Regencell Bioscience(RGC) - 2024 Q4 - Annual Report

Company Overview and Risk Factors Key Information The company faces significant risks from its early-stage operations, lack of revenue, financial control weaknesses, and adverse PFIC tax status Financial and Capital Risks The company has a history of net losses, no revenue, and requires substantial future financing to sustain its operations - The company is an early-stage TCM bioscience company with a limited operating history and has incurred operating losses since its formation[11] Net Losses | Fiscal Year Ended June 30 | Net Loss (USD) | | :--- | :--- | | 2024 | $4.36 million | | 2023 | $6.06 million | - The company has not generated any revenue from its TCM formulae candidates, has not applied for regulatory approvals, and lacks distribution capabilities[13][14] - The company has limited working capital and will need substantial additional financing, and failure to secure funds could curtail or cease operations[15][16] Product Development and Regulatory Risks The company's core products are in early-stage development, facing significant regulatory hurdles and commercialization uncertainties - The company's three standardized TCM formulae candidates for ADHD and ASD are still in development and the business is materially dependent on their successful commercialization[17][18][19] - The company's research is at an early stage, requires significant investment, and has no certainty of obtaining regulatory approval or achieving commercial success[22][23][24] - Efficacy trial data relies on assessments provided by parents and caregivers, which may be subject to bias, potentially affecting result accuracy[25][27] - The company relies on trade secrets for its core formulae, which may not be adequately protected, despite holding several trademarks in Hong Kong[48][51] General Company Risks The company has a limited operating history, key person dependency, and has identified material weaknesses in its internal financial controls - The company has a very limited operating history, making it difficult to evaluate its future viability[67][68] - The company's success is wholly dependent on its founder and CEO, Mr. Yat-Gai Au, and its strategic partner, Mr. Sik-Kee Au (the CEO's father)[76][78] - Three material weaknesses in internal control over financial reporting have been identified, including lack of skilled staff and poor segregation of duties[80][81] - The company believes it was a Passive Foreign Investment Company (PFIC) for FY2024, which could result in adverse U.S. tax consequences for shareholders[94][96] - The founder and CEO, Mr. Yat-Gai Au, beneficially owns 81.2% of the company, making it a "controlled company" under Nasdaq rules[112][113] Hong Kong Operational Risks The company's Hong Kong-based operations are exposed to regional political, economic, and regulatory uncertainties - The company's operations are based in Hong Kong and it states that PRC laws do not currently have a material impact on its business, but this could change[117][130] - Political and legal developments in Hong Kong, including the National Security Law, create uncertainty and could adversely affect the business[118][119][140] - If the PCAOB's ability to inspect the company's Hong Kong-based auditor is hindered in the future, the company's shares could be delisted under the HFCAA[144][145][146] Company Information The company is an early-stage bioscience firm developing Traditional Chinese Medicine treatments for ADHD and ASD in Hong Kong - The company is an early-stage bioscience firm focused on R&D and commercialization of TCM for neurocognitive disorders like ADHD and ASD[150] - The company completed its IPO on July 20, 2021, raising net proceeds of approximately $22.67 million[158] - The business plan includes patenting its TCM formulae, scaling production, and commercializing first in Hong Kong before global expansion[161] - A second efficacy trial for its three standardized TCM formulae has shown positive interim results in reducing ADHD and ASD symptoms[174][211] - The company's operations are subject to Hong Kong regulations, including the Hong Kong Chinese Medicine Ordinance (HKCMO)[243][244][247] Financial and Corporate Information Operating and Financial Review and Prospects (MD&A) The company has generated no revenue, reported a lower net loss in FY2024, and has sufficient liquidity for the next twelve months Results of Operations (FY2024 vs. FY2023) | Metric | FY 2024 (USD) | FY 2023 (USD) | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenue | $0 | $0 | $0 | N/A | | Selling and marketing | $125,427 | $262,664 | ($137,237) | (52)% | | General and administrative | $3,545,066 | $4,429,379 | ($884,313) | (20)% | | Research and development | $1,066,233 | $1,581,628 | ($515,395) | (33)% | | Total operating expenses | $4,736,726 | $6,273,671 | ($1,536,945) | (24)% | | Net Loss | ($4,363,221) | ($6,062,329) | $1,699,108 | (28)% | | Loss Per Share (Basic & Diluted) | ($0.33) | ($0.45) | $0.12 | (27)% | Cash Flow Summary (FY2024) | Cash Flow Activity | Amount (USD) | | :--- | :--- | | Net cash used in operating activities | ($4,001,687) | | Net cash provided by investing activities | $5,242,624 | | Net cash provided by financing activities | $102,282 | - As of June 30, 2024, the company had $8.0 million in cash and short-term investments and believes this is sufficient to fund operations for at least the next twelve months[310] - Critical accounting estimates include share-based compensation and deferred tax assets, for which a full valuation allowance has been provided[326][327][329] Directors, Senior Management and Employees This section details the company's leadership, board composition, executive compensation, share option plan, and employee count - The executive team is led by Yat-Gai Au (Chairman & CEO) and James Wai Hong Chung (Director, COO & CSO), with a board including three independent directors[332] - For FY2024, aggregate cash compensation paid to directors and executive officers was $0.78 million, with the CEO's annual base salary set at $1[342][343] - Under the 2021 Share Option Plan, 754,553 options are outstanding as of the report date[347][355] - As of June 30, 2024, the company had 12 full-time employees in Hong Kong[377] Major Shareholders and Related Party Transactions The founder beneficially owns 81.2% of the company, and a key related party transaction involves exclusive rights to his father's TCM formulae Major Shareholder Ownership | Shareholder | Shares Beneficially Owned | Percentage | | :--- | :--- | :--- | | Yat-Gai Au (Founder, CEO) | 10,568,839 | 81.2% | - The company has a Strategic Partnership Agreement with the CEO's father, granting exclusive rights to all his TCM formulae in exchange for a 3% net revenue donation[390][391] - The company's Audit Committee is responsible for reviewing and approving all related party transactions[395] Financial Information The company is not involved in any material legal proceedings and does not plan to pay dividends in the foreseeable future - The company is not currently involved in any material legal proceedings[397] - The company does not expect to declare or pay any dividends in the foreseeable future, retaining earnings to finance business operations[398] Additional Information This section covers taxation details and highlights the significant adverse PFIC tax risk for U.S. investors - The company is incorporated in the Cayman Islands and is not subject to profits, income, or capital gains taxes there[405] - In Hong Kong, subsidiaries are subject to a profits tax rate of 16.5% on assessable profits over HK$2 million[307][407] - The company believes it was a PFIC for its taxable year ended June 30, 2024, which can lead to adverse U.S. federal income tax consequences for U.S. Holders[416][420][428] - The company does not intend to provide information for a QEF election, limiting options for U.S. Holders to mitigate adverse PFIC tax treatment[424] Market Risk Disclosures The company's primary market risks, including foreign exchange, credit, and interest rate risks, are considered minimal - Foreign exchange risk is considered minimal because most transactions are in HKD or USD, and the HKD is pegged to the USD[443] - Credit risk is limited by placing bank deposits with well-established, high-credit-rating financial institutions[444] Controls, Procedures, and Corporate Governance Use of IPO Proceeds The company has used approximately $14.7 million of its IPO proceeds, with $8.0 million remaining as of June 30, 2024 - The company received net proceeds of approximately $22.67 million from its IPO and over-allotment[451] - As of June 30, 2024, $8.0 million of the net IPO proceeds remained unused[453] Controls and Procedures Management concluded that disclosure controls were ineffective as of June 30, 2024, due to three identified material weaknesses - Management concluded that disclosure controls and procedures were not effective as of June 30, 2024[454] - Three material weaknesses were identified: (1) lack of staff with U.S. GAAP/SEC knowledge, (2) lack of an internal audit function, and (3) lack of segregation of duties[458] - Remediation efforts include recruiting experienced personnel and engaging external experts for complex transactions[459] - As an emerging growth company, an attestation report on internal control is not required from the independent auditor[462] Corporate Governance and Other Matters This section outlines corporate governance details, including the audit committee financial expert, accountant fees, and cybersecurity framework - The board has determined that Dr. Wing Yan (William) Lo qualifies as an "audit committee financial expert"[464] Principal Accountant Fees (USD) | Fee Type | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Audit Fees | $120,000 | $120,000 | | Audit-Related Fees | $30,000 | $30,000 | | Total Fees | $150,000 | $150,000 | - The company has implemented a cybersecurity risk management strategy, with oversight from the board of directors[476][477][478] Financial Statements Consolidated Financial Statements This section presents the U.S. GAAP consolidated financial statements for the three years ended June 30, 2024 Consolidated Balance Sheet Highlights (as of June 30) | Account | 2024 (USD) | 2023 (USD) | | :--- | :--- | :--- | | Cash | $2,961,235 | $1,564,795 | | Short-term investment | $5,000,000 | $10,000,000 | | Total Assets | $8,438,211 | $12,621,755 | | Total Liabilities | $219,512 | $632,320 | | Total Shareholders' Equity | $8,218,699 | $11,989,435 | Consolidated Statement of Operations Highlights (Year Ended June 30) | Account | 2024 (USD) | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | :--- | | Total operating expenses | $4,736,726 | $6,273,671 | $7,617,770 | | Net Loss | ($4,363,221) | ($6,062,329) | ($7,594,555) | | Loss Per Share | ($0.33) | ($0.45) | ($0.58) | - The company's operations are primarily funded by proceeds from its IPO and it has not generated revenue since inception[504][508] - As of June 30, 2024, the company had tax loss carry-forwards of approximately $17 million, against which a full valuation allowance has been recorded[554]