What changed in Scienture Holdings, Inc.'s 10-K — 2023 vs 2024

Item 1. Business ”, above, our business is highly regulated in the United States, at both the federal and state level, and in foreign countries. If we fail to comply with regulatory requirements, or if allegations are made that we fail to comply, our results of operations and financial condition could be adversely affected.

To lawfully operate our businesses, we are required to obtain, and hold permits, product registrations, licenses and other regulatory approvals from, and to comply with operating and security standards of, numerous governmental bodies..

Failure to maintain or renew necessary permits, product registrations, licenses or approvals, or to comply with required standards, could have an adverse effect on our results of operations and financial condition. We are also required to comply with various state pricing gouging laws. Products that we source and distribute must also comply with regulatory requirements.

Noncompliance or concerns over noncompliance may result in suspension of our ability to distribute or import products, product bans, recalls or seizures, or criminal or civil sanctions, which, in turn, could result in product liability claims and lawsuits, including class actions.

Many of our competitors are better established and have resources significantly greater than we have, which may make it difficult to fend off competition. We expect to compete with large ADR distributors (such as McKesson, Cardinal Health and AmerisourceBergen), in addition to other pharmaceutical distributors, buying groups, software products, and various start-up drug companies.

Many of these companies have substantially greater financial and manufacturer-backed resources, longer operating histories, greater name recognition and more established relationships in the industry than us. In addition, a number of these competitors may combine or form strategic partnerships.

As a result, our competitors may establish a more favorable footing in the pharmaceutical industry with respect to pricing or other factors.

Our failure to compete successfully with any of these companies would have a material adverse effect on our business and the trading price of our common stock. 23 The three distributors listed above have a strong control over our industry, as they have contracts with approximately 24,000 independent, retail pharmacies that limit the participants’ ability to purchase pharmaceuticals outside of those primary distributors.

Additional restrictive elements exist within the pharmaceutical channels of distribution. For example, a number of the inventory management systems, either developed by the distributors or third-party vendors, have been developed to require compliance to these restrictive purchasing agreements.

Management anticipates that other existing and prospective competitors will adopt technologies or business plans similar to ours or seek other means to develop operations competitive with ours, particularly if our development of large-scale production progresses as scheduled. We will need to expand our member base or our profit margins to attain profitability.

Currently, we are aware of the competitiveness of the group of suppliers that participate within our industry and intend to price products accordingly. However, price is not the only factor that influences where retail pharmacies will obtain their product. Quality fulfillment services are also important, and retail pharmacies have historically received quality fulfillment services from the three major ADR distributors.

In order to be more competitive, we must improve our customer service and fulfillment efforts, because the independent retail pharmacy has for years considered this element of the fulfillment process as important as price.

Other factors influencing the pharmacies purchasing behavior in the future will be changes brought upon by the ACA, which regulates some aspects of pharmaceutical spending and pricing. Management believes that we should benefit substantially from our pricing and product knowledge that is offered by our platform.

Profitability may be further increased as a result of lower cost of goods, should the Company build stronger relationships with manufacturers and other larger buying groups that serve wholesalers and distributors. On a larger scale, those margins are expected to drop depending upon the breadth of products provided in the market and the sale turn rates required.

We are currently undertaking a significant effort to increase our membership base through attendance at annual conferences and other strategies. We intend to expand our e-mail marketing strategy based on our competitive price advantages and unique distribution services. There are inherent risks associated with our operations within the Pharmaceutical Distribution Market.

There are inherent risks involved with doing business within the pharmaceutical distribution market, including: ● Improperly manufactured products may prove dangerous to the end consumer. ● Products may become adulterated by improper warehousing methods or modes of shipment. ● Counterfeit products or products with fake pedigree papers. ● Unlicensed or unlawful participants in the distribution channel. ● Risk with default and the assumption of credit loss. ● Regulatory risks. ● Risk related to the loss of supply, or the loss of a number of suppliers, or in the delay of obtaining the supply of drugs.

Although all of our end-user agreements require our customers to indemnify us and for any and all liabilities resulting from our participation in the pharmaceutical distribution industry, we cannot assure you that the parties required to provide such indemnification will have the financial resources to do so.

Additionally, although we have evaluated appropriate state statutes and federal laws pertaining to pharmaceutical distribution in an effort to diminish our risks, the Board of Pharmacy for each state is responsible for interpreting their state laws, and their interpretations may not comport with our analysis.

It is also possible that any third-party logistics arrangements may disrupt service, create a loss of income, or other unforeseen disruptions should the service provider experience any legal, financial or other difficulties of their own. We do not have a traditional credit facility with a financial institution, which may adversely impact our operations.

We do not have a traditional credit facility with a financial institution, such as a working line of credit. The absence of such a facility could adversely impact our operations, as it may constrain our ability to have available the working capital for equipment purchases or other operational requirements.

If adequate funds are not otherwise available, we may be required to delay, scale back or eliminate portions of our business development efforts.

Without credit facilities, we could be forced to cease operations and investors in our securities could lose their entire investment. 24 We offer limited credit to the pharmacies which limits the amount of the orders that they place and may result in us losing business and a reduction in our revenues.

We currently offer a limited amount of credit to our members. Such limited credit reduces the risk that such members do not pay for products; however, it also limits the amount of revenue we generate per member.

We believe that if we were to increase the amount of credit we provide to members we would generate more revenues, but bear more risk of non-payment. We are currently exploring increasing the amount of credit we provide to members, which may in turn result in an increase in receivables and write-offs.

We are dependent upon our current management, who may have conflicts of interest. We are dependent upon the efforts of our current management. All of our officers and directors have duties and affiliations with other companies.

Even though these companies are not competitors or involved in pharmaceutical distribution, involvement of our officers and directors in other businesses may still present a conflict of interest regarding decisions they make for Trxade or with respect to the amount of time available for Trxade. The loss of any of our officers or directors and, in particular, Mr.

Prashant Patel, our President or Mr. Suren Ajjarapu, our Chief Executive Officer and Chairman of the Company, could have a materially adverse effect upon our business and future prospects. The Company holds, on behalf of and for the benefit of Mr. Suren Ajjarapu, a personal disability insurance policy providing for a $1,500,000 lump sum benefit, payable to Mr.

Ajjarapu, in the event of Mr. Ajjarapu’s disability. The premiums on such policy will be paid by the Company for so long as Mr. Ajjarapu is employed by the Company. The Company also holds a $4,000,000 key-man life insurance policy on the life of Mr. Suren Ajjarapu, and a $1,500,000 lump sum disability insurance policy on Mr.

Ajjarapu, providing for the Company as beneficiary of such policies. While our management team has considerable information technology and entrepreneurial experience, none of our management was involved in pharmaceutical distribution prior to joining the Company and, as such, did not have any technical experience in pharmaceutical distribution prior to joining us. In the event of the loss of Mr.

Ajjarapu’s services, we will seek to hire and retain a qualified professional. In the event of the loss of his services in connection with his death, upon obtaining funding from the key-man life insurance, management intends to hire qualified and experienced personnel. We may be unable to find a suitable or qualified replacement for Mr.

Ajjarapu and as such our operations and/or prospects may suffer. We rely on third party contracts. We depend on others to provide products and services to us. We do not manufacture pharmaceuticals and we do not sell pharmaceuticals to the end consumer.

We do not control these wholesalers, suppliers and purchasers, and although our arrangements with them will be terminable or of limited length, a change may be difficult to implement. At this time, we have a working relationship with over 10 manufacturers and other suppliers.

Although we believe that those entities are satisfied with their business relationship with Trxade, if our buying group pharmacies and several of our vendors decided no longer to do business with us, that vendor void would materially and adversely affect our competitiveness in the marketplace.

We depend on suppliers to make their drugs and other medical products available to us for resale and are subject to risks associated with the availability of these drugs and other medical products.

We do not directly manufacture any of the products we sell and instead we rely on third parties to manufacture and/or procure such drugs and other medical products for us to resell. Supply chain constraints have, and may in the future have, a negative impact on the availability of drugs and medical products that we sell.

Our supplier relationships could be interrupted, become less favorable to us or be terminated and the supply of these drugs or products could be interrupted or become insufficient.

Supply interruptions or other disruptions in manufacturing processes could be caused by events beyond our control, including natural disasters, supplier facility shut-downs, defective raw materials, the impact of epidemics or pandemics, such as COVID-19, and actions by U.S. or international governments, including export restrictions or tariffs.

A sustained supply reduction or interruption, and an inability to develop alternative and additional sources for such supply, could result in lost sales, increased cost, damage to our reputation, and may have an adverse effect on our business. 25 We may have difficulties in sourcing or selling products due to a variety of causes.

We might experience difficulties and delays in sourcing and selling products due to a variety of causes, such as: difficulties in complying with the legal requirements for export or import of pharmaceuticals or supplies; suppliers’ failure to satisfy production demand; manufacturing or supply problems such as inadequate resources; and real or perceived quality issues.

Difficulties in product manufacturing or access to raw materials could result in supplier production shutdowns, product shortages and other supply disruptions. Any of these risks might have a materially adverse impact on our business operations and our financial position or results of operations. Rapid technological change in our industry presents us with significant risks and challenges .

These risks include, among others, the following: ● We are currently unprofitable, have generated net losses, and we may incur losses in the future; ● We may need additional financing in the future, which may not be available on favorable terms, if at all; ● We may not be able to manage our future growth; ● Risks relating to implementing our acquisition strategies, and the risk that acquisitions will likely be dilutive to our stockholders and we may not realize the anticipated benefits of certain strategic transactions that we pursue or effect; ● Many of our competitors are better established and have resources significantly greater than ours; ● We face risks associated with our operations within the pharmaceutical distribution market; ● We are dependent on our current management; ● We rely on third party contracts, which may not be renewed or may be terminated; ● We may in the future face difficulties in sourcing products and inventory due to a variety of causes; ● We have in the past, and may in the future, not be able to sell our inventory, at or above the price we acquired such inventory for, have in the past, and may in the future, be forced to write-down inventory and certain of our other assets which may have a material adverse effect on our balance sheet; ● We have in the past, and may in the future, not receive products or receive refunds for deposited amounts and have experienced losses in connection with such deposits; ● We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant damages and limit our ability to operate; ● Our business and operations depend on the proper functioning of information systems, critical facilities and distribution networks and a disruption, cyber-attack, failure or destruction of such networks, systems, or technologies may disrupt our business or result in liability; ● There may be losses or unauthorized access to or releases of confidential information, including personally identifiable information, that could subject the Company to significant reputational, financial, legal and operational consequences; ● We face numerous risks, including risks associated with legal challenges, relationships with third parties and affiliated professionals, competition for services; new technologies, failure to develop widespread brand awareness and regulatory risks from the Office of Inspector General, U.S.

Department of Health and Human Services (OIG) and the United States Department of Justice (DOJ) and state regulators around pharmaceutical distribution now and in the future. ● Our certificate of incorporation limits the liability of our officers and directors and provides for indemnification rights, mandatory forum selection provisions and limits the ability of stockholders to call special meetings of stockholders; ● We incur significant costs to ensure compliance with U.S. and NASDAQ Capital Market reporting and corporate governance requirements; ● At various times we have not been in compliance with NASDAQ’s continued listing requirements, and may not be able to maintain the listing of our common stock on the NASDAQ Capital Market; ● Regulatory changes that affect our distribution channels could harm our business; ● Healthcare fraud laws are often vague and uncertain, exposing us to potential liability; ● New and expanded laws or regulations could have a material adverse effect on our business operations, cash flows or future prospects; ● The public health crisis involving the abuse of prescription opioid pain medication could have a material negative effect on our business operations and timely reporting to new state regulations. ● Consolidation in the U.S. healthcare industry may negatively impact our results of operations; ● We have identified material weaknesses in our internal control over financial reporting and controls and procedures; ● There may not be sufficient liquidity in the market for our securities in order for investors to sell their shares.

The market price of our common stock may continue to be volatile; ● Stockholders may experience dilution to future equity sales, the exercise or conversion of outstanding convertible securities or future transactions; ● Our results of operations are subject to rising inflation, rising interest rates, governmental responses thereto and possible recessions caused thereby; ● Our Chief Executive Officer and President are our two largest stockholders and, as a result, they can exert significant control over us and have actual or potential interests that may differ from yours; ● Cyber security attacks and website problems; ● There is substantial doubt regarding our ability to continue as a going concern; and ● Claims, litigation, government investigations, and other proceedings that may adversely affect our business and results of operations. 17 Risk Factors You should be aware that there are substantial risks for an investment in our common stock.

Risks Related to Our Liquidity and Business Operations and Plans Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below. This section discusses factors that, individually or in aggregate, could cause our actual results to differ materially from expected and historical results.

Our business, financial condition or results of operations could be materially adversely affected by any of these risks. It is not possible to predict or identify all such factors. Consequently, the following description of Risk Factors is not a complete discussion of all potential risks or uncertainties applicable to our business.

We were recently unprofitable, we have recently generated net losses, and we may incur losses in the future. Revenues generated from our consolidated operations for the years ended December 31, 2023 and 2022 were $8,272,214 and $10,250,168, respectively.

We incurred a net loss of $13,720,546 for during the year ended December 31, 2023, compared to a net loss of $2,403,442 for the year ended December 31, 2022. We may incur other losses in the foreseeable future due to the significant costs associated with our business operations, including costs associated with maintaining industry regulatory and licensure compliance.

We also incur significant compliance costs associated with maintaining SEC regulatory and financial reporting requirements; as well as costs to maintain minimum listing requirements of Nasdaq. We cannot assure you that our operations will annually generate sufficient revenues to fund our continuing operations or to fully implement our business plan, and thereafter sustain profitability in any future period.

The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the start and growth of a business, the implementation and execution of our business plan, and the regulatory environment affecting the distribution of pharmaceuticals in which we operate.

We need additional capital which may not be available on commercially acceptable terms, if at all, which creates substantial doubt about our ability to continue as a going concern. Our historical financial statements have been prepared under the assumption that we will continue as a going concern. As of December 31, 2023, the Company had an accumulated deficit of $33,245,940.

We have limited financial resources, as of December 31, 2023, we had a working capital deficit of approximately $8,803,000 and a cash balance of approximately $152,000. We will need to raise additional capital or secure debt funding to support on-going operations.

The sources of this capital are expected to be the sale of equity and debt, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders.

Additional financing may not be available to us when needed or, if available, it may not be obtained on commercially reasonable terms.

If we are not able to obtain the necessary additional financing on a timely or commercially reasonable basis, we will be forced to delay or scale down some or all of our development activities (or perhaps even cease the operation of our business).

Our access to additional capital may be negatively affected by future recessions, downturns in the economy or the markets as a whole, or inflation. 18 If we do not obtain additional financing, our business, prospects, financial condition and results of operations will be adversely affected.

Management anticipates that we will require additional working capital in the future to pursue continued development of products, services, and marketing operations. We cannot accurately predict the timing and amount of such capital requirements. Additional financing may not be available to us when needed or, if available, it may not be obtained on commercially reasonable terms.

If we are not able to obtain the necessary additional financing on a timely or commercially reasonable basis, we will be forced to delay or scale down some or all of our development activities (or perhaps even cease the operation of our business).

Our access to additional capital may be negatively affected by future recessions, downturns in the economy or the markets as a whole, or inflation. We have no commitments for any additional financing, and such commitments may not be obtained on favorable terms, if at all.

Any additional equity financing will be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to dividends, raising future capital, and other financial and operational matters.

If we are unable to obtain additional financing as needed, we may be required to reduce the scope of our operations or our anticipated expansion, which could have a material adverse effect on us.

We have attempted to expand, and may further explore, the expansion of our business beyond our legacy healthcare and pharmacy focused business model, and those efforts may not prove successful. We expect to attempt to broaden our current assets and operations through additional business combinations and acquisition transactions.

Certain of these transactions may involve companies involved in industries that are outside and different from our legacy operations, which focused on the healthcare and pharmaceutical industries. For example, during the year ended December 31, 2023 we acquired Superlatus a diversified food technology company.

These transactions, if successful, may result in a change of the Company’s focus, a change in the composition of its management, and otherwise result in the Company entering new businesses in which it does not have substantial prior experience.

As a result, these transactions may not prove successful or may result potential negative effects that prevent us from realizing the benefits of such transaction and, in turn, have a material adverse impact on our stock price, financial condition, results of operations and liquidity.

It is likely that any efforts we may make to acquire a business will result in substantial additional dilution to our stockholders. Our existing resources will likely be insufficient to support business operations for a significant period of time.

Furthermore, with any business combination or acquisition in which we engage, we will likely issue shares of our common stock rather than paying cash for the business.

Moreover, if we raise capital for any operations in the future or issue stock for a business combination or acquisition, such action will require the issuance of equity or debt securities which will likely result in substantial dilution to our existing stockholders.

Although we will attempt to minimize the dilutive impact of any future business acquisition or capital-raising activities, we cannot offer any assurance that we will be able to do so. 19 Our acquisitions and investments in new businesses and new products, services, and technologies is inherently risky, and could disrupt our ongoing businesses.

Failure to adequately manage our planned aggressive growth strategy may harm our business or increase our risk of failure. For the foreseeable future, we intend to pursue an aggressive growth strategy for the expansion of our operations through increased product development and marketing (or acquisitions of business operations and assets outside of our legacy operations).

Our ability to rapidly expand our operations will depend upon many factors, including our ability to work in a regulated environment, market value-added products effectively to independent pharmacies, establish and maintain strategic relationships with suppliers, and obtain adequate capital resources on acceptable terms.

Any restrictions on our ability to expand may have a materially adverse effect on our business, results of operations, and financial condition. Accordingly, we may be unable to achieve our targets for sales growth, and our operations may not be successful or achieve anticipated operating results.

Additionally, our growth may place a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively.

This will require us to, among other things: ● implement additional management information systems; ● further develop our operating, administrative, legal, financial, and accounting systems and controls; ● hire additional personnel; ● develop additional levels of management within our company; ● locate additional office space; ● maintain close coordination among our engineering, operations, legal, finance, sales and marketing, and client service and support organizations; and ● manage our expanding international operations. 20 As a result, we may lack the resources to deploy our services on a timely and cost-effective basis.

Failure to accomplish any of these requirements could impair our ability to deliver services in a timely fashion or attract and retain new customers. Future business combinations and acquisition transactions, if any, as well as recently closed business combinations and acquisition transactions, may not succeed in generating the intended benefits and may adversely affect our business.

Part of our growth strategy is to evaluate strategic acquisitions or relationships from time to time. The inability of our management to successfully integrate acquired businesses, assets or technologies, and any related diversion of management’s attention, could have a material adverse effect on our business, operating results and financial condition.

Business combinations and other acquisition transactions may have a direct adverse effect on our financial condition, results of operations, liquidity or stock price.

ITEM 1C. CYBERSECURITY The Company has not adopted any formal cybersecurity risk management program or formal processes for assessing, identifying, and managing material risks from cybersecurity threats. The full board of directors has oversight responsibility for the Company’s overall risk management, including cybersecurity risk, and has not delegated oversight authority for cybersecurity risks to any committee.

ITEM 2. PROPERTIES We do not own any real property. We entered into a lease for our current corporate office space at 2420 Brunello Trace, Lutz, Florida 33558 on November 8, 2021. The lease included a five-year term, beginning January 1, 2022, and ending December 31, 2026. The office space occupies approximately 9,850 square feet.

Pursuant to the lease, the Company is responsible for water/sewer costs ($140 per month) and its proportionate share of the building’s operating expenses, including property taxes. We paid a security deposit of $38,500 in connection with our entry into the agreement, which was surrendered upon termination of the lease in November 2023.

We entered into a lease for Superlatus Food Service Holding Company, LLC at 20 Sarine Road, Wurtsboro, New York 12790 for approximately $132,000 per year ($11,000 per month) under a three-year lease agreement, effective October 1, 2023. As a result of our divestiture of Superlatus in March 2024 we no longer have obligations related to this lease.

Recent Sales of Unregistered Securities There were no sales of unregistered securities during the three months ended December 31, 2023, and from the period from January 1, 2024, to the filing date of this report, that were not previously disclosed in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Issuer Purchases of Equity Securities In May and December of 2021, the Company’s Board of Directors authorized the repurchase of up to $1 million of the currently outstanding shares of the Company’s common stock.

Under the stock repurchase program, shares may be repurchased from time to time in the open market or through negotiated transactions at prevailing market rates, or by other means in accordance with federal securities laws.

Repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance.

Any open market purchases will be conducted in accordance with the limitations set forth in Rule 10b-18 of Exchange Act and other applicable legal requirements. Repurchases may also be made under a Rule 10b5-1 plan.

There was no time frame or expiration date for the repurchase program, and such program was to remain in place until a maximum of $1.0 million of the Company’s common stock had been repurchased or until such program was suspended or discontinued by the Board of Directors.

During Fiscal 2023 the Company did not repurchase or any shares of the Company’s common stock under the repurchase program. 45