our existing distribution agreements with our
desired distributors, could negatively affect our ability to effectively sell our products and would materially and adversely affect our
business, financial condition and results of operations.
We rely on a limited number of distributors
for the majority of sales of our products.
We rely on a limited number
of distributors for most of our net revenue. Our top five distributors in aggregate accounted for 20% and 21% of our net revenues in 2022
and 2021, respectively. We expect that a relatively small number of distributors will continue to account for a major portion of our net
revenue in the near future. Our dependence on a few distributors may expose us to the risk of substantial losses if a single large distributor
stops purchasing our products, purchases lower quantities of our products or goes out of business and we cannot find substitute distributors
on equivalent terms. If any of our large distributors reduces the quantity of the products they purchase from us or stops purchasing from
us, our net revenue would be materially and adversely affected.
Our operations may be affected if we could
not pass the Consistency Evaluation requirement issued by the State Council for any of our current existing products.
Generic drugs refer to drugs
with the same active ingredient, dosage form, delivery channel and therapeutic effects compared to the original drugs. The “Consistency
Evaluation” requires currently marketed generic products to prove their consistency in term of quality and therapeutic effect, and
substitutability during clinical trials with original drug. The Consistency Evaluation could enhance the development of pharmaceutical
industry, ensure drug safety and effectiveness, promote the upgrading and restructuring the pharmaceutical industry, and improve international
competitiveness. Both Relevant Matters Related to the Implementation of the Opinions of the General Office of the State Council on
the Consistent Evaluation of the Quality and Efficacy of Generic Drugs (No. 106 of 2016) issued on May 26, 2016, and Announcement
of the General Administration on the Consistency Evaluation of the Quality and Efficacy of Generic Drugs (No. 100 of 2017) issued
on August 28, 2017 require that if a drug has more than 3 manufacturers passed the consistency evaluation, then the drug manufacturers
without consistency evaluation valid status will have no access to participate in the drug Centralized Procurement. NMPA issued an official
document on The Implementation of the Evaluation of the Quality and Efficacy of Chemical Injection Generics on May 14, 2020, requiring
consistent evaluation for generics of pharmaceutical injections that are already on the market. If we fail to complete the consistency
evaluations for our generic drugs per the government’s requirements, our business and operation will be negatively impacted.
Our operations may be affected if we could
not obtain raw materials from our current key suppliers on acceptable terms.
We need a supply of a wide variety of raw materials to manufacture
our products. Currently, we rely on numerous suppliers in the PRC and overseas to deliver our required raw materials. We have at least
three principal suppliers for each of our most critical raw materials. For the year ended December 31, 2022, three suppliers accounted
for 21.7%, 11.1%, and 8.9% of raw material purchases and for the year ended December 31, 2021, three suppliers accounted for 24.8%, 12.7%,
and 11.8% of raw material purchases.
Historically, we have not
had difficulty obtaining raw materials from suppliers. However, we cannot assure in the future we will not encounter any difficulty in
obtaining the supplies, nor can we predict the impact on our suppliers of the current economic environment and other developments in their
respective businesses, either. Insolvency, financial difficulties or other factors may result in our suppliers not being able to fulfill
the terms of their agreements with us. Furthermore, such factors may render suppliers unwilling to extend contracts that provide favorable
terms to us or may force them to seek to renegotiate existing contracts. Although we believe we have alternative sources of supply for
the raw materials used in our business, termination of our relationships with any of our key suppliers could have a material adverse effect
on our business, financial condition or results of operations in the unlikely event that we are unable to obtain adequate raw materials
from other sources in a timely manner or at all.
We may not be able to effectively manage
our employees and distribution network, and our reputation, business, prospects and brand may be materially and adversely affected by
actions taken by our distributors and third party marketing firms.
We have limited ability to
manage and control the activities of our independent distributors and third-party marketing firms that we contract to promote our products
and brand name, therefore, our reputation, business, prospects and brand may be materially and adversely affected by actions taken by
them. Our distributors and third-party marketing firms could take one or more of the following actions, any of which could have a material
adverse effect on our business, prospects and brand:
| ● | sell our products outside their
designated territory, possibly in violation of the exclusive distribution rights of other distributors; |
| ● | fail to adequately promote our
products; |
| ● | promote competing products in
lieu of our products; or |
| ● | violate the anti-corruption
laws of China, the United States or other countries. |
Additionally, although our
company policies prohibit our employees from making improper payments to hospitals or otherwise engaging in improper activities to influence
the procurement decisions of hospitals, we may not be able to effectively manage our employees, as the compensation of our sales and marketing
personnel is partially linked to their sales performance. As a result, we cannot assure you that our employees will not violate the anticorruption
laws of the PRC, the United States and other countries. Such violations could have a material adverse effect on our reputation, business,
prospects and brand.
Failure to adequately manage
our employees, distribution network or third-party marketing firms, or their non-compliance with employment, distribution or marketing
agreements could harm our corporate image among hospitals and end users of our products and disrupt our sales, resulting in a failure
to meet our sales goals. Furthermore, we could be liable for actions taken by our employees, distributors or third-party marketing firms,
including any violations of applicable law in connection with the marketing or sale of our products, including China’s anticorruption
laws and the Foreign Corrupt Practices Act of the United States, or the FCPA. In particular, if our employees, distributors or third-party
marketing firms make any payments that are forbidden under the FCPA, we could be subject to civil and criminal penalties imposed by the
U.S. government.
Recently, the PRC government
has increased its anti-corruption measures. In the pharmaceutical industry, corrupt practices include, among others, acceptance of rebates,
bribes or other illegal gains or benefits by hospitals and medical practitioners from pharmaceutical manufacturers and distributors in
connection with the prescription of certain pharmaceuticals. Our employees, affiliates, distributors or third-party marketing firms may
violate these laws or otherwise engage in illegal practices with respect to their sales or marking of our products or other activities
involving our products. If our employees, affiliates, distributors or third-party marketing firms violate these laws, we could be required
to pay damages or fines, which could materially and adversely affect our financial condition and results of operations. In addition, PRC
laws regarding the types of payments to promote or sell our products that are impermissible are not always clear. As a result, we, our
employees, affiliates, our distributors or third-party marketing firms could make certain payments in connection with the promotion or
sale of our products or other activities involving our products which at the time could be reasonably determined to be legal but are later
deemed impermissible by the PRC government. Furthermore, our brand and reputation, our sales activities or the price of our common stock
could be adversely affected if we become the target of any negative publicity as a result of actions taken by our employees, affiliates,
distributors or third-party marketing firms.
We have limited insurance coverage and may
incur losses resulting from product liability claims, business interruptions or claims that could be covered by D&O Insurance.
The nature of our business
exposes us to the risk of product liability claims that is inherent in the research and development, manufacturing and marketing of pharmaceutical
products. Using product candidates in clinical trials also exposes us to product liability claims. These risks are greater for our products
that receive regulatory approval for commercial sale. Even if a product is approved for commercial use by an appropriate governmental
agency, there can be no assurance that users will not claim effects other than those intended resulted from the use of our products. While
no material claim for personal injury resulting from allegedly defective products has been brought against us to date, a substantial claim
or a substantial number of claims, if successful, could have a material adverse impact on our business, financial condition and results
of operations. Such lawsuits may divert the attention of our management from our business strategies, may be costly to defend and may
negatively impact our reputation and our Helpson brand’s reputation, and may harm the sales of our other branded products. In addition,
product liability insurance for pharmaceutical products is not available in the PRC. In the event of allegations that any of our products
are harmful, we may experience reduced consumer demand for our products or our products may be recalled from the market. We may also be
forced to defend lawsuits and, if unsuccessful, to pay a substantial amount in damages, legal fees, and other related expenses. In addition,
business interruption insurance available in the PRC offers limited coverage compared to that offered in many other countries. We do not
have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion
of resources. Lastly, we currently do not have directors and officers insurance. In the event we or any of our directors or officers are
sued under any proceedings or actions that could be covered by a standard D&O insurance, we may incur substantial costs and expenses
to defend such case.
Our future liquidity needs are uncertain
and we may need to raise additional funds in the future.
Based on our current operating
plans, we expect our existing resources to be sufficient to fund our existing operations for at least 12 months. However, we may need
to raise additional funds to expand our operations. In addition, we may need to raise additional funds if our expenditures exceed our
current expectations. This could occur for a number of reasons, including:
| ● | we decide to devote significant
amount of financial resources to the development of products that we believe to have significant commercialization potential; |
| ● | we decide to acquire or license
rights to additional product candidates or new technologies; |
| ● | some of our product candidates
fail in clinical trials or pre-clinical studies or prove not to be as commercially promising as we expected, and we are forced to develop
or acquire additional product candidates; |
| ● | Some of our product candidates
require more extensive clinical or pre-clinical testing or clinical trials for these product candidates take longer to complete than
we currently expect; or |
| ● | we decide or are required to
conduct more high-throughput screening than expected against current or additional disease targets to develop additional product candidates. |
| Our | ability to raise additional funds in the future is subject
to a variety of uncertainties, including: |
| ● | our future financial condition,
results of operations and cash flows; |
| ● | general market conditions for
capital-raising activities by pharmaceutical companies; and |
| ● | economic, political and other
conditions in China and elsewhere. |
We cannot assure you that
our revenues will be sufficient to meet our operational needs and capital requirements. If we need to obtain external financing, we cannot
assure you that financing will be available in amounts or on terms acceptable to us, if at all. Our future liquidity needs and other business
reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked
securities could result in additional dilution to our stockholders. The incurrence of additional indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict our operations.
The failure to manage growth effectively
could have an adverse effect on our business, financial condition and results of our operations.
The rapid market growth of
our pharmaceutical products may pose more requirements or more costs on the employment management for managerial, operational, financial
and other purposes. As of December 31, 2022, we had 244 employees. To keep rapidly increasing trend of the Chinese pharmaceutical industry,
it will impose significant responsibilities upon the members of management to identify, recruit, maintain, integrate and motivate new
and old employees In addition, we may need to increase the salary, or the equity incentive plan for the employees to keep them in the
Company. Aside from the increased difficulties and increased costs in the management of human resources, we may also encounter working
capital issues, as we need increased liquidity to finance the purchases of raw materials and supplies, drug formulas for new products,
investment in research and development, acquisition of new businesses and technologies. Our failure to manage any of the above business
administration may lead to operational and financial inefficiencies that will have a negative effect on our profitability.
We depend upon key employees and consultants
in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely affect our ability
to develop and market our products.
We are highly dependent upon
the principal members of our management team, especially Ms. Zhilin Li, our Chairman, President and Chief Executive Officer. We cannot
not guarantee that Ms. Li will stay in the Company in the long run, and the loss of Ms. Li’s services would adversely affect our
ability to develop and market our products. We also depend in part on the continued services of our key scientific personnel and our ability
to identify, hire and retain additional personnel, including marketing and sales staff. We face intense competition for qualified personnel,
and the existence of noncompetition agreements between prospective employees and their former employers may prevent us from hiring those
individuals or subject us to suit from their former employers. While we attempt to provide competitive compensation packages to attract
and retain key personnel, many of our competitors are likely to have greater resources and more experience than we have, making it difficult
for us to compete successfully for key personnel.
Certain of our employees and
consultants were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors,
or at universities or other research institutions. Although there is currently no claim against us, we may be subject to claims that these
employees or consultants have, inadvertently or otherwise, used or disclosed trade secrets or other proprietary information of their former
employers. It may be necessary to for us to litigate and defend against these claims. Even if we successfully defend against these claims,
litigation could result in substantial costs and be a distraction to our management. If we fail to defend such claims, in addition to
paying monetary damages, we may lose valuable intellectual property rights or personnel.
Power shortages, natural disasters, terrorist
acts or other calamities could disrupt our production and have a material adverse effect on our business, financial position and results
of operations.
All of our products are produced
at our manufacturing facility in Hainan, China. A significant disruption at that facility, even on a short-term basis, could impair our
ability to timely produce and ship products, which could have a material adverse effect on our business, financial position and results
of operations. Our manufacturing operations are vulnerable to interruption and damage from natural and other types of disasters, including
earthquake, fire, floods, environmental accidents, power loss, communications failures and similar events. If any disaster were to occur,
our ability to operate our business at our facilities would be seriously impaired. For example, a once-in-forty-year 16 grade super typhoon
Rammasun hit Haikou on July 18, 2014, which caused us approximately $2.3 million (RMB14.2 million) in losses. Part of a warehouse was
flooded, some damage was caused to our new facility, and the water and electricity supply was suspended for several days, causing a brief
halt to our production activities and a delay in our obtaining GMP certification.
In addition, we do not maintain
any insurance other than property insurance for some of our buildings, vehicles and equipment. Accordingly, unexpected business interruptions
resulting from disasters could disrupt our operations and thereby result in substantial costs and diversion of resources. Our production
process requires a continuous supply of electricity. We have encountered power shortages historically due to restricted power supply to
industrial users during summers when the usage of electricity is high and supply is limited or as a result of damage to the electricity
supply network. Because the duration of those power shortages was brief, they had no material impact on our operations. Longer interruptions
of electricity supply could result in lengthy production shutdowns, increased costs associated with restarting production and the loss
of production in progress. Any major suspension or termination of electricity or other unexpected business interruptions could have a
material adverse impact on our business, financial condition and results of operations.
We cannot guarantee the protection of our
intellectual property rights, and if infringement or counterfeiting of our intellectual property rights occurs, then our reputation and
business may be adversely affected.
To protect the brand names
of our products, we have registered and applied for registration of certain of our trademarks in the PRC. Currently eight of the 19 pharmaceutical
products we manufacture are marketed under a brand registered as a trademark in China. We also purchased a pharmaceutical compound from
a third party that we are seeking to develop into a further product. To date, we have not experienced any infringements of our trademarks
for sales of pharmaceutical products or our exclusive patent license, and we are not aware of any infringement of our intellectual property
rights. However, there is no guarantee that there will not be any infringements of our brand name or other registered trademarks or counterfeiting
of our products in the future. There is no guarantee that there will not be any third-party infringement of our patents. Should any such
infringement or counterfeiting occur, our reputation and business may be adversely affected. We may also incur significant expenses and
substantial amounts of time and effort to protect our intellectual property rights in the future. Such diversion of our resources may
adversely affect our existing business and future expansion plans.
Litigation may be necessary
in the future to enforce our intellectual property rights or to determine the validity and scope of the intellectual property rights of
others. However, because the validity, enforceability and scope of protection of intellectual property rights in the PRC are uncertain
and still evolving, we may not be successful in prosecuting these cases. In addition, any litigation or proceeding or other efforts to
protect our intellectual property rights could result in substantial costs and diversion of our resources and could seriously harm our
business and operating results. Furthermore, the degree of future protection of our proprietary rights is uncertain and may not adequately
protect our rights or permit us to gain or keep our competitive advantage. If we are unable to protect our trade names, trade secrets
and other propriety information from infringement, our business, financial condition and results of operations may be materially and adversely
affected.
Risks Related to Doing Business in China
Adverse changes in political and economic
policies of the PRC government could have a material and adverse effect on the overall economic growth of China, which could reduce the
demand for our services and materially and adversely affect our competitive position.
We conduct substantially all
of our business and have historically derived all of our revenues in China. Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs
from the economies of most developed countries in many respects, including:
| ● | the degree of government involvement; |
| ● | the level of development; |
|
● |
the control of foreign exchange; |
|
● |
access to financing; and |
|
● |
the allocation of resources. |
While the Chinese economy
has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the
economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example, our operating results and financial condition may be
adversely affected by government control over capital investments or changes in tax regulations that are applicable to us, and by government
policies or guidance aimed at curtailing the perceived over-capacity of certain industry sectors, such as pharmaceutical companies. The
Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These
measures may cause decreased economic activity in China, which could in turn reduce the demand for our products and materially and adversely
affect our operating results and financial condition.
China’s economy has
been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still
owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government
could materially and adversely affect our business.
The Chinese government also
exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the
economic conditions or government policies in China could have a material and adverse effect on overall economic growth and the level
of investments in health industries in China, which in turn could lead to a reduction in demand for our products and consequently have
a material and adverse effect on our business.
The PRC legal system has inherent uncertainties
that could limit the legal protections available to us.
The PRC legal system is a
civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing commercial matters.
The overall effect of legislation enacted over the past 20 years has significantly enhanced the protections afforded to foreign-invested
enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their
interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors.
The practical effect of the
PRC legal system on our business operations in China can be viewed as two separate but intertwined considerations. First, as a matter
of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these
laws guarantee the full benefit of corporate articles and contracts to foreign invested enterprise participants. These laws, however,
do impose standards concerning corporate formation and governance that are not qualitatively different from the corporation laws found
in the United States. Similarly, PRC accounting laws mandate accounting practices that may not be consistent with the U.S. generally accepted
accounting principles. PRC accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting
standards and that the account books of a foreign invested enterprise be maintained in accordance with PRC accounting laws. Article 14
of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities. If a foreign-invested enterprise refuses to keep account books in China, the financial
and tax authorities may impose a fine on it, and the industry and commerce administration authority may order it to suspend operations
or may revoke its business license.
Second, while the enforcement
of substantive rights may be less clear than United States procedures, foreign-invested enterprises and foreign wholly-owned enterprises
are PRC registered companies that enjoy the same status as other PRC registered companies in business-to-business dispute resolutions.
The PRC legal infrastructure, however, is significantly different in operation from its United States counterpart, and may present a significant
impediment to the operation of a foreign invested enterprise.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing original actions in the PRC against our company or our management based
on U.S. or other foreign laws.
Our operating subsidiary,
Helpson, is incorporated under the laws of the PRC and substantially all of our assets are located in the PRC. Additionally, substantially
all of our directors, executive officers and managers reside within the PRC, and substantially all assets of these persons are located
within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC
upon certain of our directors, executive officers or managers, including with respect to matters arising under U.S. federal securities
laws or applicable state securities laws. Moreover, the PRC does not have treaties providing for the reciprocal recognition and enforcement
of judgments of courts with the United States, the United Kingdom, Japan or many other countries. As a result, recognition and enforcement
in the PRC of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may
be difficult or impossible. Furthermore, an original action may be brought in the PRC against us, our directors, executive officers or
managers only if the actions are not required to be arbitrated by PRC law under Helpson’s articles of association, and only if the
facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court
may impose civil liability, including monetary damages.
As a Foreign Invested Company in China,
Helpson’s ownership structure may be impacted by the foreign investment regulation and its measures in China.
In accordance with Decree
No. 723 of the State Council of the People’s Republic of China issued on December 26, 2019, the Regulations on the Implementation
of the Foreign Investment Law of the People’s Republic of China came into force on January 1, 2020. On December 28, 2020, the National
Development and Reform Commission and the Ministry of Commerce publicly released the Directory of Industries to Encourage Foreign Investment
(Encouraged Catalogue) (2020 Edition). On December 27, 2021, the National Development and Reform Commission of China (“NDRC”)
and the Ministry of Commerce (“MOFCOM”) jointly issued the Special Administrative Measures for Foreign Investment Access (Negative
List) (2021 Edition), and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List)
(2021 Edition), effective January 1, 2022. As per these policies, the national negative list of foreign investment access was reduced
from 33 to 31, and the negative list of foreign investment access in the FTZ was reduced from 30 to 27. Industries listed in the 2020
Encouraged Catalogue are the encouraged industries. On the other hand, industries listed in the 2021 Negative List are subject to special
management measures. For example, establishment of wholly foreign-owned enterprises is generally allowed in industries outside of the
2021 Negative List. Also, foreign investors are not allowed to invest in industries that are expressly prohibited in the 2021 Negative
List. The industries that are not expressly prohibited in the Negative List are still subject to government approvals and certain special
requirements.
The majority of pharmaceutical manufacturing industry
including the segments under which the Company conducts its business is not included in the 2021 Negative List. Helpson manufactures and
markets generic and branded pharmaceutical products as well as biochemical products primarily to hospitals and private retailers located
throughout the PRC. The Company believes Helpson’s business is not subject to any ownership restrictions prescribed under the Catalogue.
Onny acquired 100% of the ownership in Helpson on May 25, 2005, by entering into an Equity Transfer Agreement with Helpson’s three
former shareholders. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson received the
Certificate of Approval for Establishment of Enterprises with Foreign Investment in the PRC on the same day. Helpson received its business
license evidencing its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005. However, in the event the 2021 Negative List is
amended in the future to include any of the business Helpson is operating, our ownership structure could be subject to change to the extent
our structure is not given any “grandfather” protection.
Because we receive substantially all of
our revenue in Renminbi, which currently is not a freely convertible currency, and the PRC government controls the currency conversion
and the fluctuation of the Renminbi, we are subject to changes in the PRC’s political and economic decisions.
We receive substantially all
of our revenues in Renminbi, which currently is not a freely-convertible currency. The PRC government may, at its discretion, restrict
access in the future to foreign currencies for current account transactions. Any future restrictions on currency exchanges may limit our
ability to use revenue generated in Renminbi to fund any future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi for current
account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may
only buy, sell or remit foreign currencies, after providing valid commercial documents, at those banks authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.
We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange
transactions.
Fluctuation in the value of
the Renminbi may have a material and adverse effect on your investment. The change in value of the Renminbi against the U.S. dollar is
affected by, among other things, changes in PRC’s political and economic conditions. From 1995 until July 2005, the People’s
Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately Renminbi 8.3 per U.S. dollar. On
July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S. dollar. Under
the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. As
a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar.
It is difficult to predict how long the current situation may last and when and how it may change again. There is significant international
pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more
significant appreciation in the value of the Renminbi against the U.S. dollar. Significant revaluation of the Renminbi may have a material
adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from securities offering
into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount
we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments
for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative
effect on the U.S. dollar amount available to us. In August 2015, the PRC Government devalued its currency by approximately 3%, represented
the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports, will need
a stimulus that can only come from further cuts in the exchange rate.
In addition, appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of operations. The income statements of our operations are translated
into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies,
the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for
our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign
currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We
are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars
in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial
statements into U.S. dollars will lead to a translation gain or loss, which is recorded as a component of other comprehensive income.
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. 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.
We are subject to the environmental protection
laws of the PRC that may be costly to comply with and may adversely affect our manufacturing operations.
Our manufacturing process
may produce by-products, such as effluent, gases and noise, which are harmful to the environment. We are subject to multiple laws governing
environmental protection, such as “The Law on Environmental Protection in the PRC” and “The Law on Prevention of Effluent
Pollution in the PRC,” as well as standards set by the relevant governmental bodies determining the classification of different
wastes and proper disposal. We have properly attained a waste disposal permit for our manufacturing facility, which details the types
and concentration of effluents and gases allowed for disposal. We are responsible for periodically renewing this waste disposal permit.
There is no assurance that we will obtain a renewal of the waste disposal permit when the current permit expires in February 2028.
China is experiencing substantial
problems with environmental pollution. Accordingly, it is likely that the national, provincial and local governmental agencies will adopt
stricter pollution controls. There is no guarantee that future changes in environmental laws and regulations will not impose costly compliance
requirements on us or otherwise subject us to future liabilities. Our business’s profitability may be adversely affected if additional
or modified environmental control regulations are imposed upon us.
Failure to comply with PRC regulations regarding
the registration requirements for employee equity incentive plans may subject our PRC citizen employees or us to fines and other legal
or administrative sanctions.
On March 28, 2007, the SAFE
promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding
Plan or Share Option Plan of Overseas-Listed Company, which were superseded by Notice from SAFE regarding Issues related to Domestic Individual
Participating Offshore Public Company Equity Incentive Plan promulgated on February 15, 2012 (“SAFE #7”), or the Share Option
Rule. Under the Share Option Rule, PRC citizens who are granted stock options or other employee equity incentive awards by an overseas
publicly-listed company are required, through a PRC agent who may be a PRC subsidiary of such overseas publicly-listed company, to register
with the SAFE and complete certain other procedures related to the share options or other employee equity incentive plans. We and our
PRC citizen employees who are granted share options or other equity incentive awards under our 2010 Long-Term Incentive Plan, or PRC optionees,
are subject to the Share Option Rule. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be
subject to fines and legal sanctions.
U.S. regulatory bodies may be limited
in their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents
or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state
secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies.
There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be
honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially
as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these
regulators may be limited or prohibited.
PRC regulation of loans to and direct investment
in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of
this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our
liquidity and our ability to fund and expand our business.
Any funds the Company transfer
to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration
with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in
China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce, or MOFCOM
or its local branches and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition,
(i) a foreign loan of less one year duration procured by our PRC subsidiaries is required to be registered with SAFE or its local branches
and (ii) a foreign loan of one year duration or more procured by our PRC subsidiaries is required to be applied to the NDRC in advance
for undergoing recordation registration formalities. Any medium or long-term loan to be provided by us to our PRC operating subsidiaries,
must be registered with the NDRC and the SAFE or its local branches. The Company may not be able to complete such registrations on a timely
basis, with respect to future capital contributions or foreign loans by us to our PRC Subsidiary. If the Company fail to complete such
registrations, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which
could adversely affect our liquidity and our ability to fund and expand our business.
On March 30, 2015, the SAFE
promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises,
or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the
settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but
continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business
scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating
Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to
SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary
basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but
not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in
China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not
be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi
shall not be provided as loans to its non-affiliated entities. As this circular is relatively new, there remains uncertainty as to its
interpretation and application and any other future foreign exchange related rules. Violations of these Circulars could result in severe
monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from
the net proceeds of this offering to fund our PRC operating subsidiary, to invest in or acquire any other PRC companies through our PRC
Subsidiary, which may adversely affect our business, financial condition and results of operations.
Compliance with
China’s new Data Security Law, Measures on Cybersecurity Review, Personal Information Protection Law (second draft for consultation),
regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant
expenses and could materially affect our business.
China
has implemented or will implement rules and is considering a number of additional proposals relating to data protection. China’s
new Data Security Law took effect in September 2021. The Data Security Law provides that the data processing activities must be conducted
based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities
in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by
the Chinese government.
Additionally, China’s Cyber Security Law requires companies to
take certain organizational, technical and administrative measures and other necessary measures to ensure the security of their networks
and data stored on their networks. Specifically, the Cyber Security Law provides that China adopt a multi-level protection scheme (MLPS),
under which network operators are required to perform obligations of security protection to ensure that the network is free from interference,
disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered. Under the MLPS, entities operating
information systems must have a thorough assessment of the risks and the conditions of their information and network systems to determine
the level to which the entity’s information and network systems belong-from the lowest Level 1 to the highest Level 5
pursuant to a series of national standards on the grading and implementation of the classified protection of cyber security. The grading
result will determine the set of security protection obligations that entities must comply with. Entities classified as Level 2 or
above should report the grade to the relevant government authority for examination and approval. The Company’s management believes
that they are currently classified as Level 1.
Recently,
the Cyberspace Administration of China has taken action against several Chinese internet companies in connection with their initial public
offerings on U.S. securities exchanges, for alleged national security risks and improper collection and use of the personal information
of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law, the Cyber
Security Law and the Measures on Cybersecurity Review, which are aimed at “preventing national data security risks, maintaining
national security and safeguarding public interests.” On July 10, 2021, the Cyberspace Administration of China published a revised
draft of the Measures on Cybersecurity Review, expanding the cybersecurity review to data processing operators in possession of personal
information of over 1 million users if the operators intend to list their securities in a foreign country. As we are not a data processing
operator in possession of person information, we are not within the expanded scope.
It
is unclear at the present time how widespread the cybersecurity review requirement and the enforcement action will be and what effect
they will have on our business. China’s regulators may impose penalties for non-compliance ranging from fines or suspension of operations,
and this could lead to us delisting from the U.S. stock market.
Also, recently, the National People’s Congress released the Personal
Information Protection Law (the “PIPL”), which became effective on November 1, 2021. The PIPL creates a comprehensive set
of data privacy and protection requirements that apply to the processing of personal information and expands data protection compliance
obligations to cover the processing of personal information of persons by organizations and individuals in China, and the processing of
personal information of persons in China outside of China if such processing is for purposes of providing products and services to, or
analyzing and evaluating the behavior of, persons in China. The PIPL also provides that critical information infrastructure operators
and personal information processing entities who process personal information meeting a volume threshold to-be-set by Chinese cyberspace
regulators are also required to store in China personal information generated or collected in China, and to pass a security assessment
administered by Chinese cyberspace regulators for any export of such personal information. Lastly, the PIPL provides significant fines
for serious violations of up to RMB 50 million or 5% of annual revenues from the prior year and may also be ordered to suspend any related
activity by competent authorities.
Interpretation,
application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through
new legislation, amendments to existing legislation and changes in enforcement. Compliance with the Cyber Security Law and the Data Security
Law could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or even
prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in the future.
Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection and information
security, it is possible that our practices, offerings or platform could fail to meet all of the requirements imposed on us by the Cyber
Security Law, the Data Security Law and/or related implementing regulations. Any failure on our part to comply with such law or regulations
or any other obligations relating to privacy, data protection or information security, or any compromise of security that results in unauthorized
access, use or release of personally identifiable information or other data, or the perception or allegation that any of the foregoing
types of failure or compromise has occurred, could damage our reputation, discourage new and existing counterparties from contracting
with us or result in investigations, fines, suspension or other penalties by Chinese government authorities and private claims or litigation,
any of which could materially adversely affect our business, financial condition and results of operations. Even if our practices are
not subject to legal challenge, the perception of privacy concerns, whether or not valid, may harm our reputation and brand and adversely
affect our business, financial condition and results of operations. Moreover, the legal uncertainty created by the Data Security Law and
the recent Chinese government actions could materially adversely affect our ability, on favorable terms, to raise capital, including engaging
in follow-on offerings of our securities in the U.S. market.
We are not required to submit an application to CSRC pursuant to the
M&A Rules, nor are we subject to the cybersecurity review. However, based on the recent promulgation of the Trial Measures, which
are set to be effective on March 31, 2023, we may be required to complete the filing requirements when we have re-financing or any additional
offerings in future.
The
Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory
agencies in 2006 and amended in 2009, require an overseas special purpose vehicle formed for listing purposes through acquisitions of
PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading
of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its
official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval
of its overseas listings. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore
special purpose vehicles. Currently, there is no consensus among leading PRC law firms regarding the scope and applicability of the CSRC
approval requirement.
Based on our understanding of the Chinese laws and regulations in effect
at the time of this report, we will not be required to submit an application to the CSRC for its approval of an offering in a foreseeable
future and the listing and trading of our common stock on NYSE American. However, there remains some uncertainty as to how the M&A
Rules will be interpreted or implemented in the context of an overseas offering and our belief is subject to any new laws, rules and regulations
or detailed implementations and interpretations in any form relating to the M&A Rules or overseas offering approval. We cannot assure
you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down
on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The
Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision
over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will
be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection
requirements and similar matters.
On December 28, 2021, the CAC, and other
twelve PRC regulatory authorities jointly revised and promulgated the Measures for Cyber Security Review, or the New Measures
for Cyber Security Review, which came into effect on February 15, 2022 and replace the prior Measures for Cyber Security Review promulgated
on April 13, 2020. The New Measures for Cyber Security Review provides that, among others, (i) the purchase of cyber products
and services by critical information infrastructure operators and the network platform operators engaging in data processing activities
that affects or may affect national security should be subject to the cybersecurity review by the Cybersecurity Review Office, the department
which is responsible for the implementation of cybersecurity review under the CAC; (ii) network platform operators with personal
information data of more than one million users are obliged to apply for a cybersecurity review by the Cybersecurity Review Office before
listing abroad; and (iii) relevant governmental authorities in the PRC may initiate cybersecurity review if they determine the relevant
network products or services or data processing activities affect or may affect national security.
We believe that we are not subject
to cybersecurity review, since we (i) are not network platform operators engaging in data processing activities that affect
or may affect national security; (ii) are not critical information infrastructure operators purchasing cyber products or services
that affect or may affect national security; (iii) are not network platform operators with personal information data of more than
one million users and do not need to obtain any permission or approval from the CAC in accordance with the New Measures for Cyber
Security Review. However, as PRC governmental authorities have significant
discretion in interpreting and implementing statutory provisions and there remains significant uncertainty in the interpretation and
enforcement of relevant PRC cybersecurity laws and regulations, we cannot guarantee the PRC government will have the same analysis
and application of law like us.
On December 24, 2021, the China Securities Regulatory Commission, or
the “CSRC”, published draft regulations (the “Draft Rules”) on domestic enterprises issuing securities and being
listed overseas. The Draft Rules lay out specific filing requirements for overseas listing and offering by PRC domestic companies and
include unified regulation management and strengthening regulatory coordination. On February 17, 2023, the CSRC promulgated the Trial
Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”), which will
take effect on March 31, 2023. The Trial Measures supersede the Draft Rules and clarified and emphasized several aspects, which include
but are not limited to: (1) criteria to determine whether an issuer will be required to go through the filing procedures under the Trial
Measures; (2) exemptions from immediate filing requirements for issuers including those that have already been listed or registered but
not yet listed in foreign securities markets, including U.S. markets, prior to the effective date of the Trial Measures; (3) a negative
list of types of issuers banned from listing or offering overseas, such as issuers whose affiliates have been recently convicted of bribery
and corruption; (4) issuers’ compliance with web security, data security, and other national security laws and regulations; (5)
issuers’ filing and reporting obligations, such as obligation to file with the CSRC after it submits an application for initial
public offering to overseas regulators, and obligation after offering or listing overseas to report to the CSRC material events including
change of control or voluntary or forced delisting of the issuer; and (6) the CSRC’s authority to fine both issuers and their shareholders
for failure to comply with the Trial Measures, including failure to comply with filing obligations or committing fraud and misrepresentation.
Because we are already publicly listed in the U.S., the Trial Measures do not impose additional regulatory burden on us beyond the obligation
to report to the CSRC any future offerings of our securities, or material events such as a change of control or delisting. Despite of
the foregoing, we cannot assure you if we will be able to complete the filing procedure in a timely fashion when we are required to do
so for any offerings in the future.
The Holding Foreign Companies Accountable
Act, or the HFCAA, and the related regulations continue to evolve. Further implementations and interpretations of or amendments to the
HFCAA or the related regulations, or a PCAOB determination of its lack of sufficient access to inspect our auditor, might pose regulatory
risks to and impose restrictions on us because of our operations in mainland China.
On May 20, 2020, the U.S. Senate passed the Holding
Foreign Companies Accountable Act (the “HFCAA”) requiring a foreign company to certify it is not owned or controlled by a
foreign government if the PCAOB is unable to audit specified reports because the Company uses a foreign auditor not subject to PCAOB inspection.
If the PCAOB is unable to inspect the Company’s auditors for three consecutive years, the issuer’s securities are prohibited
to trade on a national securities exchange or in the over the counter trading market in the U.S. On December 18, 2020, the HFCAA was signed
into law. The HFCAA has since then been subject to amendments by the U.S. Congress and interpretations and rulemaking by the SEC.
On June 22, 2021, the U.S. Senate passed the Accelerating
Holding Foreign Companies Accountable Act (“AHFCAA”), which proposes to reduce the period of time for foreign companies to
comply with PCAOB audits from three to two consecutive years, thus reducing the time period before the securities of such foreign companies
may be prohibited from trading or delisted. On December 29, 2022, the AHFCAA was signed into law.
On December 16, 2021, PCAOB announced the PCAOB
HFCAA determinations relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered
in mainland China of the PRC or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one
or more authorities in the PRC or Hong Kong. The inability of the PCAOB to conduct inspections of auditors in China made it more difficult
to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors
outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in issuers operating in
China to lose confidence in such issuers’ procedures and reported financial information and the quality of financial statements.
Our auditor, BF Borgers CPA PC, the independent
registered public accounting firm that issues the audit report included elsewhere in this report, as an auditor of companies that are
traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the
PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Our auditor is
headquartered in Colorado, and is subject to inspection by the PCAOB on a regular basis with the last inspection in 2022.
On August 26, 2022, the PCAOB announced and signed
a Statement of Protocol (the “Protocol”) with the China Securities Regulatory Commission and the Ministry of Finance of the
People’s Republic of China (together, the “PRC Authorities”). The Protocol provides the PCAOB with: (1) sole discretion
to select the firms, audit engagements and potential violations it inspects and investigates, without any involvement of Chinese authorities;
(2) procedures for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB
to retain information as needed; (3) direct access to interview and take testimony from all personnel associated with the audits the PCAOB
inspects or investigates.
On December 15, 2022, the PCAOB announced in its
2022 HFCAA Determination Report (the “2022 Report”) its determination that the PCAOB was able to secure complete access to
inspect and investigate audit firms in the People’s Republic of China (PRC), and the PCAOB Board voted to vacate previous determinations
to the contrary. According to the 2022 Report, this determination was reached after the PCAOB had thoroughly tested compliance with every
aspect of the Protocol necessary to determine complete access, including on-site inspections and investigations in a manner fully consistent
with the PCAOB’s methodology and approach in the U.S. and globally. According to the 2022 Report, the PRC Authorities had fully
assisted and cooperated with the PCAOB in carrying out the inspections and investigations according to the Protocol, and have agreed to
continue to assist the PCAOB’s investigations and inspections in the future. The PCAOB may reassess its determinations and issue
new determinations consistent with the HFCAA at any time.
While the HFCAA and AHFCAA are not currently applicable to the Company
because the Company’s current auditors are subject to PCAOB review, if this changes in the future for any reason, the Company may
be subject to the HFCAA and AHFCAA. The implications of this regulation if the Company were to become subject to it are uncertain. Such
uncertainty could cause the market price of our common stock to be materially and adversely affected, and our securities could be delisted
or prohibited from being traded on NYSE American earlier than would be required by the HFCAA and AHFCAA. If our common stock is unable
to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase the
common stock when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on
the price of the common stock.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability
or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’ ability to increase their registered
capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated
the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and
Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign
Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or
SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including
PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore
investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore
acquisitions that we make in the future.
Under SAFE Circular 37, PRC
residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose
vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is
a direct or indirect shareholder of an SPV is required to update its filed registration with the local branch of SAFE with respect to
that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders
to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration
or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or
the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional
capital contributions into its subsidiary in China. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and
Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015.
Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct
investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks
will directly examine the applications and accept registrations under the supervision of SAFE.
Some of our shareholders that
we are aware of are subject to SAFE regulations, and we expect all of these shareholders will have completed all necessary registrations
with the local SAFE branch or qualified banks as required by SAFE Circular 37. We cannot assure you, however, that all of these shareholders
may continue to make required filings or updates in a timely manner, or at all. We can provide no assurance that we are or will in the
future continue to be informed of identities of all PRC residents holding direct or indirect interest in our company. Any failure or inability
by such shareholders to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border
investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans
from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to
make distributions to you could be materially and adversely affected.
Furthermore, as these foreign
exchange regulations are still relatively new and their interpretation and implementation have been constantly evolving, it is unclear
how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented
by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to
our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect
our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that
we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings
and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and
could adversely affect our business and prospects.
U.S. regulatory bodies may be limited in
their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents
or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state
secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies.
There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be
honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially
as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these
regulators may be limited or prohibited.
Our China-sourced income is subject to PRC
withholding tax under the new Enterprise Income Tax Law of the PRC, and we may be subject to PRC enterprise income tax at the rate of
25% when more detailed rules or precedents are promulgated.
The PRC enterprise income tax is
calculated based on the taxable income determined under the PRC laws and accounting standards. On March 16, 2007, the National People’s
Congress of China enacted a new Enterprise Income Tax Law of the PRC, which became effective
on January 1, 2008 and amended the Enterprise Income Tax Law of the PRC on December 29, 2018.
On December 6, 2007, the State Council promulgated the Implementation Rules to the Enterprise Income Tax Law
of the PRC, or the Implementation Rules, which also became effective on January 1, 2008 and amended the Implementation Rules to the Enterprise Income Tax Law
of the PRC on April 23, 2019. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition
Preferential Policy under the Enterprise Income Tax Law of the PRC, or the Transition Preferential
Policy Circular, which became effective simultaneously with the Enterprise Income Tax Law of
the PRC. On October 17, 2017, the State Administration of Taxation promulgated the Announcement of the State Administration of Taxation
on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, which became effective on December 1, 2017 and
amended Withholding at Source of Income Tax of Non-resident Enterprises on June 15, 2018. The Enterprise Income Tax Law
of the PRC imposes a uniform enterprise income tax rate of 25% on all domestic enterprises, including
foreign-invested enterprises unless they qualify for certain exceptions, and terminates most of the tax exemptions, reductions and preferential
treatments available under previous tax laws and regulations.
Moreover, under the Enterprise Income Tax Law
of the PRC, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located
within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at
the rate of 25% on their worldwide income. The Implementation Rules define the term “de facto management body” as the management
body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties
of an enterprise. In addition, the Circular Related to Relevant Issues on the Identification of a Chinese holding Company Incorporated
Overseas as a Residential Enterprise under the Criterion of De Facto Management Bodies Recognizing issued by the State Administration
of Taxation on April 22, 2009 provides that a foreign enterprise controlled by a PRC company or a PRC company group will be classified
as a “resident enterprise” with its “de facto management bodies” located within China if the following requirements
are satisfied: (i) the senior management and core management departments in charge of its daily operations function mainly in China; (ii)
its financial and human resources decisions are subject to determination or approval by persons or bodies in China; (iii) its major assets,
accounting books, company seals and minutes and files of its board and shareholders’ meetings are located or kept in China; and
(iv) more than half of the enterprise’s directors or senior management with voting rights reside in China. Although the circular
only applies to offshore enterprises controlled by PRC enterprises and not those controlled by PRC individuals or foreigners, the determining
criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto
management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises, individuals or foreigners. It is uncertain to us as to how it will be implemented and the respective
tax base and the tax exposure cannot be determined reliably at this stage. In case we are required to pay the income tax on capital gains
by the relevant PRC tax authorities, our financial conditions and results of operations could be adversely affected.
Our ability to distribute dividends are
to large extent based on the dividends paid to us by our operating entity in China, and its ability to distribute dividends may be limited
by the PRC laws.
As we are a holding company with all of business
operations conducted in PRC by Helpson, which is our wholly-owned subsidiary, we depend on its dividend issuance to us to pay the dividends
to our investors. According to the PRC Company Law and Foreign Investment Law, our PRC subsidiary, as a foreign-invested enterprise, or
FIE, we may only pay dividends out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and
regulations. In addition we are required to draw 10% of its after-tax profits each year, if any, to fund a common reserve, which may stop
drawing its after-tax profits if the aggregate balance of the common reserve has already accounted for over 50% of its registered capital.
The reserve funds are not distributable as cash dividends. A PRC company is not permitted to distribute any profits until any losses from
prior fiscal years have been offset. Our ability to distribute dividends may be restricted because of the above-mentioned regulations.
We may even cannot distribute dividends if we are suffering loss in certain fiscal year in the future.
Dividends payable by us to our foreign investors
and gain on the sale of our shares may become subject to taxes under PRC tax laws.
Under the new EIT law and
its implementation rules, to the extent that we are considered a “resident enterprise” which is “domiciled” in
China, PRC income tax at the rate of 10% is applicable to dividends payable by us to investors that are “non-resident enterprises”
so long as such “non-resident enterprise” investors do not have an establishment or place of business in China or, despite
the existence of such establishment or place of business in China, the relevant income is not effectively connected with such establishment
or place of business in China. Similarly, any gain realized on the transfer of our shares by such investors is also subject to a 10% PRC
income tax if such gain is regarded as income derived from sources within China and we are considered a “resident enterprise”
which is domiciled in China for tax purposes. Additionally, there is a possibility that the relevant PRC tax authorities may take the
view that our purpose is that of a holding company, and the capital gain derived by our overseas stockholders would be deemed China-sourced
income, in which case such capital gain may be subject to PRC withholding tax at the rate of up to 10%. If we are required under the new
EIT law to withhold PRC income tax on our dividends payable to our foreign stockholders who are “non-resident enterprises”,
or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your
investment in our shares may be materially and adversely affected.
We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015,
the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident
Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through
offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group
restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign
transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets, as such persons need to determine
whether their transactions are subject to these rules and whether any withholding obligation applies.
On October 17, 2017,
the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise
Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice
and procedure of the withholding of non-resident enterprise income tax.
Where a non-resident enterprise
transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an “Indirect Transfer”,
the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such
Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard
the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing,
avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and
the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for
the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under
PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties as to
the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring,
sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company
is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under
SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC
subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to
expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase
taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have
a material adverse effect on our financial condition and results of operations.
Risks Related to our Common Stock
We may be held
in default on our convertible note, which could trigger penalties that worsen our financial condition and potentially disqualify us from
listing on the stock exchange where we are currently listed.
On
November 17, 2021, we entered into a Securities Purchase Agreement pursuant to which we issued an unsecured convertible promissory note
(the “Convertible Note”) to an institutional accredited investor Streeterville Capital, LLC (“Streeterville”).
The Convertible Note was due on February 17, 2023. The parties are in negotiation in extending the Convertible Note. There can be no assurances
that these negotiations will be successful. The Convertible Note has a principal balance of $3,800,000 at December 31, 2022.
Although
no event of default has occurred as of the date herein, pursuant to the terms of the Convertible Note, upon our failure to pay back the
Convertible Note upon due, Streeterville can, at its sole discretion, send us a notice which turns this into an Event of Default (“Event
of Default”), which would give us 10 days to cure. As of the date herein, Streeterville has not sent such a notice and therefore
no Event of Default has occurred. If an Event of Default occurs and is not cured within the 10-day notice period, pursuant to the terms
of the Convertible Note Streeterville can impose additional interest payments and other penalties upon us.
Such
penalties, as well as other similar penalties that could be imposed upon us as a result of our ongoing negotiations to extend the Convertible
Note, if and when imposed by Streeterville, could worsen our financial conditions by consuming or tying up our cash reserve, cash flow,
and assets, as well as dilute our existing shareholders if Streeterville initiates conversion of some or part of the Convertible Note
into our equity securities. Thus, such penalties could generally and negatively impact the operation of our business and the public trading
price of our common stock. Particularly, it could cause the values of our shareholder’s equity and market capitalization to decline
further. As a result of such decline, we may become unable to satisfy the continuous listing standards of the stock exchange where we
are currently listed, which would further negatively impact the operation of our business and the public trading price of our common
stock.
The market price for our common stock may
be volatile which could result in a complete loss of your investment.
The market price for our common
stock is highly volatile and subject to wide fluctuations in response to factors including the following:
| ● | actual or anticipated fluctuations
in our quarterly operating results; |
| ● | announcements of new products
by us or our competitors; |
| ● | changes in financial estimates
by securities analysts; |
| ● | conditions in the pharmaceutical
market; |
| ● | changes in the economic performance
or market valuations of other companies involved in pharmaceutical production; |
| ● | announcements by our competitors
of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
| ● | economic, regulatory and political
developments; |
| ● | addition or departure of key
personnel, or |
In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We may issue additional shares of our capital
stock to raise additional cash for working capital; if we issue additional shares of our capital stock, our stockholders will experience
dilution in their respective percentage ownership in the company.
We may issue additional shares
of our capital stock to raise additional cash for working capital. There is no anti-dilution protection or preemptive rights in connection
with our common stock. Thus, the percentage ownership of existing holders of common stock may be diluted in their respective percentage
ownership in us if we issue additional shares of our capital stock.
A large portion of our common stock is controlled
by a small number of stockholders and as a result, these stockholders are able to influence and ultimately control the outcome of stockholder
votes on various matters.
A large portion of our common
stock is held by a small number of stockholders. For instance, Zhilin Li, our Chief Executive Officer, holds 16.31%, and Heung Mei Tsui,
a member of our Board of Directors, holds 11.00% of our common stock, respectively, as of the date hereof. As a result, these two stockholders
are able to significantly influence the outcome of stockholder votes on various matters, including the election of directors and other
corporate transactions including business combinations. In addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through
an offering of equity securities. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity
of our common stock which can in turn affect the market price of our common stock.
We are likely to remain subject to “penny
stock” regulations and as a consequence there are additional sales practice requirements and additional warnings issued by the SEC.
If at any time we have net
tangible assets of $5,000,000 or less and the trading price of our common stock is below $5.00 per share, the open-market trading of our
common stock will be subject to the “penny stock” rules of the SEC. The “penny stock” rules impose additional
sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and
have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving
a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating
to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited
market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability of broker-dealers to sell the common
stock and may affect a stockholder’s ability to resell the common stock.
There can be no assurance
that our common stock will qualify for exemption from the “penny stock” rules. In any event, even if our common stock is exempt
from such rules, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person
from participating in a distribution of a “penny stock” if the SEC finds that such a restriction would be in the public interest.
Stockholders should be aware
that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.
Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter
or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii)
boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters
and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market.
We are responsible for the indemnification
of our officers and directors under certain circumstances which could result in substantial expenditures, which we may be unable to recoup.
Our bylaws provide for the
indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other
expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of
us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
We have identified material weaknesses in
our internal control over financial reporting, which could affect our ability to ensure timely and reliable financial reports, affect
the ability of our auditors to attest to the effectiveness of our internal controls should we become an accelerated filer in the future,
and weaken investors’ confidence in our financial reporting.
As directed by Section 404
of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies in their annual reports to include a report of management
on the reporting company’s disclosure controls and procedures and internal controls over financial reporting. We became subject
to this requirement commencing with our fiscal year ended December 31, 2007 and a report of our management is included under Item 9A.
“Controls and Procedures” of this Annual Report on Form 10-K. As set forth in such report, our management has concluded that
our internal controls over financial reporting were not effective as of December 31, 2022, and there existed a material weakness in our
internal control over financial reporting as of December 31, 2022.
We are taking appropriate actions to internally training related personnel,
such as Chief Financial Officer, to remediate such material weakness; however, such measures may not be sufficient to address the material
weaknesses identified or ensure that our controls and procedures are effective. We may also discover other material weaknesses in the
future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in the implementation
of such controls, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial
statements and affect the ability of our auditors to attest to the effectiveness of our internal control over financing reporting to the
extent we become an accelerated filer in the future. In addition, substantial costs and resources may be required to rectify any internal
control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information,
the market price of our common stock could decline significantly, and our business and financial condition could be adversely affected.
There is substantial doubt about our ability to continue as a
going concern.
Our auditors have indicated
in their report on our financial statements for the years ended December 31, 2022 and 2021 that conditions exist that raise substantial
doubt about our ability to continue as a going concern as discussed in Note 1 to the financial statements. The Company incurred recurring
losses from operations, has net current liabilities and an accumulated deficit that raise substantial doubt about its ability to continue
as a going concern.
To alleviate the conditions that
raise substantial doubt about the Company’s ability to continue as a going concern, management plans to enhance the sales model
of advance payment, and further strengthen its collection of accounts receivable. Further, the Company is currently exploring strategic
alternatives to accelerate the launch of comprehensive healthcare products. In addition, management believes that the Company’s
existing fixed assets can serve as collateral to support additional bank loans. While the current plans will allow the Company to fund
its operations in the next twelve months, there can be no assurance that the Company will be able to achieve its future strategic alternatives
raising substantial doubt about its ability to continue as a going concern.
If we are unable to generate
enough cash or obtain additional sufficient funding, we would need to scale back or eliminate our business plan, reduce our operating
costs and headcount, or discontinue or curtail our operations. Accordingly, our business, prospects, financial condition and results of
operations could be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue
as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited
consolidated financial statements, and it is likely that investors will lose all or a part of their investment. Our financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
We do not anticipate paying cash dividends
on our common stock.
You should not rely on an
investment in our common stock to provide dividend income, as we have not paid any cash dividends on our common stock and do not plan
to pay any in the foreseeable future. Accordingly, investors must rely on sales of our common stock after price appreciation, which may
never occur, as the only way to realize any return on their investment.
Restrictions on the Use of Rule 144 by Shell
Companies or Former Shell Companies.
Historically, the SEC has
taken the position that Rule 144 under the Securities Act, as amended, is not available for the resale of securities initially issued
by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical compliance
with the requirements of Rule 144. The SEC has codified and expanded this position in its amendments effective on February 15, 2008 and
applies it to securities acquired both before and after that date by prohibiting the use of Rule 144 for resale of securities issued by
shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company.
The SEC has provided an important exception to this prohibition, however, if the following conditions are met: the issuer of the securities
that was formerly a shell company has ceased to be a shell company; the issuer of the securities is subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act; the issuer of the securities has filed all Exchange Act reports and material required to be
filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials),
other than Form 8-K reports; and at least one year has elapsed from the time that the issuer filed current Form 10 type information with
the SEC reflecting its status as an entity that is not a shell company. As such, due to the fact that we had been a shell company prior
to October 2005, holders of “restricted securities” within the meaning of Rule 144, when reselling their shares pursuant to
Rule 144, shall be subject to the conditions set forth herein.