SXT Pharmaceuticals(US:SXTC)2025-07-31 13:27PART I Item 3. Key Information This section details significant investment risks, including business operations, VIE structure, China-specific regulatory challenges, and share price volatility Risk Factors The company faces material risks from customer concentration, VIE structure vulnerabilities, PRC regulatory and political uncertainties, and potential delisting under the HFCA Act - The company operates as a British Virgin Islands holding company with no material operations, conducting all business through subsidiaries and a Variable Interest Entity (VIE) in China, posing unique risks for investors24 - A significant portion of revenue is derived from a small number of customers, with one customer accounting for 68.72% of total revenue in FY202548 - The company's VIE agreements, crucial for operational control, have not been tested in a Chinese court, risking invalidation by PRC authorities2467133 - The company's auditor, Enrome LLP, is currently subject to PCAOB inspections, but future inability to inspect for three consecutive years could lead to delisting under the HFCA Act110114115 - The company has implemented two reverse stock splits: a 1-for-25 split effective October 5, 2023, and a 1-for-8 split on February 25, 2025, also eliminating the par value of ordinary shares25 Item 4. Information on The Company This section describes the company's history, business operations, organizational structure, and properties, focusing on its Traditional Chinese Medicine Pieces (TCMP) R&D, manufacturing, and sales History and Development of the Company The company, incorporated in the BVI in 2017, operates via a VIE structure controlling Taizhou Suxuantang, with its shares listed on Nasdaq since January 2019 - The company was incorporated in the British Virgin Islands on July 4, 2017, and operates through a VIE structure with Taizhou Suxuantang, established on October 13, 2017160 - The company's ordinary shares commenced trading on the Nasdaq Capital Market under the symbol "SXTC" on January 3, 2019162 Business Overview The company specializes in Traditional Chinese Medicine Pieces (TCMP), offering Advanced, Fine, and Regular varieties, with Regular TCMP dominating FY2025 revenue, and serves a diverse customer base in China Revenue Contribution by Product Type (FY2025 vs. FY2024) | Product Type | FY2025 Revenue % | FY2024 Revenue % | | :--- | :--- | :--- | | Advanced TCMP | 14.8% | 49.1% | | Regular TCMP | 82.9% | 49.0% | - The company has developed 11 Advanced TCMP products, 5 Fine TCMPs, and 200 Regular TCMPs, with Advanced TCMP products being innovative for their ease of administration without traditional decoction165166 - As of March 31, 2025, the company's customer base includes 57 pharmaceutical companies, 14 chain pharmacies, and 16 hospitals across 5 provinces in China170198 - The company has submitted 4 invention patent applications and 8 utility model patent applications, all under substantive examination by the State Intellectual Property Office of PRC169200 Organizational Structure The company, a BVI holding entity, controls its PRC operating entity, Taizhou Suxuantang, through a Variable Interest Entity (VIE) structure, necessitated by foreign ownership restrictions - The company does not directly own its Chinese operating entity, Taizhou Suxuantang, but controls it through a series of VIE agreements entered into on October 13, 2017268 - Key VIE agreements include: - Exclusive Business Cooperation Agreement: WFOE provides exclusive technical and management services to the VIE in exchange for service fees equal to the VIE's net income - Share Pledge Agreement: VIE shareholders pledge all their equity to WFOE to guarantee performance - Exclusive Option Agreement: WFOE has the right to purchase all equity in the VIE for a nominal price - Power of Attorney: VIE shareholders grant WFOE their voting rights270273277280 Property, plants and equipment The company operates GMP-certified facilities in Taizhou, Jiangsu, including production, R&D, and storage, and is expanding its production base - The company has GMP-certified facilities in Taizhou, China, with a total of approximately 3,690 square meters for production, R&D, and storage283 - An expansion of the production base on a 33,300 square meter land plot has been underway since October 2017284 Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting a 10% revenue decrease and 7% net loss increase in FY2025, alongside improved liquidity from financing activities Results of Operations In FY2025, revenue decreased 10% to $1.74 million and net loss widened 7% to $3.30 million, primarily due to declining Advanced TCMP sales and lower gross margin Financial Performance (FY2025 vs. FY2024) | Metric | FY 2025 | FY 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,740,907 | $1,928,497 | $(187,590) | (10)% | | Gross Profit | $367,427 | $553,971 | $(186,544) | (34)% | | Gross Margin | 21.1% | 28.7% | - | - | | Net Loss | $(3,303,652) | $(3,098,532) | $(205,120) | 7% | Financial Performance (FY2024 vs. FY2023) | Metric | FY 2024 | FY 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $1,928,497 | $1,971,679 | $(43,182) | (2)% | | Gross Profit | $553,971 | $426,271 | $127,700 | 30% | | Net Loss | $(3,098,532) | $(5,934,772) | $2,836,240 | (48)% | - The decrease in gross margin in FY2025 was mainly due to a significant drop in sales of high-margin Advanced TCMP products and a higher sales mix of low-margin Regular TCMP products300 - General and administrative expenses in FY2025 included a $1,006,052 impairment loss for a long-term deposit, contributing to the increased net loss302303 Liquidity and Capital Resources As of March 31, 2025, cash and equivalents increased to $18.1 million, primarily from $8.4 million in financing activities, despite ongoing operating cash outflows and prior going concern doubts Cash Flow Summary (FY2025 vs. FY2024) | Cash Flow Activity | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,345,333) | $(1,928,053) | | Net cash provided by investing activities | $63,516 | $26,423 | | Net cash provided by (used in) financing activities | $8,399,153 | $(2,624,428) | - Cash and cash equivalents increased to $18.1 million as of March 31, 2025, from $12.1 million as of March 31, 2024, primarily due to financing activities345 - As of March 31, 2025, the company's VIE held 90% of total assets and 91% of total liabilities332 - The independent auditor's report for the fiscal year 2024 raised substantial doubt about the company's ability to continue as a going concern due to recurring net losses and declining revenue671 Item 6. Directors, Senior Management and Employees This section details the company's directors, senior management, their compensation, board committee structure, and share ownership, including Co-CEOs Feng Zhou and Simon Lim Sze Beng - The company's leadership includes Co-CEO and Director Feng Zhou, Co-CEO Simon Lim Sze Beng (appointed Jan 20, 2025), and CFO Xiaodong Pan362363364 Executive Compensation (FY2025) | Name | Position(s) | Salary ($) | | :--- | :--- | :--- | | Feng Zhou | Co-CEO and Director | 50,000 | | Simon Lim Sze Beng | Co-CEO | N/A (appointed Jan 2025) | | Xiaodong Pan | CFO | 50,000 | - The Board of Directors consists of 5 members, including 3 independent directors, and has established Audit, Compensation, and Nominating and Governance committees376393 - As of July 23, 2025, the company had 116,027,758 ordinary shares outstanding, with Co-CEO Feng Zhou beneficially owning 532 ordinary shares401403 Item 7. Major Shareholders and Related Party Transactions This section outlines the company's related party transactions, including minimal revenue from related parties, financial guarantees, and non-cash settlements, with key figures like CEO Feng Zhou involved Revenue from Related Parties | Fiscal Year Ended March 31, | Revenue ($) | | :--- | :--- | | 2025 | 4,301 | | 2024 | 27,760 | | 2023 | 33,621 | - The company has provided financial guarantees for loans to related parties, including Taizhou Jiutian Pharmaceutical Co. Ltd., for amounts up to $387,796 and $303,168429866 - The company leases office and warehouse space from a related party for free and recorded operating lease expenses of $69,343 for FY2025 based on the lease's fair value428864 - Significant non-cash settlements occurred between the company and related parties, including an offset of a $7.27 million long-term deposit against amounts due to related parties in FY2025426862 Item 10. Additional Information This section covers corporate governance, material contracts, exchange controls, and taxation, highlighting significant financing activities, reverse stock splits, and potential PRC resident enterprise or PFIC classifications - The company has engaged in multiple financing transactions through securities purchase agreements, primarily with Streeterville Capital, LLC, issuing convertible promissory notes throughout 2022, 2023, and 2024509517526 - In January 2025, the company conducted a PIPE offering, selling 14.2 million ordinary shares and issuing warrants, and in March 2025, exchanged 28.4 million of these warrants for 11.225 million new ordinary shares553 - The company is subject to PRC exchange controls, where Renminbi is freely convertible for current account items (like dividends) but not for capital account items without prior approval565 - There is a risk that the company could be classified as a PRC "resident enterprise," which would subject its global income to a 25% PRC enterprise income tax and potentially subject non-PRC shareholders to a 10% withholding tax on dividends145576579 - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, which could result in adverse tax consequences for U.S. shareholders593 Item 11. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks including credit, interest rate, commodity price, and foreign exchange fluctuations, particularly given RMB's non-convertibility, and does not use hedging instruments - The company's primary market risks include credit risk, interest rate risk, commodity price risk, foreign exchange risk, and inflation risk612614 - Substantially all cash is held in PRC bank accounts, which are not insured, and the company's revenue and costs are denominated in RMB, exposing it to foreign currency exchange rate fluctuations613617 - The company has not entered into any hedging transactions to mitigate its exposure to foreign currency or interest rate risks615618 PART II Item 15. Controls and Procedures Management concluded that disclosure controls were ineffective as of March 31, 2025, due to material weaknesses in internal control over financial reporting, with a remediation plan underway - Management concluded that as of March 31, 2025, the company's disclosure controls and procedures were not effective625 - Material weaknesses in internal control over financial reporting were identified, including: - Inadequate accounting personnel with U.S. GAAP and bilingual capabilities - Inadequate segregation of duties in accounting processes due to limited staff size626 - A remediation plan is in place to hire additional personnel, engage consultants, and enhance training to address these weaknesses629631 Item 16. Corporate Governance and Other Matters This section details corporate governance, including the audit committee financial expert, code of ethics, principal accountant fees, foreign private issuer exemptions, and cybersecurity risk management Principal Accountant Fees | Fee Type | FY 2025 | FY 2024 | | :--- | :--- | :--- | | Audit fees | $130,000 | $151,000 | | Audit related fees | $15,000 | $30,000 | | Total | $145,000 | $181,000 | - The company follows its home country (British Virgin Islands) corporate governance practices, which exempt it from certain NASDAQ shareholder approval requirements for security issuances and the requirement to hold an annual meeting every year641 - The company has implemented a cybersecurity risk management program overseen by the board of directors, with no material cybersecurity incidents identified as of the report date646647648 PART III Item 18. Financial Statements This section presents the company's consolidated financial statements for FY2025 and FY2024, prepared under U.S. GAAP, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheet Highlights | Metric | As of Mar 31, 2025 | As of Mar 31, 2024 | | :--- | :--- | :--- | | Total Assets | $21,663,508 | $23,127,057 | | Total Liabilities | $6,223,746 | $9,196,611 | | Total Shareholders' Equity | $15,439,762 | $13,930,446 | Consolidated Statement of Loss Highlights | Metric | FY ended Mar 31, 2025 | FY ended Mar 31, 2024 | | :--- | :--- | :--- | | Revenues | $1,740,907 | $1,928,497 | | Gross Profit | $367,427 | $553,971 | | Net Loss | $(3,303,652) | $(3,098,532) | | Loss Per Share (Basic & Diluted) | $(2.321) | $(28.577) | - The company's operations are conducted through a VIE structure due to PRC legal restrictions on foreign ownership in the pharmaceutical sector, with agreements designed to give the company's WFOE control and economic benefits equivalent to direct ownership690 - For the year ended March 31, 2025, the company recorded a $1,000,451 impairment allowance on a long-term deposit related to a potential acquisition that is no longer probable775