Scienture Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Information This information should be read in conjunction with the interim unaudited financial statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto and “Part II. Other Information – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contained in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 26, 2025 (the “Annual Report”). Certain capitalized terms used below and otherwise defined below, have the meanings given to such terms in the footnotes to our unaudited consolidated financial statements included above under “Part I – Financial Information” – “Item 1. Financial Statements”. Please see the section entitled “Glossary” in our Annual Report for a list of abbreviations and definitions used throughout this Report. Unless the context requires otherwise, references to the “Company,” “we,” “us,” and “our” refer specifically to Scienture Holdings, Inc., formerly TRxADE HEALTH, INC., and its consolidated subsidiaries. References to “Q1”, “Q2”, “Q3”, and “Q4” refer to the first, second, third, and fourth quarter, respectively, of the applicable year. Unless otherwise stated or the context otherwise requires, comparisons from one period to another are to the same period of the prior fiscal year. In addition, unless the context otherwise requires and for the purposes of this report only: ● “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; ● “Securities Act” refers to the Securities Act of 1933, as amended. 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 the three months ended March 31, 2025. ● 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 three months ended March 31, 2025, and 2024. ● 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 March 31, 2025, 100% of Softell Inc. (f/k/a Trxade Inc.), Integra Pharma Solutions, LLC and Scienture, LLC (f/k/a Scienture, Inc.). 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. 23 Table of Contents 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 anticipates dissolving Bonum Health, Inc. and Bonum Health, LLC. Scienture 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 also plans to foray into commercialization of innovative and branded pharmaceutical products in the US market. Scienture’s assets in development are across therapeutics areas and indications and cater to different market segments. Scienture’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. Disposition of Legacy Subsidiaries On April 8, 2025, the Company entered into a Membership Interest Purchase Agreement (the “IPS MIPA”) with Tollo Health, Inc. (“Tollo”), pursuant to which Tollo agreed to purchase and the Company agreed to sell all of the Company’s membership interests in IPS. Suren Ajjarapu, the Company’s Chief Executive Officer, and Prashant Patel, the Company’s President and Chief Operating Officer, each have a beneficial interest in Tollo. On April 8, 2025, the Company also entered into a Stock Purchase Agreement (the “Bonum SPA” and together with the IPS MIPA, the “Agreements”) with Tollo, pursuant to which Tollo agreed to purchase and the Company agreed to sell all issued and outstanding shares of common stock of Bonum Health, Inc. In connection with each of the Agreements, the Company agreed to retain certain excluded liabilities of IPS and Bonum including all liabilities: (i) related to, in connection with or arising out of any claims, charges, complaints, actions, suits, settlements, hearings, investigations, proceedings, or governmental or regulatory inquiries with respect to IPS or Bonum, respectively, prior to the closing under the applicable Agreement; (ii) related to, in connection with or arising out of any breach by the Company of the applicable Agreement or any other agreements and documents required to be delivered by the Company; (iii) not disclosed by the Company in accordance with each Agreement; (iv) related to any actions threatened or initiated by a governmental entity against IPS or Bonum, respectively; and (v) related to tax returns or tax matters of the Company, IPS, or Bonum, respectively, for any periods prior to closing under the applicable Agreement. The Company and Tollo have agreed to consummate the closing of each of the Agreements on June 30, 2025, or such other time as the Company and Tollo may agree. As consideration for acquiring IPS and Bonum, Tollo has agreed to pay the Company $5 million in the form of a promissory note bearing interest at the prime rate. The promissory note matures on June 30, 2030. However, Tollo is required to pay 20% of the proceeds of a future equity financing toward repayment of the principal and accrued but unpaid interest owed under the promissory note. The divestitures are part of a broader strategic realignment at the Company designed to sharpen operational focus and unlock long-term value. It is aligned with the Company’s commitment to streamline its core operations, optimize its portfolio, and accelerate growth in the Branded and Specialty Pharma markets. The Company intends to use the proceeds obtained from the divestment to facilitate the high-growth commercial and strategic product development activities at its Scienture, LLC subsidiary. The Company believes that the key benefits of the divestitures include: ● Increased Operational Efficiency : Streamlining the Company’s structure aimed at strengthening its balance sheet, providing for leaner operations and a more agile decision-making framework. ● Realize Synergies : Consolidating overlapping functions and eliminating redundancies intended to cause annualized cost savings. ● Dedicated Focus : Affording the full focus and deployment of resources to the commercial products and the high value product pipeline in development at its Scienture, LLC subsidiary. Liquidity and Capital Resources Cash Cash was $2,049,638 as of March 31, 2025, compared to $308,096 as of December 31, 2024. The increase in cash was primarily due to the proceeds from issuance of common stock pursuant to ELOC agreement. 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: March 31, December 31, Percent 2025 2024 Change Change Cash $ 2,049,638 $ 308,096 $ 1,741,542 565 % Current assets (excluding cash) $ 5,775,588 $ 5,997,381 $ (221,793 ) -4 % Current liabilities $ 7,461,666 $ 7,906,893 $ (445,227 ) -6 % Working capital $ 363,561 $ (1,601,416 ) $ 1,964,977 -123 % 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. 24 Table of Contents Liquidity Outlook Cash Explanation Cash Requirements Our primary objectives for the remainder of 2025 are expected to be the continued implementation of Scienture 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. We estimate our operating expenses and working capital requirements for the next 12 months to be approximately as follows: Projected Expenses from April 2025 to March 2026 Amount General and administrative (1) $ 9,800,000 Total $ 9,800,000 (1) Includes estimated wages and payroll, legal and accounting, marketing, rent and web 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 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 interim 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 March 31, 2025, the Company had an accumulated deficit of $42,102,970. As of March 31, 2025, the Company had $2,049,638 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: Three Months Ended March 31, Percent 2025 2024 Change Change Net cash (used in) provided by operating activities from continuing operations (2,956,457 ) (9,659,231 ) 6,702,774 -69 % Net cash (used in) provided by operating activities from discontinued operations - (530,442 ) 530,442 -100 % Operating Activities (2,956,457 ) (10,189,673 ) 7,233,216 -71 % Net cash (used in) provided by investing activities from continuing operations - (2,500,000 ) 2,500,000 -100 % Net cash (used in) provided by investing activities from discontinued operations - 29,932,589 (29,932,589 ) -100 % Investing Activities - 27,432,589 (27,432,589 ) -100 % Net cash (used in) provided by financing activities from continuing operations 4,697,999 (13,891,011 ) 18,589,010 -134 % Net cash (used in) provided by financing activities from discontinued operations - (5,000 ) 5,000 -100 % Financing Activities 4,697,999 (13,896,011 ) 18,594,010 -134 % Net change in cash $ 1,741,542 $ 3,346,905 $ (1,605,363 ) -48 % 25 Table of Contents Cash used in operating activities for the three months ended March 31, 2025, was $2,956,457, compared to cash used in operations for the three months ended March 31, 2024, of $10,189,673. The decrease in cash used in operations for the three months ended March 31, 2025 compared to 2024 was primarily due to a lower net loss in and less cash used in operating assets and liabilities in 2025. Cash provided by (used in) investing activities for the three months ended March 31, 2025, was $0 and cash provided by investing activities was $27,432,589 for the three months ended March 31, 2024. The cash provided by investing activities in 2024 was primarily due to the MMS disposition in the first quarter, partially offset by the investment in securities of $2,500,000. Cash provided by financing activities for the three months ended March 31, 2025, was $4,697,999 compared to $13,896,011 of cash used in financing activities for the three months ended March 31, 2024. Cash provided by financing activities in 2025 was due to proceeds from issuance of common stock pursuant to ELOC agreement. 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. Three Month Period Ended March 31, 2025, compared to Three Month Period Ended March 31, 2024 Three Months Ended March 31, Percent 2025 2024 Change Change Revenues $ 10,258 $ - 10,258 100 % Cost of sales 9,585 - 9,585 100 % Gross profit 673 - 673 100 % Operating expenses: Wage and salary expense 696,068 222,594 473,474 213 % Professional fees 412,850 179,553 233,297 130 % Accounting and legal expense 470,825 339,047 131,778 39 % Technology expense 61,620 51,615 10,005 19 % General and administrative (including stock-based compensation expense) 1,355,948 4,700,162 (3,344,214 ) -71 % Research and development 574,679 - 574,679 100 % Total operating expenses 3,571,990 5,492,971 (1,920,981 ) -35 % Change in fair value of warrant liability 645,986 (729,889 ) 1,375,875 -189 % Change in fair value of derivative liability 603,322 - 603,322 100 % Loss on conversion of note payable (96,646 ) - (96,646 ) -100 % Interest income 25,442 62,921 (37,479 ) -60 % Loss on disposal of asset - (374,968 ) 374,969 -100 % Interest expense (670,784 ) (98,515 ) (572,269 ) 581 % Net loss from operations (3,063,997 ) (6,633,422 ) 3,569,426 -54 % Income from discontinued operations, net of tax - 27,879,455 (27,879,455 ) -100 % Net (loss) income $ (3,063,997 ) $ 21,246,033 $ (24,310,030 ) -114 % 26 Table of Contents There are $10,258 in revenues for the three months ended March 31, 2025. Revenues increased by $10,258 compared to the same period ended March 31, 2024 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. For the three-month period ended March 31, 2025, cost of goods sold and gross profit were $9,585 and $673, and $0 and $0, all respectively for the same period in 2024. Gross profit as a percentage of sales was 6.56% for the three months ended March 31, 2025, compared to no such gross profit (loss) for the three months ended March 31, 2024. Wages and salary expense increased by $473,474 for the three months ended March 31, 2025 to $696,068 compared to $222,594 for the comparable period in 2024. The increase is primarily due to an increase in salaries for executives, as well as the Scienture Merger in July 2024, as compared to the same period in 2024, which increased the headcount of the Company’s operations. Professional fees increased by $233,297 to $412,850 compared to $179,553 for the comparable period in 2024. The increase was primarily due to increase in post-acquisition professional fees expense of Scienture, including increased advisory and consulting efforts as Scienture’s operations prepare for commercialization. Accounting and legal expenses increased by $131,778 for the three months ended March 31, 2025 to $470,825 compared to $339,047 for the comparable period in 2024. The increase is primarily due to more SEC filings and corporate actions requiring additional accounting and legal services. General and administrative expenses (including stock-based compensation expense) decreased by $3,344,214 for the three months ended March 31, 2025, to $1,355,948 compared to $4,700,162 for the comparable period in 2024. The decrease from 2024 was mainly due to a decrease in the fair value of shares issued for services in 2025. Technology expense increased $10,005 for the three months ended March 31, 2025 to $61,620 compared to $51,615 for the comparable period in 2024. 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. Research and development expenses was mainly due to contract research organization costs of Scienture LLC. Total expenses by program were as follows: Three Months Ended March 31, Project Codes Product Name 2025 SCN-102 Losartan $ 205,063 SCN-104 DHE 159,852 SCN-106 Alteplase 140,000 SCN-107 Bupivacaine 69,765 Total research and development expense $ 574,679 We had interest expense of $670,784 for the three months ended March 31, 2025, compared to interest expense of $98,515 for the three months ended March 31, 2024. The increase is due to the interest expense on Scienture LLC’s convertible debt, the convertible notes issued in August and November 2024, and related debt discount amortization on these notes. We recognized a gain on the change in the fair value of the warrant liability of $645,986 for the three months ended March 31, 2025, compared to a loss of $729,889 during the three months ended March 31, 2024, based on the underlying valuation inputs. We recognized a gain on the change in the fair value of the derivative liability of $603,322 for the three months ended March 31, 2025, based on the underlying valuation inputs and the conversion features of the Arena convertible debenture. During the three months ended March 31, 2025, the Company incurred a net loss from continuing operations of $3,063,997 compared to a net loss from continuing operations of $6,633,422 for the three months ended March 31, 2024. The change was due to change in operating income, other income (expense). Net income from discontinued operations was $27,879,455 for the three months ended March 31, 2024. The income was primarily due to the disposal of Softell assets, partially offset by loss on disposal of Superlatus during the three months ended March 31, 2024. 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 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 Customer receives the product. 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 Customer receives the product. 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. 27 Table of Contents 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. 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 3. 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).