What changed in Scienture Holdings, Inc.'s 10-K — 2022 vs 2023

For example, as a wholesale distributor of controlled substances, we must hold valid DEA registrations and state-level licenses, meet various security and operating standards, and comply with the Controlled Substances Act (CSA).

Currently, we are paid an administrative fee of up to 6 percent of the buying price on the generic pharmaceuticals sold to pharmacies and up to 1 percent on brand pharmaceuticals that pass through our pharmaceutical exchanges.

Difficulties in product manufacturing or access to raw materials could result in supplier production shutdowns, product shortages and other supply disruptions. The COVID-19 pandemic has adversely affected the availability of some products, resulting in product allocation and delivery delays.

Our success will depend on our ability to develop or to acquire and market new services. There is no guarantee that we will possess the resources, either financial or personnel, for the research, design and development of new applications or services, or that we will be able to utilize these resources successfully and avoid technological or market obsolescence.

In July 2020, the Company’s wholly-owned subsidiary, Integra, entered into an agreement with Studebaker Defense Group, LLC (“ Studebaker ”) wherein Integra would pay Studebaker a down payment of $500,000 and Studebaker would deliver 180,000 boxes of nitrile gloves by August 14, 2020.

Integra wired the $500,000 to Studebaker, but to date, Studebaker has not delivered the gloves or provided a refund of the deposit. On December 31, 2020, we filed a complaint against Studebaker in Florida state court, Case No. 20-CA-010118 in the Circuit Court for the Thirteenth Judicial Circuit in Hillsborough County, for among other things, breach of contract.

On January 29, 2021, Integra Pharma Solutions filed a motion for clerk’s default against Studebaker. On February 2, 2021, the clerk of court issued a default judgment against Studebaker. On March 4, 2021, Integra Pharma Solutions filed a motion for final default judgment against Studebaker. On March 22, 2021, counsel for Studebaker filed a notice of appearance in the case.

On March 24, Studebaker filed a response in opposition to the motion for final judgment, and on March 25, 2021, Studebaker filed a motion to dismiss the case. On May 14, 2021, the Court denied Integra’s motion for final default judgment, granted Studebaker’s motion to set aside the clerk’s default, and denied Studebaker’s motion to dismiss.

An amended answer and affirmative defenses were filed by Studebaker on October 14, 2021. Integra’s motion to strike the affirmative defenses, or in the alternative, motion for more definite statement is scheduled for hearing on April 27, 2022.

We have also scheduled the deposition of Studebaker’s corporate representative on April 12, 2022, and moved to compel better answers to outstanding discovery. The litigation remains pending and is in the discovery phase. Integra remains confident it can successfully prosecute its claims against Studebaker on the merit.

On June 30, 2021, the $500,000 was recorded as Loss on Inventory Investment. 26 In August 2020, Integra, entered into an agreement with Sandwave Group Dsn Bhd (“ Sandwave ”), wherein Integra would pay Sandwave a down payment of $581,250 and Sandwave’s supplier, Crecom Burj Group SDN BHD (“ Crecom ”), would deliver 150,000 boxes of nitrile gloves within 45 days.

Integra wired the $581,250 to Sandwave, which in turn wired the purchase price to Crecom, which Crecom accepted; however, to date, Crecom has not delivered the nitrile gloves. Integra demanded return of its $581,250 and Crecom has acknowledged that Integra is entitled to a refund, but to date Crecom has failed to return Integra’s money.

In February 2021, Integra filed a complaint against Crecom in Malaysia: Case No. WA-22NCC-55-02/2021 in the High Court of Malaysia at Kuala Lumpur in the Federal Territory, Malaysia for the Malaysian equivalent of breach of contract. Crecom filed an appearance on March 1, 2021.

In April 2021, an Application for Summary Judgment was filed with the court, and on May 25, 2021, the Court extracted the sealed application, and a copy thereof was served on Crecom’s attorneys and Crecom, 14 days later, filed an Affidavit in Reply with the court alleging that there are issues to be tried and that this case must go to a full trial.

On June 28, 2021, the court directed both parties to file their written submissions/arguments in relation to the application for summary judgment on or before July 12, 2021, and scheduled a hearing thereon for August 26, 2021. At the final hearing on October 18, 2021, the ruling for the summary judgment was denied and a trial date is pending.

The Company believes that it will prevail in the lawsuit filed; but the steps to enforce a judgment in Malaysia, if any, may be cumbersome, time-consuming or costly. The Company cannot determine the timing of the judgment, nor the amount ultimately collected. On June 30, 2021, the $581,250 was recorded as Loss on Inventory Investment.

On May 20, 2022, effective as of May 18, 2022, the Company’s wholly owned subsidiary Community Specialty Pharmacy, LLC (“ CSP ”) entered into an agreement to acquire COVID-19 testing kits (the “ CSP Test Kits ”) from a third party vendor for an aggregate of $1,200,000, of which $875,000 was paid on May 23, 2022.

The Company received the CSP Test Kits in July of 2022. On August 18, 2022, the Company was informed by the vendor that the vendor had received a letter from the U.S. Food and Drug Administration (“ FDA ”) that the CSP Test Kits were misbranded under Section 502(o) of the Federal Food.

Drug, and Cosmetic Act (“ FDC Act ”) (21 USC 352(o)) and adulterated under Section 501(f) of the FDC Act (21 USC 351(f)).

Furthermore, the vendor informed the Company that the letter from the FDA also stated that because of the FDA’s prohibition on the distribution of adulterated and/or misbranded devices applies to all parties along the distribution chain, the FDA was advising the vendor against furthering the distribution of the CSP Test Kits in interstate commerce.

At this time the Company has informed the vendor that it expects the vendor to provide a full return of the $875,000 paid on May 23, 2022, along with any additional damages that the Company may incur. As of December 31, 2022, $875,250 was recorded as a loss on inventory investment in the statement of operations for Fiscal 2022.

We have invested and expect to continue to invest in new businesses, products, services, and technologies.

Such endeavors may involve significant risks and uncertainties, including insufficient revenues from such investments to offset any new liabilities assumed and expenses associated with these new investments, inadequate return of capital on our investments, distraction of management from current operations, and unidentified issues not discovered in our due diligence of such strategies and offerings that could cause us to fail to realize the anticipated benefits of such investments and incur unanticipated liabilities.

Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results. To date we have taken losses and/or write-downs on several businesses, products, services, and technologies.

For example. 27 a) We had $725,973 of loss on impairment of goodwill for the fiscal year ended December 31, 2020, in connection with the acquisition of Community Specialty Pharmacy, LLC; b) We designed and invested resources into the “Bonum Health Hub”, a self-enclosed, free standing virtual examination room, which was launched by the Company’s wholly-owned Bonum Health, LLC, in November 2019 and was expected to be operational in April 2020; however, due to the COVID-19 pandemic, the Company does not anticipate installations moving forward, and has taken a write off of the hubs purchased at June 30, 2021 in the amount of $143,891, which is included under loss on inventory investments in the statement of operations for Fiscal 2021; and c) We also used resources and funding to create a Health Passport application during 2020 and 2021, which was planned to store a user’s health and vaccination status and allow confirmation thereof via a QR code; however, we did not generate any revenue from this product and the product was discontinued at the end of December 2021; d) We had $792,500 of loss on impairment of intangible assets related to our investment in the joint venture SOSRx, LLC formed in February of 2022.

The subsidiary did not generate material revenue and in February of 2023, subsequent to the Fiscal 2022, the Company voluntarily withdrew from the joint venture agreement. The asset impairment is reflected in the statement of operations for the Fiscal 2022 as impairment of intangible asset.

Additionally, the Company contributed a cash investment of $275,000 in February of 2022 when the joint venture was formed, the Company did not recover this investment as part of the withdrawal settlement; e) We recorded a loss of $875,250 in connection with CSP Test Kits purchased for our Community Specialty Pharmacy that were later deemed inappropriate for distribution by the FDA.

The Company plans to attempt to recover this amount from the vendor in 2023, however the inventory was written down and was recorded as loss on inventory investment in the statement of operations for Fiscal 2022.

The use of resources for new businesses and new products, services, and technologies, to the extent such new businesses and new products, services, and technologies do not generate revenues or profits may take management’s focus and time away from more profitable endeavors, may require the Company to take significant write-downs or write-offs, may take funding away from the Company’s other operations or growth opportunities, which may ultimately be more profitable, and may have a material adverse effect on the Company’s cash flows, liquidity and revenues, any or all of which may cause the value of the Company’s securities to decline in value or become worthless.

System errors or failures of our platform or services to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our results of operations. The software and technology services that we operate are complex.

The telehealth market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand, consumer acceptance and market adoption.

Our success will depend to a substantial extent on the willingness of our clients’ members or patients to use, and to increase the frequency and extent of their utilization of, our services, as well as on our ability to demonstrate the value of telehealth to employers, health plans, government agencies and other purchasers of healthcare for beneficiaries.

Negative publicity concerning our services or the telehealth market as a whole could limit market acceptance of our services. If our clients, or their members or patients, do not perceive the benefits of our services, or if our services are not competitive, then our market may not develop at all, or it may develop more slowly than we expect.

Similarly, individual and healthcare industry concerns or negative publicity regarding patient confidentiality and privacy in the context of telehealth could limit market acceptance of our healthcare services.

If any of these events occurs, it could have a material adverse effect on our business, financial condition or results of operations. 30 Our telehealth business could be adversely affected by legal challenges to our business model or by actions restricting our ability to provide services in certain jurisdictions.

Our ability to conduct telehealth services in a particular U.S. state is dependent upon the applicable laws governing remote healthcare and the practice of medicine and healthcare delivery in general in such location which are subject to changing political, regulatory and other influences.

With respect to telehealth services, such services and our ability to offer such services are subject to rules established or interpreted by state medical boards and whether such boards consider such services to be the practice of medicine.

The definition of practicing medicine is subject to change and open to evolving interpretations by medical boards and state attorneys’ generals, among others.

Accordingly, we must monitor our compliance with laws in the jurisdictions in which we operate on an ongoing basis, and we cannot provide assurance that our activities and arrangements, if challenged, will be found to be in compliance with the law.

Additionally, it is possible that the laws and rules governing the practice of medicine, including remote healthcare, in one or more jurisdictions may change in a manner which negatively effects our ability to operate.

If a successful legal challenge or an adverse change in the relevant laws were to occur, and we were unable to adapt our business model accordingly, our operations in the affected jurisdictions would be disrupted, which could have a material adverse effect on our business, financial condition and results of operations.

In our telehealth business, we will be dependent on our relationships with affiliated professions and our business would be adversely affected if those relationships were disrupted. There is a risk that state authorities in some jurisdictions may find that contractual relationships with physicians providing telehealth violate laws prohibiting the corporate practice of medicine.