Scienture Holdings, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company’s historical performance and financial condition should be read together with the consolidated financial statements and related notes in the section entitled “ Item 8. Financial Statements and Supplemental Data ” of this Annual Report. This discussion contains forward-looking statements based on the views and beliefs of our management, as well as assumptions and estimates made by our management. See the section entitled “ Cautionary Statement Regarding Forward-Looking Information ” above. These statements by their nature are subject to risks and uncertainties and are influenced by various factors. As a consequence, actual results may differ materially from those in the forward-looking statements. See “ Item 1A. Risk Factors ” of this Annual Report for the discussion of risk factors. For all periods presented, the consolidated statements of income and consolidated balance sheet data have been adjusted for the reclassification of discontinued operations information, unless otherwise noted. All references to years relate to the calendar year ended December 31 of the particular year. Summary of The Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows: ● Company Overview . Discussion of our business and overall analysis of financial and other highlights affecting us, to provide context for the remainder of MD&A. ● Recent Events . Summary of material transactions occurring during year ended December 31, 2024. ● Liquidity and Capital Resources . An analysis of changes in our consolidated balance sheets and cash flows and discussion of our financial condition. ● Results of Operations . An analysis of our financial results comparing the years ended December 31, 2024, and 2023. ● Critical Accounting Policies . Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. Company Overview On September 20, 2024, the Company filed with the Secretary of State of the State of Delaware an amendment to its Second Amended and Restated Certificate of Incorporation to change the legal name of the Company from “TRxADE HEALTH, Inc.” to “Scienture Holdings, Inc.” The Company owned, as of December 31, 2024, 100% of Softell Inc. (f/k/a Trxade Inc.), Integra Pharma Solutions, LLC and Scienture, LLC (f/k/a Scienture, Inc.). 76 Table of Contents On October 4, 2024, the Company and Softell entered into IPS Assignment Agreement, pursuant to which the Company transferred, and Softell accepted, 100% of the membership interests of IPS. As a result, IPS is now a wholly-owned subsidiary of Softell. During the year ended December 31, 2023 and a portion of the quarter ended March 31, 2024, Softell, operated a web-based market platform that enabled commerce among healthcare buyers and sellers of pharmaceuticals, accessories and services. Softell’s current primary operations are conducted through IPS. IPS is a licensed pharmaceutical wholesaler and sells brand, generic and non-drug products to customers. IPS’ customers include all healthcare markets including government organizations, hospitals, clinics and independent pharmacies nationwide. Bonum Health, LLC was formed to hold certain telehealth assets acquired in October 2019. The “Bonum Health Hub” was launched in February 2020; however, the Company does not anticipate installations moving forward. The Company is in the process of determining a divestment and winddown plan for Softell and IPS. On January 25, 2025, the Company’s Board of Directors approved the preparation of a divestment and winddown plan for the winddown of each of Softell, IPS, Bonum Health, Inc., and Bonum. Scienture LLC is a New York based branded, specialty pharmaceutical research company which is engaged in the research and development of branded pharmaceutical products. The intellectual property application process was initiated in November 2019 and the product development activities commenced in January 2020. Scienture LLC also plans to foray into commercialization of innovative and branded pharmaceutical products in the US market. Scienture LLC’s assets in development are across therapeutics areas and indications and cater to different market segments. Scienture LLC’s mission is to identify, develop and bring to market innovative technology-based products to address unmet medical needs. Its targeted portfolio consists of short term and long-term opportunities with efficient development, regulatory, and go to market strategies. Acquisitions See ITEM 1 of PART 1 Dispositions See ITEM 1 of PART 1 Recent Events On September 20, 2024, the Company filed with the Secretary of State of the State of Delaware an amendment to its Second Amended and Restated Certificate of Incorporation to change the legal name of the Company from “TRxADE HEALTH, Inc.” to “Scienture Holdings, Inc.” (the “Name Change”). Other than the Name Change, there were no changes to the Company’s certificate of incorporation or bylaws. Effective September 23, 2024, the Company’s common stock trades under the ticker symbol “SCNX”. The Name Change resulted in a change to the CUSIP number for the Company’s outstanding shares of common stock offered on the Nasdaq Stock Market LLC. Liquidity Outlook Cash Explanation Cash Requirements Our primary objectives for the year of 2025 are expected to be the continued implementation of the Scienture LLC business plan, and to complete potential strategic transactions of our business-to-consumer subsidiaries, which may include a potential sale, spin-off, fund raising, combination or other strategic transaction, and also include the winding down of such entities. There can be no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms if required in the future, or at all. We may also raise additional funding in the future through the sale of equity. 77 Table of Contents We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows: Projected Expenses from January 2025 to December 2025 Amount General and administrative (1) $ 9,800,000 Total $ 9,800,000 (1) Includes estimated wages and payroll, legal and accounting, marketing, rent and research and development. We may require additional funding in the future to implement on our business plan and potentially to expand or complete acquisitions. The sources of this capital are expected to be equity investments and notes payable. Our plan for the next twelve months is to continue using the same marketing and management strategies to promote our IPS assets and operations, exploring strategic transactions involving our corporate assets, while also seeking to expand our and Scienture LLC operations organically or through acquisitions, as funding and opportunities arise. In the event we require additional funding, we plan to raise that through the sale of debt or equity, which may not be available on favorable terms, if at all, and may, if sold, cause significant dilution to existing stockholders. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business within one year after the date the consolidated financial statements are issued. In accordance with Financial Accounting Standards Board, or the FASB, Accounting Standards Update No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40), our management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. As of December 31, 2024, the Company had an accumulated deficit of $39,038,973 and $308,096 in cash. We will need to raise additional capital or secure debt funding to support on-going operations, and to fund the assets and operations of any businesses or assets we acquire. 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. If we are unable to access additional capital moving forward, it may hurt our ability to grow and to generate future revenues, our financial position, and liquidity. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Unless Management is able to obtain additional financing, it is unlikely that the Company will be able to meet its funding requirements during the next 12 months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Cash Flows The following table summarizes our Consolidated Statements of Cash Flows for the following periods: Year Ended December 31, Percent 2024 2023 Change Change Net cash (used in) provided by operating activities from continuing operations (13,286,163 ) 3,645,257 (16,931,420 ) -464 % Net cash used in operating activities from discontinued operations (979,075 ) (5,870,449 ) 4,891,373 -83 % Operating Activities (14,265,238 ) (2,225,192 ) (12,040,046 ) 541 % Net cash used in investing activities from continuing operations (2,379,024 ) (344,454 ) (2,034,570 ) 591 % Net cash provided by investing activities from discontinued operations 29,931,815 68,737 29,863,078 43445 % Investing Activities 27,552,791 (275,717 ) 27,828,508 -10093 % Net cash (used in) provided by financing activities from continuing operations (12,974,770 ) 1,906,332 (14,881,102 ) -781 % Net cash used in financing activities from discontinued operations (5,000 ) (500,000 ) 495,000 -99 % Financing Activities (12,979,770 ) 1,406,332 (14,386,102 ) -1023 % Net change in cash $ 307,782 $ (1,094,577 ) $ 1,402,358 -128 % 78 Table of Contents Cash used in operating activities for the year ended December 31, 2024, was $14,265,238 compared to $2,225,192 in 2023. The increase in cash used in operations for the year ended December 31, 2024 was mainly due to our net loss and cash used in operating assets and liabilities in 2024 driven by other receivables, partially offset by non-cash charges. Cash provided by investing activities for the year ended December 31, 2024, was $27,552,791 and cash used in investing activities was $275,717 for the year ended December 31, 2023. The increase in cash provided by investing activities in 2024 was primarily due to the MMS disposition in the first quarter and cash received in acquisition of Scienture, Inc., partially offset by the investment in securities of $2,500,000. Cash provided by in financing activities for the year ended December 31, 2024, was ($14,979,770) compared to $1,406,332 of cash provided by financing activities for the year ended December 31, 2023. The change was primarily due to the payment of dividends of $14,858,831 in 2024. In August 2024, the Company received note proceeds of $314,000 and $2,640,000 in net proceeds from convertible debenture in November 2024. Results of Operations The following selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements and the notes to these statements included above. Year Ended December 31, 2024, compared to Year Ended December 31, 2023 Year Ended December 31, Percent 2024 2023 Change Change Revenues $ 136,643 1,363,830 (1,227,187 ) -90 % Cost of sales 130,638 1,314,800 (1,184,162 ) -90 % Gross profit 6,005 49,031 (43,026 ) -88 % Operating expenses: Wage and salary expense 2,111,066 626,547 1,484,519 237 % Professional fees 1,458,332 875,136 583,196 67 % Accounting and legal expense 1,807,041 1,506,881 300,160 20 % Technology expense 416,311 100,280 316,031 315 % General and administrative (including stock-based compensation expense) 6,677,580 1,336,637 5,340,943 400 % Research and development 2,236,690 - 2,236,690 100 % Total operating expenses 14,707,020 4,445,482 10,261,538 231 % Change in fair value of warrant liability (182,982 ) (148,420 ) (34,562 ) 23 % Change in fair value of derivative liability 180,383 - 180,383 100 % Investment impairment (2,500,000 ) - (2,500,000 ) -100 % Interest income 135,337 4,198 131,139 3124 % Loss on disposal of asset (374,968 ) (2,798,968 ) 2,424,000 -87 % Interest expense (1,335,631 ) (1,143,223 ) (192,408 ) 17 % Net loss from continuing operations (18,778,876 ) (8,482,864 ) (10,296,011 ) 121 % Benefit / (provision) for income taxes 534,396 - 534,396 100 % Net loss from continuing operations, net of tax (18,244,480 ) (8,482,864 ) (9,761,615 ) 87 % Income (loss) from discontinued operations, net of tax 27,310,278 (9,360,710 ) 36,670,988 -392 % Net income/(loss) $ 9,065,798 $ (17,843,574 ) $ 26,909,372 -151 % 79 Table of Contents There were $136,643 in revenues for the year ended December 31, 2024. Revenues decreased by $1,227,187, compared to the same period ended December 31, 2023 primarily because of the disposition of the assets and operations of Softell completed in February 2024 which resulted in the Company having fewer revenue generating operations when compared to the comparable period in 2023. For the year ended December 31, 2024, cost of goods sold and gross profit were $130,638 and $6,005, and $1,314,800 and $49,031, all respectively for the same period in 2023. Cost of goods sold decreased by $1,184,162, compared to the same period ended December 31, 2023 primarily because of the disposition of the assets and operations of Softell completed in February 2024 which resulted in the Company having fewer cost of goods sold. Gross profit as a percentage of sales was 4.39% for the year ended December 31, 2024, compared to 3.60% for the year ended December 31, 2023. Wages and salary expense increased by $1,484,520 for the year ended December 31, 2024 to $2,111,067 compared to $626,547 for the comparable period in 2023. The increase is primarily due to an increase in salary of the COO and CEO of IPS, as well as the increased personnel as a result of the Scienture Merger in July 2024, as compared to the same period in 2023. Professional fees increased by $583,196 to $1,458,332 compared to $875,136 for the comparable period in 2023. The increase was primarily due to increase in Board members’ fees and consulting expense and post- acquisition professional fees of Scienture LLC. Accounting and legal expenses increased by $162,836 for the year ended December 31, 2024 to $1,669,717 compared to $1,506,881 for the comparable period in 2023. The increase is primarily due to increase in amount of legal services during the year ended December 31, 2024 as compared to the same period in 2023. General and administrative expenses (including stock-based compensation expense) increased by $5,369,446 for the year ended December 31, 2024, to $6,706,082 compared to $1,336,637 for the comparable period in 2023. The increase was mainly due to shares issued for services at fair value of $4,598,294 in 2024. Technology expense increased by $316,031 for the year ended December 31, 2024 to $416,311 compared to $100,280 for the comparable period in 2023. The increase was mainly due to increased software expense and software support expense. Research and development expense pertaining to Scienture LLC’s operations post-acquisition was $2,236,690 for the year ended December 31, 2024. Research and development expenses was mainly due to contract research organization costs of Scienture LLC. Total expenses by program were as follows: Year Ended December 31, Project Codes Product Name 2024 SCN-102 Losartan $ 1,158,130 SCN-104 DHE 703,938 SCN-106 Alteplase 250,000 SCN-107 Bupivacaine 124,621 Total research and development expense $ 2,236,690 We had interest expense of $1,335,631 for the year ended December 31, 2024, compared to interest expense of $1,143,223 for the year ended December 31, 2023. The increase is due to the interest expense on Scienture LLC’s convertible debt, the convertible notes issued in August and 2024, and related debt discount amortization on these notes, partially offset by the Superlatus notes no longer being outstanding after its disposition in early 2024. 80 Table of Contents We recognized a loss on the change in the fair value of the warrant liability of $182,982 for the year ended December 31, 2024 compared to a loss of $148,420 during the year ended December 31, 2023, based on the underlying valuation inputs. We recognized a loss on the change in the fair value of the derivative liability of $180,383 for the year ended December 31, 2024, based on the underlying valuation inputs and the conversion features of the Arena convertible debenture. We recognized impairment loss of $2,500,000 of the investment in equity securities for the year ended December 31, 2024. During the year ended December 31, 2024, the Company incurred a net loss from continuing operations of $18,244,480 compared to $8,482,864 for the year ended December 31, 2023. The change was due to change in operating income, other income (expense), and provision for income taxes. Net income from discontinued operations increased by $36,670,988 to a net income of $27,310,278 for the year ended December 31, 2024, compared to a net loss from discontinued operations of $9,360,710 for the year ended December 31, 2023. The increase was primarily due to the disposal of Softell assets, partially offset by loss on disposal of Superlatus during the year ended December 31, 2024. Liquidity and Capital Resources Cash Cash was $308,096 as of December 31, 2024, compared to $314 as of December 31, 2023. The increase in cash was primarily due to the proceeds in February 2024 and May 2024 related to the disposition of certain assets to MMS as described above and convertible debentures issued in November 2024. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, borrowings, and additional funds raised through sales of debt and/or equity securities. Liquidity Cash, current assets, current liabilities, short term debt and working capital at the end of each period were as follows: December 31, Percent 2024 2023 Change Change Cash $ 308,096 $ 314 $ 307,782 98020 % Current assets (excluding cash) $ 5,997,381 $ 2,752,749 $ 3,244,632 118 % Current liabilities $ 7,906,893 $ 11,556,355 $ (3,649,462 ) -32 % Working capital $ (1,601,416 ) $ (8,803,292 ) $ 7,201,876 -82 % Our principal sources of liquidity have historically been cash provided by operations, sales of business assets and operations from time to time, sales of equity, and borrowings under various debt arrangements. Our principal uses of cash have been for operating expenses, technology development, and acquisitions. We anticipate these uses will continue to be our principal sources of, and uses of, cash in the future. The increase in cash as of December 31, 2024 compared to 2023 was primarily due to the proceeds received in February 2024 and May 2024 resulting from the disposition of assets to MMS as described above, as well as the convertible note issued in August 2024 and convertible debentures issued in November 2024. Special Cash Dividend On March 6, 2024, the Company announced the declaration of a special cash dividend of eight dollars ($8.00) per share of common stock, payable to stockholders of record as of March 18, 2024, with the dividend being paid on March 22, 2024. The special dividend of $12,671,072 was paid using a portion of the proceeds from the closing of the sale of certain assets. On July 9, 2024, the Company announced the declaration of a special cash dividend of one dollar and fifty cents ($1.50) per share of common stock, payable to stockholders of record as of July 19, 2024, with the dividend being paid on July 22, 2024. The special dividend was $2,187,759 paid using a portion of the proceeds received in May 2024 in connection with the February 2024 sale of certain assets. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Revenue Recognition In general, the Company accounts for revenue recognition in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers.” IPS is a licensed wholesaler of brand, generic and non-drug products to Customers. IPS takes orders for products, creates invoices for each order and recognizes revenue at the time the product is shipped to the Customer. Customer returns are not material. Step One: Identify the contract with the Customer – IPS requires that an application and a credit card for payment be completed by the Customer prior to the first order. Each transaction is evidenced by an order form sent by the Customer and an invoice for the product is sent by IPS. The collection is probable based on the application and credit card information provided prior to the first order. Step Two: Identify the performance obligations in the contract – Each order is distinct and evidenced by the shipping order and invoice. Step Three: Determine the transaction price – The consideration is variable if product is returned. The variability is determined based on the return policy of the product manufacturer. There are no sales or volume discounts. The transaction price is determined at the time of the order evidenced by the invoice. Step Four: Allocate the transaction price – There is no difference between contract price and “stand-alone selling price”. Step Five: Recognize revenue when or as the entity satisfies a performance obligation – The Revenue is recognized when the product is shipped to the Customer. The Urgent Company, Inc., which was a wholly-owned subsidiary, is a retail and distribution provider of prepackaged, prepared foods. Subsequent to December 31, 2023, we divested our interest in The Urgent Company, Inc. 81 Table of Contents Acquisitions, Goodwill and Other Intangible Assets The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The Company uses a variety of information sources to determine the value of acquired assets and liabilities, including: identifiable intangibles. Goodwill and indefinite-lived intangibles are not amortized but are instead evaluated annually for impairment as part of the Company’s annual financial review, or when indicators of a potential impairment are present. The annual test for impairment performed for goodwill can be qualitative or quantitative, taking into consideration certain factors surrounding the fair value of the goodwill including, level by which fair value exceeded carrying value in the prior valuation, as well as macroeconomic factors, industry conditions and actual results at the test date. Stock-Based Compensation The Company accounts for stock-based compensation to employees in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are recognized at the date of employee termination. Effective January 1, 2019, the Company adopted ASU 2018-07 for the accounting of share-based payments granted to non-employees for goods and services. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules. Recently Issued Accounting Standards For more information on recently issued accounting standards, see “NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION”, to the Notes to Consolidated Financial Statements included herein under “PART I. - ITEM 1. FINANCIAL STATEMENTS”. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “ smaller reporting company, ” as defined by Rule 229.10(f)(1). 82 Table of Contents ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Scienture Holdings, Inc. formerly TRxADE HEALTH, INC. FORM 10-K For the Year Ended December 31, 2024 TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PCAOB ID: 6866 84 CONSOLIDATED BALANCE SHEETS 85 CONSOLIDATED STATEMENTS OF OPERATIONS 86 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 87 CONSOLIDATED STATEMENTS OF CASH FLOWS 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89 83 Table of Contents PART II: FINANCIAL INFORMATION