SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended |
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact name of Registrant as specified in its charter)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Telephone: +
Email:
(Name, telephone, email and/or fax number and address of Company Contact Person)
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: Ordinary Shares, $0.001 par value
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
Ordinary Shares, $0.001 par value, at March 31, 2024
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes ☐
If the report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.
Large Accelerated Filer ☐ Accelerated
Filer ☐
Emerging Growth Company
If an emerging growth company
that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of
the Exchange Act.
Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
|
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International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ |
Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐
TABLE OF CONTENTS
| PART I | Page | |
| Item 1. | Identity of Directors, Senior Management and Advisors | 13 |
| Item 2. | Offer Statistics and Expected Timetable | 13 |
| Item 3. | Key Information | 13 |
| Item 4. | Information on the Company | 39 |
| Item 4A. | Unresolved Staff Comments | 70 |
| Item 5. | Operating and Financial Review and Prospects | 71 |
| Item 6. | Directors, Senior Management and Employees | 79 |
| Item 7. | Major Shareholders and Related Party Transactions | 90 |
| Item 8. | Financial Information | 94 |
| Item 9. | The Offer and Listing | 94 |
| Item 10. | Additional Information | 94 |
| Item 11. | Quantitative and Qualitative Disclosures about Market Risk | 98 |
| Item 12. | Description of Securities Other Than Equity Securities | 98 |
| PART II | ||
| Item 13. | Defaults, Dividend Arrearages and Delinquencies | 98 |
| Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 98 |
| Item 15. | Controls and Procedures | 98 |
| Item 16. | Reserved | 100 |
| Item 16A. | Audit Committee Financial Expert | 100 |
| Item 16B. | Code of Ethics | 100 |
| Item 16C. | Principal Accountant Fees and Services | 100 |
| Item 16D. | Exemptions from the Listing Standards for Audit Committees | 101 |
| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliates Purchasers | 101 |
| Item 16F. | Changes in Registrant's Certifying Accountants | 101 |
| Item 16G. | Corporate Governance | 102 |
| Item 16H. | Mine Safety Disclosure. | 102 |
| Item 16I | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 102 |
| Item 16J | Insider Trading Policy | 102 |
| Item 16K | Cybersecurity | 103 |
| PART III | ||
| Item 17. | Financial Statements | 104 |
| Item 18. | Financial Statements | 104 |
| Item 19 | Exhibits | 104 |
| SIGNATURES | 107 |
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 20-F contains forward-looking statements. A forward-looking statement is a projection about a future event or result, and whether the statement comes true is subject to many risks and uncertainties. These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. The actual results or activities of the Company will likely differ from projected results or activities of the Company as described in this Annual Report, and such differences could be material.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results and performance of the Company to be different from any future results, performance and achievements expressed or implied by these statements. In other words, our performance might be quite different from what the forward-looking statements imply. You should review carefully all information included in this Annual Report.
You should rely only on the forward-looking statements that reflect management’s view as of the date of this Annual Report. We undertake no obligation to publicly revise or update these forward-looking statements to reflect subsequent events or circumstances. You should also carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”). The Private Securities Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with the “safe harbor,” we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Factors that might cause such a difference include, but are not limited to, those discussed in the section titled “Risk Factors” under Part I. - Item 3. - “Key Information.”
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
Basis of Presentation
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America and publish our financial statements in United States Dollars.
Certain amounts, percentages and other figures included in this Annual Report have been subject to rounding adjustments. Accordingly, amounts, percentages and other figures shown as totals in certain tables or charts may not be the arithmetic aggregation of those that precede them and amounts and figures expressed as percentages in the text may not total 100% or, when aggregated, may not be the arithmetic aggregation of the percentages that precede them.
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REFERENCES
In this Annual Report, “China” refers to all parts of the People’s Republic of China, including the Special Administrative Region of Hong Kong. The terms “we,” “our,” “us,” “the Group” and the “Company” refer to Zhong Yuan Bio-Technology Holdings Limited and, where the context so requires or suggests, our direct and indirect subsidiaries. “Operating Subsidiaries” refers to Bao Feng Bio-Technology (Beijing) Limited, our wholly-owned subsidiary, and Beijing Baofeng Internet Bio-technology Limited, our 51% owned subsidiary (each, individually, an “Operating Subsidiary.”
References to “dollars,” “U.S. Dollars” or “US$” are to United States dollars, “RMB” are to Chinese Renminbi and “HKD” or “HK$” means Hong Kong dollars.
INTRODUCTION
Zhong Yuan Bio-Technology Holdings Limited (the “Company” or “we”) is an exempted company incorporated with limited liability under the laws of the Cayman Islands. Since inception and through our operating subsidiaries in the People’s Republic of China (the “PRC” or “China”), our goal is to provide a complete solution for neurological disorders, from screening to intervention. We are dedicated to the development of early detection kits for brain diseases, plant-derived nervonic acid dietary supplements (referred to as new food raw materials products in China) and new drugs for neurological diseases. Over the past decade, we have focused on research related to neurological diseases and discovered that nervonic acid can be used as a core molecular marker laying the foundation for the development of the detection kits and drugs. More recently, we have made breakthroughs in the research and development of new drugs to treat cognitive impairment, brain atrophy and other encephalopathies caused by brain white matter damage.
Our equity structure is a direct holding structure. The overseas entity that is trading on the Expert Market of OTC Markets in the United States is Zhong Yuan Bio-Technology Holdings Limited, a Cayman Islands company. The Company has four wholly-owned subsidiaries and one majority-owned subsidiary as follows:
| (i) | The Company directly owns and controls China Bio-Technology Holdings Limited, a Seychelles company (“China Bio”), which is a holding company and not conducting any business operations; |
| (ii) | China Bio directly owns and controls Zhong Yuan Bio-Technology (Hong Kong) Limited, a Hong Kong company (“Zhong Yuan-HK”), which is a holding company and not conducting any business operations; |
| (iii) | Zhong Yuan-HK directly owns and controls Zhong Yuan Bio-Technology (Shenzhen) Limited (“Zhong Yuan-SZ”), a China company and a wholly foreign-owned entity (“WFOE”), which is a holding company and not conducting any business operations; |
| (iv) | Zhong Yuan-SZ directly owns and controls Bao Feng Bio-Technology (Beijing) Limited, a China company (“Bao Feng”), our wholly owned operating subsidiary; and |
| (v) | Bao Feng owns 51% of the outstanding shares of Beijing Baofeng Internet Bio-technology Limited, a China company (“BF-Internet”), our non-wholly owned operating subsidiary. |
All of the above-referenced companies are either direct or indirect subsidiaries of the Company. China Bio, Zhong-Yuan-HK and Zhong Yuan-SZ are holding companies and do not conduct any business operations. Bao Feng and BF Internet are our operating subsidiaries, both of which conduct business operations in China (collectively, our “Operating Subsidiaries”).
Any investment in our Ordinary Shares is in shares of the Company, a Cayman Islands holding company, and not shares of the Operating Subsidiaries. Our shareholders will never directly hold equity interests in the Operating Subsidiaries.
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The Chinese government may exercise significant oversight and discretion over the conduct of our business in China and may intervene in or influence our Operating Subsidiaries’ operations at any time, which could result in a material change in their operations and/or the value of our Ordinary Shares. In addition, we may be materially affected by recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based companies including, but not limited to, cybersecurity review and regulatory review of the overseas listing of our Ordinary Shares through an offshore holding company. We are also subject to the risks of uncertainty about any future actions the Chinese government may take in this regard.
If the Chinese government were to choose to exercise significant oversight and discretion over the conduct of our Operating Subsidiaries’ businesses, it may intervene in or influence our Operating Subsidiaries’ operations. Such governmental actions:
| ● | could result in a material change in our Operating Subsidiaries’ operations; |
| ● | could hinder our ability to offer securities to investors; and |
| ● | may cause the value of our Ordinary Shares to significantly decline or cause our Ordinary Shares to become worthless. |
Our operations are conducted exclusively in China; therefore, we are subject to legal and operational risks associated with such operations, including risks related to the legal, political and economic policies of the Chinese government, the relations between China and the United States and Chinese or United States regulations, which risks could result in a material change in our operations and/or cause our Ordinary Shares to significantly decline in value or to become worthless and could affect our ability to offer or continue to offer securities to investors. Recently, the PRC government initiated a series of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews and expanding efforts in anti-monopoly enforcement. New laws could significantly limit or completely hinder our ability to offer or continue to offer securities to overseas investors and cause such securities to significantly decline in value or to be worthless.
Cybersecurity Review Measures
Through the Measures for Cybersecurity Review (2021 Version) (the “Measures”) and the Revised Measures on Cyberspace Security, issued on January 4, 2022 and effective February 15, 2022, (the “Revised Measures”), the PRC, through the Cyberspace Administration of China (the “CAC”), has adopted rules that require companies collecting or holding large amounts of data to undergo a cybersecurity review prior to listing in foreign countries, a move that significantly tightens oversight over China-based Internet giants. Pursuant to Article 7 of the Revised Measures, companies holding data on more than 1 million users must apply for cybersecurity approval when seeking listings in other nations due to the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments.” The Measures require that operators of critical information infrastructure (“CII”) intending to procure network products and services that may affect national security undergo cybersecurity review. This has impacted and could potentially impact a broad range of data-rich tech companies. The Revised Measures expand the scope of reviewed business entities to now include network platform (“NP”) operators intending to engage in certain activities, such as applying to list abroad. The Revised Measures establish a Cybersecurity Review Office (the “CRO”), an administrative body within the CAC, to formulate the regulations for cybersecurity review and to lead the cybersecurity review process. Applicable CII operators and NP operators are required to submit an application to the CRO, and the CRO will assess whether a cybersecurity review is required.
If an entity is a CII operator or an NP operator, it is required to apply for cybersecurity review if any of the following three conditions is met: (i) the CII operator proposes to procure network products and services that affect or may affect national security; (ii) the NP operator proposes to carry out data processing activities that affect or may affect national security; or (iii) the NP operator controls personal information of more than 1,000,000 users and proposes to apply for overseas listing. The term “overseas listings” is often interpreted as listings outside of China, such as in the U.S.; “network products and services” include core network equipment, high capability computers and servers, high capacity data storage, large databases and applications, network security equipment and cloud computing services; and “data processing” means the collection, storage, use, processing, transmission, provision and disclosure of data.
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Our operations in China involve the development of early detection kits for brain diseases, plant-derived nervonic acid dietary supplements (referred to as new food raw materials products in China) and new drugs for neurological diseases. Over the past decade, we have focused on research related to neurological diseases and discovered that nervonic acid can be used as a core molecular marker laying the foundation for the development of the detection kits and drugs. Our businesses may involve the collection of user data, implicate cybersecurity or involve another type of restricted industry.
Based on the advice of PRC counsel, Shanghai Skytoland Law Firm, and our understanding of currently applicable PRC laws and regulations, the Company and its PRC subsidiaries are not currently required to submit an application to the CRO and are not subject to cybersecurity review.
Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies
On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which came into effect on March 31, 2023. On February 17, 2023, the CSRC also issued the Notice on the Administrative Arrangements for the Filing of the Overseas Securities Offering and Listing by Domestic Companies (the “CSRC Notice”). Pursuant to the Trial Measures and the CSRC Notice, among other things, (i) a domestic company that seeks to offer or list securities overseas, both directly and indirectly, must complete certain filing procedures with the CSRC within three working days following its submission of an initial public offering or listing application; and (ii) domestic companies which have already, directly or indirectly, offered and listed securities in overseas markets prior to the effectiveness of the Trial Measures are required to fulfill their filing obligations and report relevant information to the CSRC within three working days after conducting a follow-on offering of equity securities on the same overseas market. If the issuer meets both of the following criteria, the overseas offering and listing conducted by such issuer shall be deemed an indirect overseas offering and listing by a PRC domestic company: (i) 50% or more of any of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent fiscal year were derived from PRC domestic companies; and (ii) the majority of the issuer’s business activities are carried out in mainland China, or its main place(s) of business are located in mainland China, or the majority of its senior management team in charge of its business operations and management are PRC citizens or have their usual place(s) of residence located in mainland China. Where a PRC domestic company is seeking an indirect overseas offering and listing in an overseas market, the issuer shall designate a major domestic operating entity responsible for all filing procedures with the CSRC. If a domestic company fails to complete the required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings and fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
On May 7, 2024, the CSRC issued the Guidelines of Regulatory Rules Application -- Overseas Offering and Listing No. 7 (“Guideline No. 7), which clarified that domestic companies that submitted an application to transfer from an overseas over-the-counter market to list on an overseas exchange prior to the effective date of the Trial Measures (March 31, 2023), but that have not yet received approval from the overseas regulator or stock exchange, must file with the CSRC before their offering and listing procedures are completed. Our Ordinary Shares are currently quoted on the Expert Market of OTC Markets and we filed a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) for a public offering of our Ordinary Shares and filed an application for listing our Ordinary Shares on the Nasdaq Stock Market (“Nasdaq”) prior to the effective date of the Trial Measures, but had not received approval from the SEC or from Nasdaq as of that date. Accordingly, we are required to file with the CSRC before our proposed public offering and listing on the Nasdaq Stock Market (“Nasdaq”) are completed. It is unpredictable whether such permission can be obtained by us or, if permission is obtained, whether it could be later denied or rescinded.
We filed with the CSRC pursuant to the Trial Measures on June 4, 2024 and, as of the date of this Annual Report, have neither received nor been denied permission to conduct our proposed public offering and to list our Ordinary Shares on a U.S. stock exchange. Therefore, such permission may be denied. In addition, even if such permission is obtained, it could be rescinded at any time by the PRC government and, if such permission were to be rescinded, we would have a duty to disclose that fact. Although we are required to obtain permission from the CSRC to offer and list our securities overseas, based on the advice of our PRC counsel, Shanghai Skytoland Law Firm, and our understanding of currently applicable PRC laws and regulations, the Company and its PRC subsidiaries: (i) are not subject to the Cyberspace Administration of China (the “CAC”) or any other entity that is required to approve their operations; and (ii) have not been denied any permissions by any PRC authorities. In addition, Zhong Yuan-HK, our Hong Kong subsidiary that owns 100% of the outstanding shares of Zhong Yuan-Shenzhen, is afforded the legal protections of national treatment under the Foreign Investment Law of the People’s Republic of China.
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If we have erroneously concluded that any permission requirements do not apply to us, or if applicable laws, regulations or interpretations change, and it is determined in the future that the permission requirements become applicable to us, we may be subject to review, may face challenges in addressing these requirements and may incur substantial costs in complying with these requirements, which could result in material adverse changes in our business operations and financial position. In addition, if we are not able to fully comply with such permission requirements or if any new or existing permission requirements are determined to be applicable to us, our ability to offer or to continue to offer securities to investors may be significantly limited or completely denied, and our securities may significantly decline in value or become worthless.
Holding Foreign Companies Accountable Act
Pursuant to the Holding Foreign Companies Accountable Act (the “HFCAA”), which became law in December 2020, our Ordinary Shares may be prohibited from trading on a U.S. exchange if our auditor cannot be fully inspected by the Public Company Accounting Oversight Board (the “PCAOB”). The HFCAA originally prohibited foreign companies from listing their securities on U.S. exchanges if the company’s auditor has been unavailable for PCAOB inspection or investigation for three consecutive years beginning in 2021. On December 29, 2022, as part of the Consolidated Appropriations Act, 2023, the time period for the delisting of foreign companies under the HFCAA was reduced from three consecutive years to two consecutive years.
On December 16, 2021, the PCAOB issued a Determination Report (the “Determination Report”), which found that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the Determination Report identified specific registered public accounting firms subject to these determinations.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the PRC (the “SOP”), pursuant to which the PCAOB has independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. The determinations as to mainland China and Hong Kong were vacated by the PCAOB as of December 15, 2022 as a result of the PCAOB’s having been able to conduct extensive and thorough inspections and investigations of mainland China and Hong Kong firms in 2022 under the SOP; however, if the PCAOB encounters any impediment, in the future, to conducting an inspection or investigation of auditors in mainland China or Hong Kong as a result of a position taken by an authority in either jurisdiction, it may issue new determinations consistent with the HFCAA.
Our financial statements for the fiscal years ended March 31, 2023 and 2024 included in this Annual Report were audited by TAAD, LLC (“TAAD”), a PCAOB registered firm located at 20955 Pathfinder Road, Suite 370, Diamond Bar, California 91765 whereas our financial statements for the fiscal year ended March 31, 2022 were audited by Centurion ZD CPA & Co., our former auditor. As TAAD is not located in China or Hong Kong, we believe that the PCAOB’s inspectors and investigators will have consistent access to the audit work performed by TAAD for us. Therefore, we do not expect to be affected by the HFCAA or the AHFCAA at this time. However, if we were to engage a public accounting firm that is headquartered in Hong Kong or mainland China in the future and if the PCAOB were to issue a new determination, those events may affect our ability to maintain the listing of our securities on a U.S. national securities exchange, including Nasdaq, and the trading of them in the over-the-counter trading market.
In addition to subjecting our securities to the possibility of being prohibited from trading or delisted from a U.S. exchange, the inability of the PCAOB to conduct inspections of our auditors’ work papers in China or Hong Kong would make it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. As a result, our investors would be deprived of the benefits of the PCAOB’s oversight of our auditor through such inspections and they may lose confidence in our reported financial information and procedures and the quality of our financial statements. Also, we cannot assure you that U.S. regulatory authorities will not apply additional or more stringent criteria to us. Such uncertainty could cause the market price of our Ordinary Shares to be materially and adversely affected.
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Implications of Being an Emerging Growth Company and a Foreign Private Issuer
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As an emerging growth company, we may take advantage of certain exemptions from specified disclosure and other requirements that are otherwise generally applicable to public companies. These exemptions include:
| ● | being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; |
| ● | not being required to comply with the auditor attestation requirements for the assessment of our internal control over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002; |
| ● | reduced disclosure obligations regarding executive compensation; and |
| ● | not being required to hold a non-binding advisory vote on executive compensation or seek shareholder approval of any golden parachute payments not previously approved. |
We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; (ii) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (iii) the issuance, in any three-year period, by our Company of more than $1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of the date of the first sale of common equity securities pursuant to an effective registration statement.
We are also considered a “foreign private issuer” and will report under the Exchange Act as a non-U.S. company with foreign private issuer status. This means that, even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
| ● | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; |
| ● | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and |
| ● | the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. |
We may take advantage of these exemptions until such time as we are no longer a foreign private issuer. We would cease to be a foreign private issuer at such time as more than 50% of our outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents; (ii) more than 50% of our assets are located in the United States; or (iii) our business is administered principally in the United States.
We may choose to take advantage of some but not all of these reduced burdens. We have taken advantage of reduced reporting requirements in this Annual Report. Accordingly, the information contained herein may be different from the information you receive from our competitors that are public companies, or other public companies in which you have made an investment.
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Cash Flows
The structure of cash flows within our organization, and a summary of the applicable regulations, is as follows:
1. Our equity structure is a direct holding structure, that is, the overseas entity that is trading on the OTC Market in the United States is Zhong Yuan Bio-Technology Holdings Limited, a Cayman Islands company (the “Company”). The Company wholly owns China Bio-Technology Holdings Limited (“China Bio”), a Seychelles company. China Bio wholly owns Zhong Yuan Bio-Technology (Hong Kong) Limited (“Zhong Yuan HK”), a Hong Kong company. Zhong Yuan HK wholly owns Zhong Yuan Bio-Technology (Shenzhen) Limited (“Zhong Yuan SZ”), a China company and a wholly foreign owned entity (“WFOE”). Our WFOE conducts its operations through Bao-Feng Bio-Technology (Beijing) Limited (“Bao-Feng”), a China company and, currently, our primary operating subsidiary. Bao Feng owns 51% of the outstanding shares of Beijing Baofeng Internet Bio-technology Co., Limited (“BF Internet”), a PRC company the remaining 49% of which is owned by a shareholder of the Company. See Part I. Item 4. “Information on the Company -- Our Business -- History and Development of the Company” and “Our Business -- Corporate Structure” for additional details.
2. Within our direct holding structure and based on our compliance with current foreign exchange regulations, the cross-border transfer of funds within our corporate group is legal and compliant with the laws and regulations of the PRC. After investors’ funds enter into the Company, the funds can be directly transferred to Zhong Yuan HK. Zhong Yuan HK can then directly transfer funds to Zhong Yuan SZ, and those funds can then be transferred to Bao-Feng. However, as these foreign exchange regulations, including their interpretation and implementation, have been evolving, it is unclear how these regulations, and any future regulations concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as cross-border transfer of funds, remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our financial condition and results of operations.
If the Company intends to distribute dividends, Bao-Feng will distribute dividends to Zhong Yuan SZ, our WFOE, which will then directly distribute dividends to Zhong Yuan HK in accordance with the laws and regulations of the PRC. Zhong Yuan HK will transfer dividends to China Bio, which will transfer them to the Company. The Company will then distribute dividends to all of its shareholders in proportion to the Ordinary Shares they hold, regardless of whether the shareholders are U.S. investors or investors in other countries or regions.
3. As of the date of this Annual Report, neither the Company nor any of its subsidiaries has ever paid dividends or made distributions to U.S. investors. Since consummation of the 2019 share exchange through which China Bio became the Company’s wholly owned subsidiary, the Company has not transferred any funds to its subsidiaries to fund their business operations, nor has it received any transfer of funds from its subsidiaries. In the future, any cash proceeds raised from financing activities may be transferred by us to our subsidiaries via capital contribution or shareholder loans, as the case may be.
4. Our PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. See Part I. Item 4. “Information on the Company -- Regulations in China Applicable to Our Business -- Regulations On Dividend Distribution” for more information.
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Foreign Exchange
To address persistent capital outflows and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures, primarily registration with SAFE, required pursuant to SAFE Circular 19 and SAFE Circular 16, necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments.
Any transfer of funds by us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches or filed with SAFE in its information system; and (ii) our PRC subsidiaries may not procure loans which exceed the difference between their total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the People’s Bank of China Notice No. 9 (“PBOC Notice No. 9”). Any medium- or long-term loan to be provided by us to our PRC-based subsidiaries must be registered with the National Development and Reform Commission and SAFE or its local branches.
In light of the various requirements imposed by PRC regulations, for example, SAFE Circular 19 and SAFE Circular 16, on loans to, and direct investment in, a PRC subsidiary by offshore holding companies, and the fact that the PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to a PRC subsidiary or with respect to future capital contributions by us to a PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to conduct our business and to capitalize or otherwise fund PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business. See Part I. Item 3. “Key Information - Part D. Risk Factors - Risks Related to the People’s Republic of China”.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of other countries or regions where the non-PRC-resident enterprises are tax resident. Pursuant to the tax agreement between mainland China and the Hong Kong Special Administrative Region, the withholding tax rate in respect of the payment of dividends by a PRC enterprise to a Hong Kong enterprise may be reduced to 5% from the standard rate of 10%. However, if the relevant tax authorities determine that our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received by our Hong Kong subsidiary from our PRC subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our PRC subsidiaries.
Recent PRC regulations have extended the PRC tax jurisdiction to transactions involving the transfer of taxable assets through offshore transfer of a foreign intermediate holding company. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an “Indirect Transfer,” the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring the PRC tax. As a result, gains derived from such Indirect Transfer may be subject to the PRC enterprise income tax, and the transferee or other person who pays for the transfer is obligated to withhold the applicable taxes currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under the PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes. Our Company may be subject to filing obligations or taxed if we are the transferor in such transactions, and may be subject to withholding obligations if our Company is the transferee in such transactions.
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Payment of Dividends
Dividends payable by us to our foreign investors and gain on the sale of our Ordinary Shares may be subject to PRC income taxes. Pursuant to the EIT Law and the EIT Rules, subject to any applicable tax treaty or arrangement between the PRC and the jurisdiction of residence of our investors that provides a different income tax arrangement, the payment of dividends by a PRC resident enterprise to investors that are non-PRC resident enterprises (including enterprises that do not have an establishment or place of business in the PRC and enterprises that have an establishment or place of business in the PRC but the income of which is not effectively connected with the establishment or place of business) or any gain realized on the transfer of shares by such investors is generally subject to PRC income tax at a rate of 10% to the extent that such dividend has its source in the PRC or such gain is regarded as income derived from sources within the PRC. Under the Individual Income Tax Law of the PRC and its implementation rules, dividends sourced within the PRC paid to foreign individual investors who are not PRC residents and gains from PRC sources realized on the transfer of our Ordinary Shares by such investors would be subject to PRC income tax at a rate of 20%, subject to any reduction or exemption set out in applicable tax treaties and PRC laws.
It is uncertain whether we will be considered a PRC ‘‘resident enterprise.’’ If we are considered a PRC ‘‘resident enterprise,’’ dividends payable by us with respect to our Ordinary Shares or any gain realized from the transfer of our Ordinary Shares may be treated as income derived from sources within the PRC and may be subject to PRC income tax, subject to the interpretation, application and enforcement of the EIT Law and the EIT Rules by the relevant tax authorities. If we are required under the EIT Law or other related regulations to withhold PRC income tax on our dividends payable to foreign holders of our Ordinary Shares which are ‘‘non-resident enterprises,’’ or if our shareholders are required to pay PRC income tax on the transfer of our Ordinary Shares under PRC tax laws, the value of an investment in our Ordinary Shares may be materially and adversely affected.
Enforcement of Civil Liabilities
Our Company is an exempted company incorporated with limited liability under the laws of the Cayman Islands. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors. In addition, Cayman Islands companies may not have standing to sue before the U.S. federal courts.
All of our current operations are conducted outside of the United States and all of our current assets are located outside of the United States, with the majority of our operations and current assets being located in China. Moreover, all of our directors and executive officers reside outside the United States and substantially all of their assets are located outside the United States. As of the date of this Annual Report; (i) Ms. Chang, our President, Chief Executive Officer and a director, Dr. Dong and Dr. Ning, both independent directors, reside in China; and (ii) Ms. Fang, our Chief Financial Officer and a director, and Mr. Tse, one of our independent directors, reside in Hong Kong. As a result, it may not be possible for investors to effect service of process within the United States upon us or any such persons or to enforce in the United States any judgment obtained in a U.S. court against us or any of such persons, including judgments based upon the civil liability provisions of the U.S. securities laws or any U.S. state or territory.
In particular, residence and location of assets in China may make it even more difficult to enforce any judgments obtained from foreign courts (including from a U.S. state or federal court) against such persons compared to the circumstance of residence in another non-U.S. and non-China jurisdiction. The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law and other applicable laws, regulations and interpretations based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the U.S. or with many other jurisdictions that provide for the reciprocal recognition and enforcement of judgments from the U.S. and many other jurisdictions. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the U.S and many other jurisdictions. In addition, the SEC, the U.S. Department of Justice and other U.S. authorities and the comparable authorities from many other jurisdictions may also have difficulties in bringing and enforcing actions against us or our directors or officers in the PRC.
We have appointed Cogency Global Inc., 122 East 42nd Street, 18th Floor, New York, New York 10168 as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.
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Cayman Islands
Harney Westwood & Riegels, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of the U.S. courts obtained against us or our directors or executive officers that are predicated upon the civil liability provisions of the U.S. securities laws or any U.S. state; or (ii) entertain original actions brought in the Cayman Islands against us or our directors or executive officers that are predicated upon the U.S. securities laws or the securities laws of any U.S. state.
We have been advised by Harney Westwood & Riegels that, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands would recognize as a valid judgment a final and conclusive judgment in personam obtained in the federal or state courts of the United States against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the Cayman Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from United States courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Hong Kong
CFN Lawyers, our counsel with respect to Hong Kong law, has advised us that there is uncertainty as to whether the courts of Hong Kong would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or (ii) entertain original actions brought in Hong Kong against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
A judgment of a court in the United States predicated upon U.S. federal or state securities laws may be enforced in Hong Kong at common law by bringing an action in a Hong Kong court on that judgment for the amount due thereunder and then seeking summary judgment on the strength of the foreign judgment, provided that the foreign judgment, among other things, is (i) for a debt or a definite sum of money (not being taxes or similar charges to a foreign government taxing authority or a fine or other penalty); and (ii) final and conclusive on the merits of the claim, but not otherwise. Such a judgment may not, in any event, be so enforced in Hong Kong if (i) it was obtained by fraud; (ii) the proceedings in which the judgment was obtained were opposed to natural justice; (iii) its enforcement or recognition would be contrary to the public policy of Hong Kong; (iv) the court of the United States was not jurisdictionally competent; or (v) the judgment was in conflict with a prior Hong Kong judgment. Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States. As a result, there is uncertainty as to the enforceability in Hong Kong, in original actions or in actions for enforcement, of judgments of U.S. courts of civil liabilities predicated solely upon the federal securities laws of the United States or the securities laws of any state or territory within the United States.
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PRC
Shanghai Skytoland Law Firm, our counsel as to PRC law, has confirmed that there is uncertainty as to whether PRC courts would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.
Shanghai Skytoland Law Firm has further confirmed that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. There exists no treaty and few other forms of reciprocity between China and the United States or the Cayman Islands governing the recognition and enforcement of foreign judgments as of the date of this Annual Report. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law before a PRC court against a company for disputes relating to contracts or other property interests, and the PRC court may accept a cause of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if such foreign shareholders can establish sufficient nexus to China for a PRC court to have jurisdiction and meet other procedural requirements, including, among others, that the plaintiff must have a direct interest in the case, that there must be a specific defendant, a concrete claim, a factual basis and a cause for the case, and that the action must fall within the range of civil actions accepted by the people’s courts and within the jurisdiction of the people’s court with which it is filed. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any qualified person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies. However, it will be difficult for U.S. shareholders to originate actions against us in China in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the Ordinary Shares, to establish a connection to China for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.
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PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
| A. | Reserved |
| B. | Capitalization and Indebtedness |
Not Applicable.
|
C. |
Reasons for the Offer and Use of Proceeds |
Not Applicable.
|
D. |
Risk Factors |
You should carefully consider the following risks, together with all other information included in this Annual Report. The realization of any of the risks described below could have a material adverse effect on our business, results of operations and future prospects.
Risks Related to Our Company
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
We, through our Operating Subsidiaries, are in the process of developing our business and have a limited operating history. You should consider our Operating Subsidiaries’ future prospects in light of the risks and uncertainties experienced by early-stage companies. Some of these risks and uncertainties relate to our Operating Subsidiaries’ ability to:
| · | Offer products of sufficient quality to attract and retain a larger customer base; |
| · | Attract additional customers and increase spending per customer; |
| · | Increase awareness of our products and continue to develop customer loyalty; |
| · | Respond to competitive market conditions; |
| · | Respond to changes in our regulatory environment; |
| · | Maintain effective control of our costs and expenses; |
| · | Raise sufficient capital to sustain and expand our business; and |
| · | Attract, retain and motivate qualified personnel. |
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The Company has incurred either small net profit or net losses in the past and may incur losses again in the future.
The Company has experienced negative cash flow and small profit or losses from operations. During the fiscal year ended March 31, 2024, the Company only had a small profit of $271,869 whereas for the fiscal years ended March 31, 2023 and 2022, the Company experienced net losses from operations in the amount of $2,204,126 and $1,125,565, respectively. There can be no assurance that the Company will not continue to experience negative cash flow and losses from operations, which could result in a loss of your entire investment in the Ordinary Shares.
We envision a period of rapid growth that may impose a significant burden on our administrative and operational resources that, if not effectively managed, could impair our growth.
Our strategy for our Operating Subsidiaries envisions a period of rapid growth that may impose a significant burden on our administrative and operational resources. The growth of our business will require significant investments of capital and management’s close attention. Our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage and retain qualified management, research and development, sales and marketing and other personnel; we may be unable to do so. In addition, our failure to successfully manage our growth could result in our sales not increasing commensurately with capital investments. If we are unable to successfully manage our growth, we may be unable to achieve our goals.
We may not be able to raise the additional capital necessary to execute our business strategy, which could result in the curtailment of our operations.
We need to raise additional funds to fully fund our existing operations and for development and expansion of our Operating Subsidiaries’ businesses. Although we have filed a registration statement with the SEC for a public offering of our Ordinary Shares that would provide us with additional capital, there can be no assurance that the registration statement will be declared effective or, if it is declared effective, that the public offering will close. Furthermore, even if our proposed public offering closes, we may need additional financing in the future.
We have no other current arrangements with respect to sources of additional financing, and future needs for additional financing may not be available on commercially reasonable terms, on a timely basis or at all. The inability to obtain future additional financing when needed would have a negative effect on us, including possibly requiring us to curtail our operations. If any future financing involves the sale of equity securities, the Ordinary Shares held by our shareholders could be diluted substantially. If we borrow money or issue debt securities, the Company will be subject to the risks associated with indebtedness, including the risk that interest rates may fluctuate and the possibility that it may not be able to pay principal and interest on the indebtedness when due. Insufficient funds would prevent us from implementing our business plan and would require us to delay, scale back or eliminate certain of our operations.
We will be required to hire and retain skilled managerial, research and development and sales and marketing personnel.
Our continued success depends in large part on our ability to attract, train, motivate and retain qualified management, research and development and sales and marketing personnel. Any failure to attract and retain the required personnel who are integral to our business may have a negative impact on our operations, which would have a negative impact on revenues. There can be no assurance that we will be able to attract and retain skilled persons, and the loss of skilled personnel would adversely affect us.
We are dependent upon our officers and management for direction, and the loss of any of these persons could adversely affect our operations and results.
We are dependent on our and Bao Feng’s officers for implementation of our proposed strategy and execution of our business plan. The loss of any of our or Bao Feng’s officers could have a material adverse effect on our results of operations and financial position. We do not maintain “key person” life insurance for any of our or Bao Feng’s officers. The loss of any of our or Bao Feng’s officers could delay or prevent the achievement of our business objectives.
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We currently have only one revenue-generating Operating Subsidiary and one line of products.
We are a holding company with a total of five subsidiaries. However, at present, only one Operating Subsidiary, Bao Feng, is conducting revenue-generating operations. Our second Operating Subsidiary, BF Internet, is primarily engaged in advertising Bao Feng’s products over the internet and does not generate significant revenues on its own. Although we plan to expand the marketing and sale of Bao Feng’s products into the international arena and have a different subsidiary, Zhong Yuan HK, handle the international business, it is expected that China will remain our primary market. In addition, the products sold in the international market will be the same products developed by Bao Feng. Therefore, we will remain primarily dependent on Bao Feng for our revenue. If Bao Feng is not profitable, our business, results of operations and cash flows could be significantly and adversely affected.
Our Operating Subsidiaries may not be able to obtain or maintain all necessary licenses, permits and approvals and to make all necessary registrations and filings for their business activities in multiple jurisdictions and related to residents therein, especially in the PRC, or otherwise relating to PRC residents.
As of the date of this Annual Report, our Operating Subsidiaries have received all necessary governmental approvals and licenses for operations in the PRC, including the business approvals and licenses issued by the PRC State Administration for Market Regulation, and neither of them has been denied any such approvals. However, in the event that our Operating Subsidiaries have erroneously concluded that certain licenses, permits or approvals are not required or if applicable laws, regulations or interpretations change and they are required to obtain additional permissions or approvals in the future, our Operating Subsidiaries may incur significant costs and expenses and may need to budget additional resources to comply with any such requirements. Moreover, if either of our Operating Subsidiaries fails to renew its relevant licenses or filings or fails to obtain future required licenses, permits or approvals, it may become subject to fines and other penalties, which may have a material adverse effect on our business, operations and financial condition.
We may be sued or become a party to litigation, which could require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may be subject to lawsuits from time to time arising in the ordinary course of our business. The expense of defending ourselves against such litigation may be significant. The amount of time to resolve these lawsuits is unpredictable, and defending ourselves may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows.
Future sales of our securities, or the perception in the markets that these sales may occur, could depress our stock price.
We currently have issued and outstanding 17,709,718 Ordinary Shares. Of these Shares, 2,236,192 were previously registered under a registration statement declared effective by the Securities and Exchange Commission on July 20, 2022. We recently filed a registration statement on Form F-1 (the “Registration Statement”) to register and sell publicly an additional 1,100,000 Ordinary Shares and to register 1,000,000 outstanding Shares for resale. The Registration Statement has not yet been declared effective by the Securities and Exchange Commission; however, subsequent to closing of the proposed public offering, all such Ordinary Shares will be available for sale in the public market. The remaining 14,473,526 Ordinary Shares also may be sold in the future if registered under the Securities Act or if the shareholder qualifies for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, or another applicable exemption. The market price of our capital stock could drop significantly after the closing of our proposed public offering due to the influx of 2,100,000 additional shares available in the market or if the holders of the restricted Ordinary Shares sell them or are perceived by the market as intending to sell them. These factors also could make it more difficult for us to raise capital or make acquisitions through the issuance of additional Ordinary Shares or other equity securities.
The ability of the Board of Directors of the Company to issue preferred shares and any anti-takeover provisions we adopt may depress the value of our Ordinary Shares.
Our Articles of Association authorize our Board of Directors to provide, out of unissued shares, for preferred shares in one or more classes or series within a class upon the authority of the Board without further shareholder approval. While no preferred shares are currently issued or outstanding, we may issue preferred shares in the future. Any preferred shares issued in the future may rank senior to the Ordinary Shares with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of the Company, or both, and any such preferred shares may have class or series voting rights. The future issuance of preferred shares could materially and adversely affect the rights of the holders of our Ordinary Shares and dilute the ordinary shareholders’ holdings.
In addition, the Board of Directors may, in the future, adopt anti-takeover measures (albeit the Board of Directors may not introduce any anti-takeover measures in our Articles of Association within a Special Resolution of Shareholders). The authority of the Board of Directors to issue preferred shares and any future anti-takeover measures it may adopt may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in our control not approved by the Board of Directors. As a result, our shareholders may lose opportunities to dispose of their Ordinary Shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal, and the market price of the Ordinary Shares and the voting and other rights of our shareholders may also be affected.
| 15 |
Our shareholders may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and all of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands and conduct substantially all of our operations in China. All of our directors and officers reside outside the United States, and their assets are located outside the United States. As a result, it may be difficult or impossible for a shareholder to effect service of process or to bring an action against us or against these individuals in the Cayman Islands or in Hong Kong or China in the event that a shareholder believes that his rights have been infringed under the securities laws or otherwise. Even if a shareholder is successful in bringing an action of this kind, the laws of the Cayman Islands, Hong Kong and China may render the shareholder unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands or Hong Kong of judgments obtained in the United States, although the courts of the Cayman Islands and Hong Kong will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
Our corporate affairs are governed by our Amended and Restated Memorandum and Articles of Association, as amended and restated from time to time, and by the Companies Act (Revised) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have the standing to initiate a shareholder derivative action in U.S. federal courts.
PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest.
As a result, our shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
It may be difficult for overseas regulators to conduct investigations or collect evidence within China.
In China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. While the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the United States may not be efficient in the absence of a mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law (“Article 177”), which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation or implementation of the rules under Article 177 have yet to be promulgated, the inability of an overseas securities regulator to directly conduct investigation or evidence collection activities within China may result in difficulties faced by our shareholders in protecting their interests.
| 16 |
There may be conflicts of interest between our management and our non-management shareholders.
Conflicts of interest create the risk that our officers and directors may have an incentive to act adversely to the interests of the Company. A conflict of interest may arise between our officers’ and directors’ personal pecuniary interests and their fiduciary duty to our shareholders.
We have identified material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the future trading price of our Ordinary Shares.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, is designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. Ineffective internal control could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the future trading price of our Ordinary Shares.
We have identified material weaknesses in our internal control over financial reporting in the Company and in its subsidiaries. As defined in Regulation 12b-2 under the Exchange Act, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Specifically, we determined that we have the following material weaknesses in our internal control over financial reporting: (i) we have limited controls over information processing; (ii) we have inadequate segregation of duties; and (iii) we do not have sufficient formal written policies and procedures for accounting and financial reporting with respect to the requirements and application of both generally accepted accounting principles in the United States of America, or GAAP, and SEC guidelines.
Although we have an audit committee comprised of three independent directors, two of whom management has determined qualify as financial experts under the applicable SEC rules and our financial statements and footnotes are now reviewed by our management and our audit committee, we still do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions.
Even if we develop effective internal controls over financial reporting, such controls may become inadequate due to changes in conditions or the degree of compliance with such policies or procedures may deteriorate, which could result in the discovery of additional material weaknesses and deficiencies. In any event, the process of determining whether our existing internal control over financial reporting is compliant with Section 404 of the Sarbanes-Oxley Act (“Section 404”) and is sufficiently effective requires the investment of substantial time and resources by our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this process and whether we will need to implement remedial actions in order to establish effective controls over financial reporting. The determination of whether our internal controls are sufficient and any remedial actions required could result in our incurring additional costs that we did not anticipate, including the hiring of additional outside consultants. We may also fail to timely complete our evaluation, testing and any remediation required to comply with Section 404.
We are required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. However, for as long as we are an “emerging growth company” or for as long as we are not an accelerated filer under Rule 12b-2 under the Securities Exchange Act of 1934, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. While we could be exempt from the auditor attestation requirement for an indefinite amount of time even after we lose our status as an emerging growth company, an independent assessment of the effectiveness of our internal control over financial reporting, if obtained, could detect problems that our audit committee’s assessment might not. Such undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.
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The recent joint statement by the SEC, proposed rule changes submitted by Nasdaq, and an act passed by the U.S. Senate and the U.S. House of Representatives, all call for additional and more stringent criteria to be applied to emerging market companies. These developments could add uncertainties to our offering, business operations, Ordinary Share price and reputation.
U.S. public companies that have substantially all of their operations in China (including in Hong Kong) have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.
On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or that have substantial operations in emerging markets, including China, reiterating past SEC and PCAOB statements on matters including the difficulty associated with inspecting accounting firms and audit work papers in China, higher risks of fraud in emerging markets and the difficulty of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets generally.
On December 18, 2020, Congress enacted the HFCAA requiring foreign companies to certify that they are not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for two consecutive years, the issuer’s securities are prohibited from trading on a national exchange.
On May 21, 2021, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating in a “Restrictive Market;” (ii) prohibit Restrictive Market companies from directly listing on the Nasdaq Capital Market and only permit them to list on the Nasdaq Global Select or Nasdaq Global Market in connection with a direct listing; and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.
As a result of this scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our offering, our business and our Ordinary Share price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend ourselves. This situation would be costly and time consuming and would distract our management from developing our growth. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our Ordinary Shares.
To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for the Company may, in the future, be located in China or in Hong Kong, our Ordinary Shares could be delisted and prohibited from trading on a U.S. exchange.
The HFCAA, as amended, prohibits foreign companies from listing their securities on U.S. exchanges if the company’s auditor has been unavailable for PCAOB inspection or investigation for two consecutive years beginning in 2021. On December 16, 2021, the PCAOB issued the Determination Report, which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in (i) mainland China of the People’s Republic of China because of a position taken by one or more authorities in mainland China; and (ii) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. In addition, the Determination Report identified specific registered public accounting firms subject to these determinations.
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On August 26, 2022, the PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the PRC (the “SOP”). Pursuant to the SOP, the PCAOB has independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. The determinations as to mainland China and Hong Kong were vacated by the PCAOB as of December 15, 2022 as a result of the PCAOB’s having been able to conduct extensive and thorough inspections and investigations of mainland China and Hong Kong firms in 2022 under the SOP; however, if the PCAOB encounters any impediment, in the future, to conducting an inspection or investigation of auditors in mainland China or Hong Kong as a result of a position taken by an authority in either jurisdiction, it may issue new determinations consistent with the HFCAA.
The financial statements for the fiscal years ended March 31, 2023 and 2024 included in this Annual Report were audited by TAAD, LLC (“TAAD”), a PCAOB registered firm located at 20955 Pathfinder Road, Suite 370, Diamond Bar, California 91765. The financial statements for the fiscal year ended March 31, 2022 included in this Annual Report were audited by Centurion ZD CPA & Co, a firm headquartered in Hong Kong. In approving the selection of TAAD as our independent registered public accounting firm, the Board of Directors considered all relevant factors, including the location of TAAD.
As our new auditor is located in the United States and we no longer have work papers located in Hong Kong, such work papers should be available for inspection by the PCAOB. However, if we were to engage an auditor located in Hong Kong in the future, our work papers would be located in Hong Kong. If authorities in Hong Kong were again to take a position that would prevent the PCAOB from continuing to inspect or investigate completely registered public accounting firms headquartered in Hong Kong, and if such lack of inspection were to extend for the requisite period of time under the HFCAA, the PCAOB may issue new determinations based on its inability to inspect or investigate completely registered public accounting firms headquartered in Hong because of a position taken by an authority in those jurisdictions. In such event, and if our auditor at that time is located in Hong Kong, our Ordinary Shares could be delisted and prohibited from trading on a U.S. exchange. In general, investors would be deprived of the benefits of the PCAOB’s oversight of auditors through such inspections, and they may lose confidence in reported financial information and procedures and the quality of our financial statements. Also, we cannot assure you that U.S. regulatory authorities will not apply additional or more stringent criteria to us. Such uncertainty could cause the market price of our Ordinary Shares to be materially and adversely affected.
The war in Ukraine could materially and adversely affect our business and results of operations.
The outbreak of war in Ukraine has affected global economic markets, including a dramatic increase in the price of oil and gas, and the uncertain resolution of this conflict could result in protracted and/or severe damage to the global economy. Russia’s military interventions in Ukraine have led to, and may lead to, additional sanctions being levied by the United States, the European Union and other countries against Russia. Russia’s military incursion and the resulting sanctions could adversely affect global energy and financial markets and thus could affect our customers’ businesses and our business, even though we do not have any direct exposure to Russia or the adjoining geographic regions. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks described herein. We cannot predict the progress or outcome of the situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond our control. Prolonged unrest, intensified military activities or more extensive sanctions impacting the region could have a material adverse effect on the global economy, and such effect could in turn have a material adverse effect on our business, financial condition, results of operations and prospects.
We are exposed to risks in respect of acts of war, terrorist attacks, epidemics, political unrest, adverse weather conditions and other uncontrollable events.
Unforeseeable circumstances and other factors such as power outages, labor disputes, adverse weather conditions or other catastrophes, epidemics or outbreaks of communicable diseases such as COVID-19, Severe Acute Respiratory Syndrome, Middle East Respiratory Syndrome, Ebola or other contagious diseases may disrupt our operations and cause loss and damage to our production facilities, and acts of war, terrorist attacks or other acts of violence may further materially and adversely affect the global financial markets and consumer confidence. Any of such incidents may have a widespread effect on our business operations, which could in turn adversely and materially affect our business, results of operations and financial condition.
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Our revenue is susceptible to changes in the economic conditions and regulatory environment, social and/or political conditions and civil disturbance or disobedience. We cannot assure that there will be no political or social unrest in the near future or that there will not be other events that could lead to widespread protests or the disruption of the economic, political and social conditions in the PRC. If such events persist for a prolonged period of time or the economic, political and social conditions in the PRC are disrupted, our overall business and results of operations may be adversely affected.
Our business may also be affected by macroeconomic factors in the countries where our customers are located, such as general economic conditions, market sentiment and regulatory, fiscal and other governmental policies, all of which are beyond our control. Any such events may cause damage or disruption to our business, markets, customers and suppliers, any of which may materially and adversely affect our business, financial condition, results of operations and prospects.
Risks Related to the Business of Bao Feng
Bao Feng’s business depends on the market recognition of its brand. If we are not able to maintain our reputation and enhance our brand recognition, our business and operating results may be materially and adversely affected.
The quality and acceptance of our products will determine whether our brand becomes recognized as a leading brand in the industry. We believe that market recognition of our brand is a key factor to ensuring our future success. As we continue to grow in size and broaden the scope of our product offerings, however, it may become increasingly difficult to maintain the quality and consistency of the products we offer, which may negatively impact our brand and the popularity of our products offered thereunder.
Our brand value will also be affected by customer perceptions. Those perceptions are affected by a number of factors, some of which are based on first-hand observation of our product quality and effectiveness, while others may be based on indirect information from media or other sources. Incidents and any negative publicity related thereto, even if factually incorrect, may lead to significant deterioration of our brand image and reputation and consequently negatively affect customers’ interest in our products, as well as top-notch sales and marketing personnel’s interest in being associated with our brand. Particularly in the age of digital media and social network, impacts of negative publicity associated with any single incident could be easily amplified and potentially cause impacts that go beyond our estimation or control.
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In addition, scientific studies on health products are constantly evolving and new or innovative conclusions on effectiveness may affect customers’ perception of our products. If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our products, it may be difficult to maintain and grow our customer base and distribution channels, and our business and growth prospects may be materially and adversely affected.
We may face increasing competition in our industry and may not be able to successfully compete with our competitors.
Our business is in an industry that we expect to become increasingly competitive, and many of our competitors, both local and international, may have substantially greater technical, financial and marketing resources than we have. As a result, we may be unable to compete successfully with these competitors. As competition increases, we may also face pressures on pricing, which could result in lower margins. Lower margins may affect our ability to cover our costs, which could have a material negative impact on our operations and our business.
We may not be successful in introducing new products or enhancing our existing products.
We currently offer three lines of health supplement products. We intend to continue developing new products, as well as further enhancing our existing products. This process is subject to risks and uncertainties, such as unexpected technical, regulatory, operational, logistical or other problems that could delay the process temporarily or permanently. Moreover, we cannot assure you that any of these new products or enhancements of existing products will fulfill customer needs, match the quality or popularity of those developed by our competitors, achieve widespread market acceptance or generate incremental revenues.
In addition, introducing new products or enhancing existing products requires us to make various investments in research and development, incur personnel expenses and potentially reallocate other resources. If we are unable to develop new products or cannot do so in a cost-effective manner or are otherwise unable to effectively manage the quality of those products, our financial condition and results of operations could be adversely affected.
Our business is affected by global, national and local economic conditions, as the products we sell are discretionary.
We depend upon factors relating to discretionary consumer spending in China. These factors include economic conditions, consumers, employment rates, the amounts of consumers' disposable income, business conditions, interest rates, consumer debt, availability of credit and applicable taxation in regional and local markets where we sell our products. There can be no assurance that consumer spending for our products will not be adversely affected by changes in economic conditions.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our products and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past, the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in the PRC, which may adversely affect our business and operating results.
Our ability to establish effective marketing and advertising campaigns is the key to our success.
Our advertisements promote our products and the pricing of such products. If we are unable to increase awareness of our brands and our products, we may not be able to attract new customers. Our marketing activities may not be successful in promoting or pricing our products or retaining and enlarging our customer base. We cannot assure you that our marketing programs will be adequate to support our future growth, which may lead to material adverse effects on our results of operations.
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Consumer preferences in the health care industry change rapidly and are difficult to predict.
The success of our business depends on our ability to accurately anticipate and respond to future changes in consumer demand, maintain the correct inventory, deliver the appropriate products at the right prices and produce our products at minimum costs. We must optimize our product selection and inventory based on consumer preferences and sales trends. If we fail to anticipate, identify or react appropriately to changes in consumer demand, we could experience excess inventories, higher than normal markdowns or be unable to sell the products, which would reduce our revenue, financial position and results of operations.
While we must maintain sufficient inventory to operate our business successfully and meet our customers' demands, we must be careful not to overstock.
Changing consumer demands and uncertainty surrounding new product launches expose us to increasing inventory risks. Demand for products can change rapidly and unexpectedly, affecting product availability and back-order time. We carry seven different products for which we must maintain sufficient inventory amounts. In the event that consumer demand for one or more of our products decreases, we may be unable to sell our inventory of those products. Our inventory holding costs will increase if we maintain excess inventory. Conversely, if we do not have sufficient inventory to fulfill customer orders, we may lose orders or customers, which may adversely affect our business, financial condition and results of operations. We cannot assure you that we can accurately predict consumer demand and events and avoid over-stocking or under-stocking products.
We primarily depend on a few products for our revenue.
We currently rely on three lines of products for our revenue. We do not currently have any other products on which we could rely to support our operations if we were to experience any difficulty with the manufacture, marketing, sale or distribution of these product lines. If we were to become unable to sustain or increase the price or sales levels for these product lines, our business could be harmed.
If we expand our product offerings, or if we experience increased capital requirements for any reason, we may need to raise additional capital.
We primarily depend on our Neuro Enhancer product line for more than 65% of our revenue. We may decide to expand our product portfolio, which would entail increased research and development expenses. If cash generated from operations is insufficient to satisfy our requirements in this regard and if our proposed public offering fails to close or to provide sufficient net proceeds, we may need to raise additional capital. If we are unable to raise the additional required capital in a timely manner or on acceptable terms, we could be forced to reduce our growth plans. There can be no assurance that additional capital will be available to us or that it will be available on acceptable terms.
We depend on our largest customers for a significant portion of our sales revenue, and we cannot be certain that sales to these customers will continue.
During the fiscal years ended March 31, 2024, 2023 and 2022, three customers accounted for approximately 59.4%, 28.1% and 28.0% of Bao Feng’s sales, respectively. We do not enter into long-term contracts with our customers but manufacture based upon purchase orders and therefore cannot be certain that sales to these customers will continue. If sales to these customers do not continue, then our sales revenue will decline and our business will be negatively impacted. Unless we were able to replace them with other customers, the loss of any of our three largest customers would have a material negative impact on our sales revenue and our business. There can be no assurance that we would be able to compensate for the loss of any of these major customers.
Product liability claims could adversely affect our business.
As a manufacturer of products that are ingested, we could face product liability claims if, among other things, our products are alleged to result in injury to a consumer. If we are found liable for product liability claims, we could be required to pay substantial monetary damages. Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business.
In addition, any product liability claims or adverse side effects, even if caused by improper use of our product, may result in adverse publicity regarding us and our products, which would harm our reputation.
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If we fail to protect our intellectual property, then our ability to compete could be negatively affected, which would harm our financial condition and operating results.
The market for our products depends to a significant extent upon the goodwill associated with our trademarks and trade names. We own the material trademark and trade name rights used in connection with the packaging, marketing and distribution of our products in the markets where those products are sold. Therefore, trademark and trade name protections are important to our business. The loss or infringement of our trademarks or trade names could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating results.
We also face the risk that unauthorized parties may attempt to copy or otherwise obtain or use our copyrights, product formulations or other intellectual property. Most of our patents are registered in China. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. Further, we may have limited legal recourse in the event that we encounter significant difficulties with intellectual property theft or infringement. As a result, we cannot assure you that we will be able to adequately protect our product formulations or other intellectual property.
Our manufacturing activity is subject to certain risks.
We manufacture all of our products through contractual arrangements with various manufacturers. As a result, we are dependent upon the uninterrupted and efficient operation of their manufacturing facilities, over which we have no control. In addition, our Acer truncatum trees are grown on several tree farms in Inner Mongolia, in China. The facilities manufacturing our products and the tree farms at which our Acer truncatum trees are grown are subject to the risk of catastrophic loss due to, among other things, earthquake, fire, flood or other natural or man-made disasters, and the manufacturing facilities are also subject to the risk of significant equipment failures. If any of these facilities were to experience a catastrophic loss, it would be expected to disrupt their operations and could have a material adverse effect on our results of operations and financial condition.
Cyber security risks and the failure to maintain the integrity of data belonging to our Company, employees and customers could expose us to data loss, litigation and liability, and our reputation could be significantly harmed.
The integrity and protection of data relating to our business, our employees and our distributors and other customers is critical to our business. We are subject to significant security and privacy regulations, as well as requirements imposed by the credit card industry. Maintaining compliance with these evolving regulations and requirements could be difficult and may increase our expenses. In addition, a penetrated or compromised data system or the intentional, inadvertent or negligent release or disclosure of data could result in theft, loss or fraudulent or unlawful use of data relating to our Company or our employees, our independent distributors or our other customers, which could harm our reputation, disrupt our operations or result in remedial and other costs, fines or lawsuits.
Our Board of Directors has adopted a cybersecurity policy, which is discussed in Item 16K of this Annual Report.
Difficulties in registering our products for sale in Mainland China could have a material adverse effect on our results of operations and financial condition.
Although Bao Feng has obtained all required approval documents for its current products, which are considered dietary supplements (referred to as new food raw materials products in China), if it expands into the medical market, it will need to apply for medical qualifications. This process may involve an extended period of time and significant man-hours and may delay us from offering new medical products for sale or prevent us from launching new product initiatives.
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For example, products marketed in China as “health foods” or for which certain claims are used are subject to “blue cap” or “blue hat” registrations, which involve extensive laboratory and clinical analysis by governmental authorities. This registration process can take anywhere from 18 months to 3 years, but may be substantially longer. We currently market dietary supplements. However, if government officials should determine that our products should be categorized as health foods, this could end or limit our ability to market such products in China and have a material adverse effect on our results of operations and financial condition.
Our business is subject to risks arising from epidemic diseases, such as the outbreak of COVID-19 in 2020.
In December 2019, a novel strain of COVID-19 was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. The Chinese government, as well as other governments worldwide, employed various measures to reduce the spread of COVID-19, including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures.
Our business has been and may continue to be adversely impacted by the COVID-19 epidemic. Both Bao Feng and BF Internet are located in China, as are all of their employees and Bao Feng’s suppliers, product manufacturers and distributors. Although Bao Feng’s online sales were not significantly affected by the epidemic, its total sales for the three months ended March 31, 2020 decreased by approximately 60.7% as compared to the three months ended March 31, 2019. Bao Feng’s production capacity had been significantly reduced due to the government lockdown, and orders were filled through existing inventory. In addition, Bao Feng’s planned business expansion had been delayed due to travel restrictions and other factors which prevented the Company from working towards expanding its distribution network.
Although Bao Feng resumed operations in September 2020, there is still uncertainty about the duration, severity and long-term impact of the COVID-19 pandemic, both in China and globally, and the extent of the long-term disruption to business and the economy remains unknown. A number of COVID variants have emerged since the original strain, the most recent of which exhibit increased contagion and antibody resistance, and, although the World Health Organization has officially declared the pandemic under control, a resurgence of the disease could negatively affect our production capacity or the collection of customer payments or result in disruption of our supply chain. The future impact of COVID-19 and its variants is still highly uncertain and cannot be predicted as of the date of this Annual Report. We are uncertain as to when any new outbreaks of COVID-19 may occur and how long it may take for them to be contained, and we cannot predict if the impact of any such outbreaks or associated containment measures will be short-lived or long-lasting. If future outbreaks of COVID-19 are not effectively controlled within a short period of time, our business, financial condition, results of operations and prospects may be materially and adversely affected.
We may also experience negative effects from other future public health crises beyond our control. These events are impossible to forecast, their negative effects may be difficult to mitigate and they could adversely affect our business, financial condition and results of operations.
Risks Related to the People’s Republic of China
Because our operations are in China and our principal executive offices are in Hong Kong, our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight and discretion over the conduct of our business, including our business in Hong Kong, and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our Ordinary Shares.
As a business operating in China, we are subject to the laws and regulations of the PRC. The PRC government has the power to exercise significant oversight and discretion over the conduct of our Operating Subsidiaries’ businesses. The application, interpretation and enforcement of new and existing laws and regulations in the PRC are often uncertain and may require a certain period of time to continuously evolve. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies or authorities and inconsistently with our current policies and practices. Compliance with new laws, regulations and other government directives in the PRC may also be costly, and such compliance or any associated inquiries or investigations or any other government actions may: (i) delay or impede our development; (ii) result in negative publicity or increase our operating costs; (iii) require significant time and attention of management; and (iv) subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations.
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The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which we conduct our Operating Subsidiaries’ businesses, could require us to change certain aspects of their businesses to ensure compliance, which could decrease demand for Bao Feng’s products, reduce revenues, increase costs, require our Operating Subsidiaries to obtain more licenses, permits, approvals or certificates or subject us to additional liabilities. To the extent that any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected, which could materially decrease the value of our Ordinary Shares.
Any changes to Hong Kong's legal, financial and monetary system resulting from actions by China could negatively impact Hong Kong’s economic and political prospects and adversely affect the Company. Hong Kong's evolving relationship with the central government in Beijing has been a source of political unrest and may result in economic disruption. To the extent that any stringent measures imposed by China on Hong Kong could affect our business, our financial condition and results of operations could be adversely affected. Recent developments with respect to the relationship between China and Hong Kong may result in the legal and operational risks of doing business in China also to apply to Hong Kong.
If the Chinese government were to impose new requirements for approval from the PRC authorities to issue the Company’s Ordinary Shares to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause such securities to significantly decline in value or become worthless.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or “the Opinions,” which were made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the need to strengthen the supervision over overseas listings by Chinese companies.
Based on the advice of PRC counsel, Shanghai Skytoland Law Firm, and our understanding of currently applicable PRC laws and regulations. the Company and its PRC subsidiaries: (i) are not currently required to obtain permissions from any PRC authorities to operate; (ii) are not subject to permission requirements from the China Securities Regulatory Commission (the “CSRC”). The Cyberspace Administration of China (the “CAC”) or any other entity that is required to approve their operations; and (iii) have not been denied any permissions by any PRC authorities. In addition, Zhong Yuan-HK, our Hong Kong subsidiary that owns 100% of the outstanding shares of Zhong Yuan-Shenzhen, is afforded the legal protections of national treatment under the Foreign Investment Law of the People’s Republic of China.
If we have erroneously concluded that any permission requirements do not apply to us, or if applicable laws, regulations or interpretations change, and it is determined in the future that the permission requirements become applicable to us, we may be subject to review, may face challenges in addressing these requirements and may incur substantial costs in complying with these requirements, which could result in material adverse changes in our business operations and financial position. In addition, if we are not able to fully comply with such permission requirements or if any new or existing permission requirements are determined to be applicable to us, our ability to offer or to continue to offer securities to investors may be significantly limited or completely hindered, and our securities may significantly decline in value or become worthless.
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We may not obtain permission from the CSRC under the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies to conduct our proposed public offering and to list our Ordinary Shares on Nasdaq.
On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which came into effect on March 31, 2023. On February 17, 2023, the CSRC also issued the Notice on the Administrative Arrangements for the Filing of the Overseas Securities Offering and Listing by Domestic Companies (the “CSRC Notice”). Pursuant to the Trial Measures and the CSRC Notice, among other things, (i) a domestic company that seeks to offer or list securities overseas, both directly and indirectly, must complete certain filing procedures with the CSRC within three working days following its submission of an initial public offering or listing application; and (ii) domestic companies which have already, directly or indirectly, offered and listed securities in overseas markets prior to the effectiveness of the Trial Measures are required to fulfill their filing obligations and report relevant information to the CSRC within three working days after conducting a follow-on offering of equity securities on the same overseas market. If the issuer meets both of the following criteria, the overseas offering and listing conducted by such issuer shall be deemed an indirect overseas offering and listing by a PRC domestic company: (i) 50% or more of any of the issuer’s operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most recent fiscal year were derived from PRC domestic companies; and (ii) the majority of the issuer’s business activities are carried out in mainland China, or its main place(s) of business are located in mainland China, or the majority of its senior management team in charge of its business operations and management are PRC citizens or have their usual place(s) of residence located in mainland China. Where a PRC domestic company is seeking an indirect overseas offering and listing in an overseas market, the issuer shall designate a major domestic operating entity responsible for all filing procedures with the CSRC. If a domestic company fails to complete the required filing procedures or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties, such as an order to rectify, warnings and fines, and its controlling shareholders, actual controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines.
On May 7, 2024, the CSRC issued the Guidelines of Regulatory Rules Application -- Overseas Offering and Listing No. 7 (“Guideline No. 7”), which indicates that domestic companies that submitted an application to transfer from an overseas over-the-counter market to list on an overseas exchange prior to the effective date of the Trial Measures (March 31, 2023), but that have not yet received approval from the overseas regulator or stock exchange, shall file with the CSRC before their offering and listing procedures are completed. We filed a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) for a public offering of our Ordinary Shares and filed an application for listing our Ordinary Shares on the Nasdaq Stock Market (“Nasdaq”) prior to the effective date of the Trial Measures, but had not received approval from the SEC or from Nasdaq as of that date. Accordingly, we are required to file with the CSRC before our proposed public offering and listing on Nasdaq are completed.
We filed with the CSRC pursuant to the Trial Measures on June 4, 2024 and, as of the date of this Annual Report, have neither received nor been denied permission to conduct our proposed public offering and to list our Ordinary Shares on a U.S. stock exchange. Therefore, such permission may be denied. We cannot predict whether such permission can be obtained by us or, if permission is obtained, whether it could later be denied or rescinded.
The Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies and other relevant rules promulgated by the CSRC may subject us to additional compliance requirements in the future.
On February 24, 2023, the CSRC and other PRC governmental authorities jointly revised the Provisions on Strengthening Confidentiality and Archives Administration for Overseas Securities Offering and Listing, which were issued in 2009 (the “Provisions”). The revised Provisions were issued under the title the “Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies,” and came into effect on March 31, 2023. One of the major revisions in the revised Provisions is the expansion of their application to cover indirect overseas offerings and listings, as is consistent with the Trial Measures.
The revised Provisions require that, among other things, (i) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals or entities, including securities companies, securities service providers and overseas regulators, any documents and materials that contain state secrets or working secrets of government agencies shall first obtain approval from competent authorities according to law and file with the secrecy administrative department at the same level; and (ii) a domestic company that plans to, either directly or indirectly through its overseas listed entity, publicly disclose or provide to relevant individuals and entities, including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. On or after March 31, 2023, any failure or perceived failure by the Company and its subsidiaries to comply with the above confidentiality and archives administration requirements under the revised Provisions and other PRC laws and regulations may result in the relevant entities being held legally liable by competent authorities and referred to the judicial branch to be investigated for criminal liability if suspected of committing a crime.
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As of the date of this Annual Report, we have not received any formal inquiry, notice, warning, sanction or any regulatory objection from the CSRC with respect to our proposed public offering. However, the Trial Measures and the revised Provisions may subject us to additional compliance requirements in the future, and we cannot assure you that we will be able to comply with all the new regulatory requirements of the Trial Measures, the revised Provisions or any future implementing rules on a timely basis, or at all. Any failure by us to fully comply with the new regulatory requirements, including but not limited to the failure to complete the filing procedures with the CSRC, may significantly limit or completely hinder our ability to offer or continue to offer our Ordinary Shares, cause significant disruption to our business operations and severely damage our reputation, which would materially and adversely affect our financial condition and results of operations and cause our Ordinary Shares to significantly decline in value or become worthless.
Furthermore, the PRC government authorities may further strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Any such action may adversely affect our operations and significantly limit or completely hinder our ability to offer or continue to offer securities to you and cause the value of such securities to significantly decline or be worthless.
Changes in international trade policies, tariffs and rising political tensions, particularly between the U.S. and China, may adversely impact our business and operating results.
In recent years, international market conditions and the international regulatory environment have been increasingly affected by competition among countries and geopolitical frictions. In particular, the U.S. administration has advocated for and taken steps toward restricting trade in certain goods, particularly from China. China and the United States have implemented certain increasingly protective trade measures with continuing trade tensions, including significant tariff increases, between these countries. Although the United States and China successfully reached an interim trade deal in January 2020 that de-escalated the trade tensions with both sides rolling back tariffs, the extent to which the trade deal will continue to be implemented is unpredictable.
The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively affecting China’s overall economic condition, which could have a negative impact on us by negatively impacting our potential customers’ discretionary income. Furthermore, the imposition of tariffs could have a negative impact on our supply chain and on foreign demand for our products and, thus, could have a material adverse impact on our business and results of operations.
If the Chinese government chooses to exert greater oversight and control over offerings that are conducted overseas and/or foreign investment in China based issuers, such action could significantly limit or completely hinder our ability to offer or continue to offer securities to overseas investors and cause such securities to significantly decline in value or to be worthless.
Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers. Effective February 15, 2022, the PRC adopted rules that would require companies collecting or holding large amounts of data to undergo a cybersecurity review prior to listing in foreign countries, a move that significantly tightens oversight over China based Internet giants. Pursuant to Article 7 of the Revised Measures on Cyberspace Security (2021 Version), companies holding data on more than 1 million users must now apply for cybersecurity approval when seeking listings in other nations due to the risk that such data and personal information could be “affected, controlled, and maliciously exploited by foreign governments.”
We are in the business of nervonic acid research, the development of nervonic acid based herbal and chemical drugs, developing and marketing nervonic acid-based dietary supplements (referred to as new food raw materials products in China), which does not involve the collection of user data, implicate cybersecurity or involve any other type of restricted industry. Based on the advice of PRC counsel, Shanghai Skytoland Law Firm, and our understanding of currently applicable PRC laws and regulations, our Ordinary Shares are not subject to the review or prior approval of the CAC or the CRSC as a result of Article 7 of the Measures on Cyberspace Security. Uncertainties still exist, however, due to the possibility that laws, regulations or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly limit or completely hinder our ability to offer or continue to offer securities to overseas investors and could cause such securities to significantly decline in value or to be worthless.
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The market price for our Ordinary Shares could be adversely affected by increased tensions between the United States and China.
Recently, there have been heightened tensions in the economic and political relations between the United States and China. On June 30, 2020, the Standing Committee of the PRC National People's Congress issued the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (HKSAR). This law defines the duties and government bodies of the HKSAR for safeguarding national security and four categories of offences-secession, subversion, terrorist activities and collusion with a foreign country or external elements to endanger national security-and their corresponding penalties. On July 14, 2020, then-U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong's autonomy. On August 7, 2020 the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including HKSAR chief executive Carrie Lam. The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions such as those provided in the HKAA is in practice discretionary and highly political, especially in a relationship as extensive and complex as that between the United States and China. It is difficult to predict the full impact of the HKAA on Hong Kong and companies like the Company. Furthermore, legislative or administrative actions in respect of Sino-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our Ordinary Shares could be adversely affected.
The Chinese government may exert substantial influence over the manner in which we conduct our Operating Subsidiaries’ business operations in China.
Our ability to conduct our Operating Subsidiaries’ operations in China may be harmed by changes in its laws and regulations, including those relating to regulation of the health product industry, taxation, import and export tariffs, environmental regulations, land use rights, property ownership and other matters. We believe that our Operating Subsidiaries’ operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which our Operating Subsidiaries operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future could have a significant effect on us and our business.
China’s economic growth rate and policies could affect our Operating Subsidiaries’ businesses.
Substantially all of our assets are located in China, and all of our revenue is currently derived from our Operating Subsidiaries’ operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
While China’s economy has experienced significant growth over the past decades, growth has been irregular, both geographically and among various sectors of the economy, and, other than for a large spike in 2021, the rate of growth has been slowing since 2012. Further, China’s economy grew by only 3.0% in 2022 compared with 8.4% growth seen in 2021 and 2.2% in 2020. (Source: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD. ZG?end=2022&locations=CN&start=2020) Sluggish income growth, lingering uncertainty about the recovery in the labor market, and high household precautionary saving could hold back consumer spending. Although the property sector is showing signs of stabilization, excessive leverage among developers remains largely unaddressed, and persistent weakness in the real estate sector threatens China’s anticipated 5.6% annual economic growth target for 2023.
(Source:https://www.worldbank.org/en/news/press-release/2023/06/14/priority-reforms-key-for-sustaining-growth-and-achieving-china-s-long-term-goals-world-bank-report#:~:text=China%20Economic%20Update%20%
2D%20June%202023&text=China's%20GDP%20growth%20is%20projected,weak%20global%20growth%20impacting%20exports.)
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A slowdown in economic growth in China could adversely affect our business and operating results, lead to a reduction in demand for our products and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China but may also have a negative effect on us. For example, our operating results and financial condition may be adversely affected by government control over capital investments or changes in tax regulations.
The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years, the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Many of the economies in Asia, including China, are experiencing substantial inflationary pressures, which may prompt governments to take action to control the growth of the economy and inflation that could lead to a significant decrease in our profitability.
While many of the economies in Asia, including China, have experienced rapid growth over the last two decades, they currently are experiencing inflationary pressures. Inflationary pressures may result in government intervention in the economy, including policies that may adversely affect the overall performance of the respective countries’ economy, which could, in turn, adversely affect our operations and the price of our Ordinary Shares. As governments take steps to address the current inflationary pressures, there may be significant changes in the availability of bank credit, interest rates, limitations on loans and restrictions on currency conversion and foreign investment. There also may be imposition of price controls. If prices for products from our suppliers and/or own products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on our profitability because of a decrease in revenue. In addition, if these or other similar restrictions are imposed by a government to influence the economy, it may lead to a slowing of economic growth.
Inflation, measures to contain inflation and speculation about potential measures can also contribute to significant uncertainty in relation to the economy and weaken investor confidence, which could affect our ability to access finance, including access to equity of international capital markets. Future measures by the governments, including increases in interest rates, intervention in the foreign exchange market and actions to adjust or fix the value of monetary denominations may trigger further increases in inflation, adversely affecting the overall performance of the respective economies. Inflation can also increase our costs and expenses, and we may not be able to transfer such costs to our customers, which would reduce our profits and net profit margins.
Fluctuation of the RMB may affect our financial condition by affecting the volume of cross-border money flow.
The value of the RMB fluctuates and is subject to changes in the PRC’s political and economic conditions. Since July 2005, the conversion of RMB into foreign currencies, including USD, has been based on rates set by the People’s Bank of China, which are set based on the interbank foreign exchange market rates and the current exchange rates of a basket of currencies on the world financial markets.
We may face obstacles from the communist system in the PRC.
Foreign companies conducting operations in the PRC face significant political, economic and legal risks. The communist regime in the PRC may hinder Western investment in the Company.
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We may have difficulty establishing adequate management, legal and financial controls in the PRC.
The PRC historically has been deficient in Western-style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.
The PRC legal system embodies uncertainties, which could limit the legal protections available to us.
The PRC legal system is a civil law system based on written statutes. Unlike common law systems, decided legal cases have little precedence. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past several decades has significantly enhanced the protections afforded to various forms of foreign investment in China. Our PRC Operating Subsidiaries are subject to PRC laws and regulations. However, these laws and regulations are continuously evolving and their interpretation and enforcement involve uncertainties. For instance, we may have to resort to administrative and court proceedings to enforce the legal protection to which we are entitled by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting statutory and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of law enforcement that we would receive in more developed legal systems. Furthermore, the PRC legal system is based partly on government policies and internal rules (some of which are not published in a timely manner or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to our business, including the promulgation of new laws. This may include changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Our failure in making contributions to various employee benefit plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
We rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are a Cayman Islands holding company, and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including for servicing any debt we may incur. Our PRC subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of their registered capital. Our PRC subsidiaries, as foreign invested enterprises, (“FIEs”), are also required to further set aside a portion of their after-tax profit to fund an employee welfare fund, although the amount to be set aside, if any, is determined at their discretion. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund and conduct our business.
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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds we receive from offshore financing activities to make loans to or make additional capital contributions to our two PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand business.
Any transfer of funds by us to our two PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches or filed with SAFE in its information system; and (ii) our PRC subsidiaries may not procure loans which exceed the difference between their total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the People’s Bank of China Notice No. 9 (“PBOC Notice No. 9”). Any medium- or long-term loan to be provided by us to our PRC-based subsidiaries must be registered with the National Development and Reform Commission and SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds we receive from our offshore financing activities and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiaries, and we are allowed to make capital contributions to our PRC subsidiaries by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiaries complete the relevant filing and registration procedures.
With respect to loans to our PRC subsidiaries by us, (i) if the PRC subsidiaries adopt the traditional foreign exchange administration mechanism, or the Current Foreign Debt Mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiaries; and (ii) if the PRC subsidiaries adopt the foreign exchange administration mechanism as provided in Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or the PBOC Notice No. 9, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in PBOC Notice No. 9, shall not exceed 200% of the net asset of the PRC subsidiaries. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Notice No. 9. As of the date of this Annual Report, neither the PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by the PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiaries have the flexibility to choose between the Current Foreign Debt Mechanism and the Notice No. 9 Foreign Debt Mechanism. However, if a more stringent foreign debt mechanism becomes mandatory, our ability to provide loans to our two PRC subsidiaries may be significantly limited, which may adversely affect our business, financial condition, and results of operations.
The Circular on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-Invested Enterprises, or SAFE Circular 19, effective as of June 1, 2015, as amended by Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, effective on June 9, 2016, allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under our business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from our offshore financing activities within the business scopes of our PRC subsidiaries. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds from our offshore financing activities to fund the establishment of new entities in China by our PRC subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new consolidated subsidiary in China, which may adversely affect our business, financial condition, and results of operations.
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Changes to PRC tax laws may subject us to greater taxes.
We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various administrative regions and countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by taxing authorities and to possible changes in law, which may have retroactive effect. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes.
Risks Related to Doing Business in Hong Kong
Hong Kong’s political and legal systems are evolving and have inherent uncertainties including Hong Kong’s relationship with mainland China.
We conduct our operations in China and our principal executive offices are located in Hong Kong. The Hong Kong political and legal systems embody uncertainties, including the relationship between Hong Kong and mainland China, which could limit the legal protections available to you and us.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China had to accept some conditions such as Hong Kong’s Basic Law. The Basic Law ensured Hong Kong would retain its own currency (the Hong Kong Dollar), legal system, parliamentary system and people’s rights and freedom for fifty years from 1997. This agreement gave Hong Kong a high degree of autonomy. The Special Administrative Region of Hong Kong is responsible for its own domestic affairs including, but not limited to, the judiciary and courts of last resort, immigration and customs, public finance, currencies and extradition. Hong Kong continues using the English common law system.
Some international observers and human rights organizations have expressed doubts about the future of the relative political freedoms enjoyed in Hong Kong and the PRC’s earlier pledge to allow a high degree of autonomy in Hong Kong. They considered, for example, that the proposals in Article 23 of the Basic Law in 2003 (which was withdrawn due to mass opposition) might have undermined autonomy. On June 10, 2014, Beijing released a new report asserting its authority over the territory. This ignited criticism from many people in Hong Kong who said that the Communist leadership was reneging on its pledges to abide by the “one country, two systems” policy that allows for a democratic, autonomous Hong Kong under Beijing’s rule. On October 26, 2022, President Xi Jinping said in a speech at the opening of the one-in-five-year Communist Party congress in Beijing that “China has achieved comprehensive control over Hong Kong turning it from chaos to governance.”
Recent developments with respect to the relationship between China and Hong Kong may result in the legal and operational risks of doing business in China also applying to Hong Kong. If the PRC were to, in fact, renege on its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of contractual rights, property rights and human rights. This could, in turn, materially and adversely affect our business and operations. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements with our customers and conduct our business.
China’s legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which prior court decisions have limited value as precedents. Since 1979, the PRC government has promulgated laws and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, China has not developed a fully integrated legal system. As a result, recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new and the limited volume of published cases and their non-binding nature, interpretation and enforcement of these newer laws and regulations involve greater uncertainties than those in jurisdictions available to you. In addition, China’s legal system is based in part on government policies and administrative rules and many have retroactive effects. As a result, we cannot predict the effect of future developments in China’s legal system, including the promulgation of new laws, changes to existing laws, or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws, nor their implications or effect on Hong Kong.
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Risks Related to the Company’s Ordinary Shares
There is currently only a limited trading market for our Ordinary Shares.
There currently is only a limited trading market for our Ordinary Shares. Our unregistered outstanding Ordinary Shares cannot be offered, sold, pledged or otherwise transferred unless subsequently registered pursuant to, or exempt from registration under, the Securities Act and any other applicable federal or state securities laws or regulations in the United States. These restrictions will limit the ability of certain of our shareholders to liquidate their investment.
Our Ordinary Shares are currently quoted on the OTCQB and we have applied for our Ordinary Shares to be listed on Nasdaq concurrently with our proposed public offering. However, there can be no assurance that a regular public market for our Ordinary Shares will ever develop. If a regular trading market for our securities does not develop, you will likely not be able to sell your Ordinary Shares, and we cannot predict the extent, if any, to which investor interest will lead to the development of a viable trading market in our Ordinary Shares. With a limited trading market, there is a risk that the absence of potential buyers will prevent you from selling your Ordinary Shares.
Certain recent initial public offerings of companies with public floats comparable to ours have experienced extreme volatility that was seemingly unrelated to the underlying performance of the company. We may experience similar volatility, which may make it difficult for prospective investors to assess the value of our Ordinary Shares.
In addition to the risks addressed below in “-It is likely that there will be significant volatility in the trading price of our Ordinary Shares,” our Ordinary Shares may be subject to extreme volatility that is seemingly unrelated to the underlying performance of our business. Recently, companies with comparable public floats and initial public offering sizes have experienced instances of extreme stock price run-ups followed by rapid price declines where such stock price volatility was seemingly unrelated to the company’s underlying performance. Although the specific cause of such volatility is unclear, our public float may amplify the impact that the actions of a few shareholders have on the price of our Ordinary Shares, which may cause our share price to deviate, potentially significantly, from a price that better reflects the underlying performance of our business. Should our Ordinary Shares experience run-ups and declines that are seemingly unrelated to our actual or expected operating performance and financial condition or prospects, our shareholders and their prospective purchasers may have difficulty assessing the rapidly changing value of our Ordinary Shares. In addition, investors in our Ordinary Shares may experience losses, which may be material, if the price of our Ordinary Shares declines or if such investors purchase our Ordinary Shares prior to any price decline.
Holders of our Ordinary Shares may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our Ordinary Shares. As a result of this volatility, investors may experience losses on their investment in our Ordinary Shares. Furthermore, the potential extreme volatility may confuse the public investors regarding the value of our stock, distort the market perception of our stock price and our Company’s financial performance and public image and negatively affect the long-term liquidity of our Ordinary Shares, regardless of our actual or expected operating performance. If we encounter such volatility, including any rapid stock price increases and declines seemingly unrelated to our actual or expected operating performance and financial condition or prospects, it will likely make it difficult and confusing for prospective investors to assess the rapidly changing value of our Ordinary Shares and understand the value thereof.
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Nasdaq may apply additional and more stringent criteria for our continued listing on the Nasdaq Capital Markets.
We have applied for the listing of our Ordinary Shares on the Nasdaq Capital Market. Nasdaq Listing Rule 5101 provides Nasdaq with broad discretionary authority over initial and continued listings of securities on Nasdaq and Nasdaq may use such discretion to deny initial listings, apply additional or more stringent criteria for initial or continued listings of particular securities or suspend or delist particular securities based on any event, condition or circumstance that exists or occurs that makes initial or continued listing of the securities on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for initial or continued listing on Nasdaq. In addition, Nasdaq has used its discretion to deny initial or continued listings or to apply additional and more stringent criteria in instances including but not limited to (i) where a company engaged an auditor that has not been subject to an inspection by the PCAOB, an auditor that PCAOB cannot inspect or an auditor that has not demonstrated sufficient resources, geographic reach or experience to adequately perform the company’s audit; (ii) where a company planned a small public offering, which would result in insiders holding a large portion of the company’s listed securities and Nasdaq was concerned that the offering size was insufficient to establish the company’s initial valuation, and there would not be sufficient liquidity to support a public market for the company; and (iii) where a company did not demonstrate sufficient nexus to the U.S. capital market, including having no U.S. shareholders, operations or members of the board of directors or management. As a result of the aforementioned concerns, we may be subject to the additional and more stringent criteria both for our initial listing approval and our continued listing on the Nasdaq Capital Market. This could cause delay or even denial of the listing application for our Ordinary Shares.
We may not maintain the listing of our Ordinary Shares on the Nasdaq Capital Market which could limit investors’ ability to make transactions in our Ordinary Shares and subject us to additional trading restrictions.
If our application to list our Ordinary Shares on the Nasdaq Capital Market is approved, we must maintain certain financial and share price levels in order to continue listing our Ordinary Shares on Nasdaq, and we may be unable to meet these requirements in the future. We cannot assure you that our Ordinary Shares will be listed on Nasdaq or, if listed, that they will continue to be listed on Nasdaq in the future. If Nasdaq delists our Ordinary Shares and we are unable to list our Shares on another national securities exchange, we will endeavor to have our Ordinary Shares quoted on an over-the-counter market in the United States. If this were to occur, we could face significant material adverse consequences, including:
| ● | limited availability of market quotations for our Ordinary Shares; |
| ● | reduced liquidity for our Ordinary Shares; |
| ● | a determination that our Ordinary Shares are “penny stock,” which will require brokers trading in our Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares; |
| ● | a limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
As long as our Ordinary Shares are listed on Nasdaq, U.S. federal law prevents or preempts the states from regulating their sale. However, the law does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar their sale. Further, if we were no longer listed on Nasdaq, we would be subject to regulations in each state in which we offer our Ordinary Shares.
Risks relating to low priced stocks.
Our Ordinary Shares currently are quoted on the OTCQB and will continue to be quoted on the OTCQB if our application for listing on Nasdaq is not approved or is not maintained. If the inside bid quotation price of the Ordinary Shares should drop below $5.00, trading in the Ordinary Shares may be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions) and a two business day “cooling off period” before broker-dealers can effect transactions in penny stocks. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. These, and the other burdens imposed upon broker-dealers by the penny stock requirements, could discourage broker-dealers from effecting transactions in our Ordinary Shares, which could severely limit the market liquidity of our Ordinary Shares and the ability of holders of our Ordinary Shares to sell them.
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It is likely that there will be significant volatility in the trading price of our Ordinary Shares.
In the event that a public market for our Ordinary Shares is created or maintained in the future, market prices for the Ordinary Shares will be influenced by many factors and will be subject to significant fluctuations in response to variations in operating results of Bao Feng and other factors. Our stock price will also be affected by the trading price of the stock of our competitors, investor perceptions of Bao Feng, interest rates, general economic conditions and those specific to our industry, developments with regard to Bao Feng’s operations and activities, our future financial condition and changes in our management.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our Ordinary Shares, the market price for our Ordinary Shares and trading volume could decline.
The trading market for our Ordinary Shares will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts downgrade our Shares, the market price for our Shares would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our Shares to decline.
Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our Ordinary Shares for a return on your investment.
We currently intend to retain all of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our Ordinary Shares as a source for any future dividend income. Our Board of Directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors. Accordingly, the return on your investment in our securities will likely depend entirely upon any future price appreciation of our Ordinary Shares. There is no guarantee that our Ordinary Shares will appreciate in value or even maintain the price at which you purchase our Ordinary Shares. You may not realize a return on your investment in our Ordinary Shares and you may even lose your entire investment.
We are controlled by our principal shareholders, whose interests may differ from those of the other shareholders.
As of the date of this Annual Report, our principal shareholders, consisting of Yu Chang, father of Ting Ting Chang, our Chief Executive Officer and director, Ting Ting Chang, Prime Legend Limited, which is wholly owned by Fung Ming Pang, our Chief Financial Officer and director, and Xianyang Chen, Bao Feng’s Chief Technical Officer, own approximately 79.8% of our Ordinary Shares. Our principal shareholders are in a position to elect the Board of Directors and to control our business and affairs, including significant corporate actions such as mergers and acquisitions, the sale or purchase of assets and the issuance and sale of our securities. We may also be prevented from entering into transactions that could be beneficial to our other shareholders. The interests of our principal shareholders may differ from the interests of our other shareholders.
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Our principal shareholders may engage in a transaction to cause us to repurchase our Ordinary Shares.
In order to provide an interest in us to a third party, our principal shareholder may choose to cause us to sell our securities to third parties, with the proceeds of such sale being utilized by us to repurchase our Ordinary Shares. As a result of such transaction, our management, principal shareholders and Board of Directors may change.
This Annual Report contains forward-looking statements and information relating to us, our industry and other businesses.
The forward-looking statements contained in this Annual Report are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this Annual Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks and uncertainties that may cause our actual results to differ materially from those contemplated in our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events.
We are an emerging growth company within the meaning of the Securities Act and will take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and take advantage of certain exemptions from various requirements applicable to other reporting companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised financial accounting standards. We have elected to use the extended transition period for complying with new or revised financial accounting standards under Section 102(b)(2) of the JOBS Act that allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.
Emerging growth companies may also take advantage of certain reduced disclosure requirements. Compliance with these reduced disclosure requirements may make our Ordinary Shares less attractive to investors.
If we are classified as a passive foreign investment company, United States taxpayers who own our Ordinary Shares may have adverse United States federal income tax consequences.
A non-U.S. corporation such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if, for such year, either:
| ● | At least 75% of our gross income for the year is passive income; or
| |
| ● | The average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income or which are held for the production of passive income is at least 50%. |
Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.
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If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional reporting requirements.
It is possible that, for our 2023 taxable year or for any subsequent year, more than 50% of our assets may be assets that produce passive income. We will make this determination following the end of any particular tax year. Although the law in this regard is unclear, we treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements. For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and assets of any entity in which it is considered to own at least 25% of the equity by value.
Certain Legal Consequences of Foreign Incorporation and Operations
Judgments against us and our management may be difficult to obtain or enforce.
We are organized as an exempted company under the laws of the Cayman Islands, our principal executive offices are located in Hong Kong and we conduct all of our operations in China. All of our directors and executive officers reside outside the United States and substantially all of their assets are located outside the United States. As of the date of this Annual Report; (i) Ms. Chang, our President, Chief Executive Officer and a director, Dr. Dong and Dr Ning, both independent directors, reside in China; and (ii) Ms. Fang, our Chief Financial Officer and a director, and Mr. Tse, one of our independent directors, reside in Hong Kong. As a result, outside the United States, it may be difficult for investors to enforce judgments obtained against us in actions brought in the United States, including actions predicated upon the civil liability provisions of United States federal securities laws. In addition, since all of our officers and directors reside outside the United States and their assets are located outside the United States, it may not be possible for investors to effect service of process within the United States upon them or to enforce against us or them judgments predicated upon the liability provisions of United States federal securities laws. There is substantial doubt as to the enforceability against us or our officers and directors in original actions or in actions for enforcement of judgments of United States courts in claims for liability based on the civil liability provisions of United States federal securities laws.
In particular, residence and location of assets in China may make it even more difficult to enforce any judgments obtained from foreign courts (including from a U.S. state or federal court) against such persons compared to the circumstance of residence in another non-U.S. and non-China jurisdiction. The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law and other applicable laws, regulations and interpretations based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the U.S. and many other jurisdictions that provide for the reciprocal recognition and enforcement of judgments from the U.S. and many other jurisdictions. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the U.S and many other jurisdictions. In addition, the SEC, the U.S. Department of Justice and other U.S. authorities and the comparable authorities from many other jurisdictions may also have difficulties in bringing and enforcing actions against us or our directors or officers in the PRC.
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No treaty exists between Hong Kong or the Cayman Islands and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong and the Cayman Islands are generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong or the Cayman Islands for the recovery of this debt. A Hong Kong or Cayman Islands court will only accept a foreign judgment as evidence of a debt due if:
| · | The judgment is for a liquidated amount in a civil matter; | |
| · | The judgment is final and conclusive; | |
| · | The judgment is not, directly or indirectly, for the payment of foreign taxes, penalties, fines or charges of a like nature; | |
| · | The judgment was not obtained by actual or constructive fraud or duress; | |
| · | The foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong or the Cayman Islands; | |
| · | The proceedings in which the judgment was obtained were not contrary to natural justice (i.e., the concept of fair adjudication); | |
| · | The proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong or the Cayman Islands; | |
| · | The person against whom the judgment is given is subject to the jurisdiction of a foreign court; and | |
| · |
The judgment is not on a claim for contribution in respect of damages awarded by a judgment, which falls under Section 7 of the Protection of Trading Interests Ordinance, Chapter 471 of the Laws of Hong Kong. | |
Enforcement of a foreign judgment in Hong Kong or the Cayman Islands may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement and moratorium, or similar laws relating to or affecting creditors’ rights generally and will be subject to a statutory limitation of time within which proceedings may be brought.
The recognition and enforcement of foreign judgments are provided for under PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands.
Because we are incorporated in the Cayman Islands, you may not have the same protections as shareholders of U.S. corporations.
We are organized under the laws of the Cayman Islands. Principles of law relating to matters affecting the validity of corporate procedures, the fiduciary duties of our management, directors and controlling shareholder and the rights of our shareholders differ from, and may not be as protective of shareholders as, those that would apply if we were incorporated in a jurisdiction within the United States. Our directors have the power to take certain actions without shareholder approval, including approving certain fundamental corporate transactions, such as reorganizations and the sale or transfer of assets. In addition, there is doubt that the courts of the Cayman Islands would enforce liabilities predicated upon United States federal securities laws.
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Our shareholders do not have the same protections or information generally available to shareholders of U.S. corporations because the reporting requirements for foreign private issuers are more limited than those applicable to public corporations organized in the United States.
We are a foreign private issuer within the meaning of rules promulgated under the Exchange Act. We are not subject to certain provisions of the Exchange Act applicable to United States public companies, including: the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations with respect to a security registered under the Exchange Act and the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within six months or less). Because we are not subject to these rules, our shareholders are not afforded the same protections or information generally available to investors in public companies organized in the United States.
Item 4. Information on the Company
History and Development of the Company
The Company was originally incorporated in Delaware as “Agate Island Acquisition Corporation” on April 4, 2016 to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions. On March 13, 2017, the Company’s name was changed to China Biotech Holdings Limited in anticipation of entering into a transaction with a company in China engaged in the Biopharma or Biotech industry. Effective August 21, 2018, the Company was redomiciled from Delaware to the Cayman Islands by merging into its wholly-owned Cayman Islands subsidiary, Zhong Yuan Bio-Technology Holdings Limited (the “Redomicile Merger”). As a result of the Redomicile Merger, the Company’s name was changed to Zhong Yuan Bio-Technology Holdings Limited.
The Share Exchange
On August 31, 2019, the Company closed on a share exchange (the “Share Exchange”) with Zhong Yuan Investment whereby the Company acquired all of the outstanding common stock of China Bio, which was wholly-owned by Zhong Yuan Investment, in exchange for the issuance by the Company of 161,500,000 Ordinary Shares to Zhong Yuan Investment. As a result of the Share Exchange, China Bio became the Company’s wholly owned subsidiary and Zhong Yuan Investment became the owner of approximately 95% of the Company’s then outstanding Shares.
Immediately prior to the Share Exchange, the Company was a “shell company” (as such term is defined in Rule 12b-2 under the Exchange Act) with nominal assets and no business operations. The acquisition of China Bio by the Company has been accounted for as a reverse merger because on a post-merger basis, the former shareholder of China Bio held a majority of the Company’s outstanding Ordinary Shares on a voting and fully diluted basis. As a result of the Share Exchange, the Company is engaged in the business of developing and marketing nervonic acid-based dietary supplements (referred to as new food raw materials products in China) through its indirect Operating Subsidiary, Bao Feng, and management of the Company believes that the Company is no longer a shell company. Also as a result of the Share Exchange, the Company changed its fiscal year end from December 31 to March 31.
Immediately subsequent to the Share Exchange, the Company had 170,000,000 Ordinary Shares outstanding.
Reverse Stock Split
On July 24, 2020, the Company completed a one-for-ten reverse stock split of the Company’s Ordinary Shares (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the authorized share capital of the Company was decreased from 500,000,000 Ordinary Shares with a par value of US$0.0001 each to 50,000,000 Ordinary Shares with a par value of US$0.001 each, and the number of issued and outstanding Ordinary Shares was decreased from 171,450,000 Ordinary Shares to 17,145,000 Ordinary Shares.
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Prior Private Securities Offerings
On December 13, 2019, the Company closed on the sale of 1,450,000 Ordinary Shares (pre Reverse Stock Split, as defined below) to unrelated parties at a purchase price of $0.10 per Ordinary Share, pursuant to a private securities offering (the “2019 Private Offering”), which was conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Ordinary Shares were offered and sold solely outside the United States to investors who are not U.S. persons, as defined in Regulation S.
On November 17, 2020, the Company sold 50,000 Ordinary Shares (post Reverse Stock Split, as defined below) to an unrelated party at a purchase price of $1.00 per Ordinary Share, pursuant to a private securities offering (the “2020 Private Offering”) conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Ordinary Shares were offered and sold solely outside the United States to an investor who is not a U.S. person, as defined in Regulation S.
On November 15, 2021, the Company sold 130,000 Ordinary Shares to unrelated parties at a purchase price of $2.00 per Ordinary Share with one warrant for each ten Ordinary Shares sold (“Warrant”), pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. Each Warrant entitled the holder to subscribe for one Share at a price of $4.00 per share for the one-year period ended November 15, 2022. As of November 15, 2022, none of the Warrants had been exercised. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
On April 29, 2022, the Company sold 100,000 Ordinary Shares to Mr. Yong Sheng, the 49% shareholder of BF Internet, at a purchase price of $4.00 per Ordinary Share, and in June 2022, it sold 20,000 Ordinary Shares to current shareholders of the Company at a purchase price of $4.00 per Ordinary Share and 12,500 Ordinary Shares to unrelated parties at a purchase price of $5.00 per Ordinary Share, pursuant to private securities offerings conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
On August 7, 2023, the Company sold 20,000 Ordinary Shares to an unrelated party, at a purchase price of US$4.80 per Ordinary Share, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
On March 24, 2024, the Company sold 10,100 Ordinary Shares to unrelated parties at a purchase price of $3.80 per Ordinary Share, pursuant to private securities offerings conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
Cancellation of Shares
On November 17, 2020, the Company acquired 25,000 of its Ordinary Shares (post Reverse Stock Split) from one of the shareholders of the Company. The Shares were acquired for no consideration; however, the Company paid the shareholder’s expenses related to the transaction in the amount of $25,000. These Shares were thereafter cancelled.
On November 18, 2020, the Company acquired 25,000 of its Ordinary Shares (post Reverse Stock Split) from one of the shareholders of the Company. The Shares were acquired for no consideration; however, the Company paid the shareholder’s expenses related to the transaction in the amount of $25,000. These Shares were thereafter cancelled.
Acquisition and Sale of Dandong BF
On December 31, 2020, Bao Feng completed its acquisition of a 100% equity interest in Dandong BF from Yu Chang, the record owner of 41.6% of the outstanding shares of Zhong Yuan Investment and the father of Ting Ting Chang, our CEO and director, for a total consideration of RMB10,500,000 (approximately $1,500,000). A deposit of RMB3,160,000 (approximately $465,460 as of September 30, 2020) was paid upon signing of the Equity Transfer Agreement on March 1, 2020. The balance of RMB7,340,000 (approximately $1,082,000 as of September 30, 2020) was settled by offsetting the amounts due from related companies of which Yu Chang is the owner and director.
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Dandong BF was incorporated in the PRC on March 11, 2019 and is principally engaged in the research, development, growing and sale of Acer Truncatum seedlings in Dandong city, Liaoning Province, in the north-eastern region of the PRC.
On September 30, 2022, Bao Feng sold its 100% interest in Dandong BF to Zhong Yuan Nervonic Acid Bio-technology Co. Ltd., of which Yu Chang, the Company’s major shareholder and father of Ting Ting Chang, our Chief Executive Officer and director, is a director, general manager and a major shareholder, for a total consideration of RMB5 million. RMB1million of the purchase price was paid in cash and the balance of RMB4 million was exchanged for a 7% interest in Yanbian Bao Feng Biotechnology Co., Ltd. (“Yanbian BF”), of which Yu Chang is the legal representative and the ultimate majority beneficial shareholder. Yanbian BF was incorporated in the PRC on May 24, 2018 and is in the process of building an extraction factory to extract nervonic acid from Acer truncatum seeds. As a result of the sale, Dandong BF is no longer owned by Bao Feng and is not a subsidiary of Zhong Yuan Cayman.
Shares transferred from Zhong Yuan Investment to its shareholders
On December 30, 2021, Zhong Yuan Investment transferred 6,425,287 Shares, 2,656,388 Shares, 2,656,388 Shares, 2,125,111 Shares and 318,767 Shares (totaling 14,181,941 Shares) to Yu Chang, father of Ting Ting Chang, our Chief Executive Officer and director, Ting Ting Chang, Prime Legend Limited which is wholly owned by Fung Ming Pang, our Chief Financial Officer and director, Xianyang Chen, Bao Feng’s Chief Technical Officer and Shuju Chen, respectively. After these Share transfers, Zhong Yuan Investment does not hold any Shares of the Company.
Exercises of Options
On December 2, 2021, Fung Ming Pang exercised 300,000 options granted under the employment agreement dated May 4, 2020 between the Company and Ms. Pang (the “Pang Employment Agreement”). Under the terms of the Pang Employment Agreement, Ms. Pang was granted options (“Options”) to purchase an aggregate of 600,000 post-reverse stock split Ordinary Shares at an exercise price of $0.50 per Ordinary Share. The Options were exercisable on a cashless basis. An aggregate of 300,000 Options vested upon commencement of trading of the Ordinary Shares on the OTCQB on July 15, 2021. We issued an aggregate of 272,118 Ordinary Shares in accordance with the terms and provisions of the Pang Employment Agreement upon Ms. Pang’s cashless exercise of the 300,000 Options. The remaining 300,000 Options vested on July 15, 2022 and, as of the date of this Annual Report, remain unexercised.
Formation of Beijing Baofeng Internet Bio-technology Co., Limited (“BF Internet”)
BF Internet was incorporated under the laws of the PRC on May 23, 2022. It is owned 51% by Bao Feng and 49% by Yong Sheng, a shareholder of the Company. Currently, the principal activities of BF Internet are selling and marketing Bao Feng’s recently developed Re’Seen nervonic acid-based drinks over the TikTok platform. The Company intends that, in the future, BF Internet will also market and sell other products of the Company over the Internet.
When we refer in this Annual Report to business and financial information for periods prior to the consummation of the Share Exchange, we are referring to the business and financial information of Zhong Yuan Investment and its subsidiaries unless the context suggests otherwise. When we use phrases such as “we,” “our,” “company” and “us,” we are referring to the Company and all of its subsidiaries, as a combined entity.
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Corporate Structure
The following chart sets forth our corporate structure as of the date of this Annual Report.
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China Bio-Technology Holdings Limited (“China Bio”) was incorporated under the laws of the Republic of Seychelles on June 27, 2016 under the name Hua Hong Powerloop Technology Limited. On February 13, 2017, its name was changed to China Bio-Technology Limited, and on March 6, 2017 it was changed to China Bio-Technology Holdings Limited. It became a wholly owned subsidiary of the Company in August 2019 as a result of the Share Exchange described above.
Zhong Yuan Bio-Technology (Hong Kong) Limited (“Zhong Yuan-HK”) was incorporated in Hong Kong on June 13, 2016. The original shareholders transferred all of the shares to China Bio on February 27, 2017.
Zhong Yuan Bio-Technology (Shenzhen) Limited (“Zhong Yuan-SZ”), our WFOE, was established under the laws of the PRC on June 10, 2014. The original shareholders transferred all of the shares to Zhong Yuan-HK on May 12, 2017.
Bao Feng Bio-Technology (Beijing) Limited (“Bao Feng)” was incorporated in the PRC on August 30, 2012 under the name Beijing Acer Truncatum Century Agricultural Science and Technology Co., Ltd. On August 10, 2017, the company’s name was changed to Bao Feng Bio-Technology (Beijing) Limited. It became a wholly owned subsidiary of Zhong Yuan-SZ on February 13, 2019. Bao Feng is currently the Company’s primary operating subsidiary.
Beijing Baofeng Internet Bio-technology Co., Limited (“BF Internet”) was established under the laws of the PRC on May 23, 2022 and is owned 51% by Bao Feng and 49% by Yong Sheng, a shareholder of the Company. The principal activities of BF Internet are to sell and market Bao Feng’s nervonic acid-based health supplements over the Internet.
Business of Bao Feng
General
Bao Feng is in the business of nervonic acid research, the development of nervonic acid based herbal and chemical drugs and the sale of dietary supplements (referred to as new food raw materials products in China) containing nervonic acid. Nervonic acid is a long chain unsaturated omega 9 fatty acid that is an important component in myelin biosynthesis in the central and peripheral nervous system. Myelin insulates nerve cell axons to increase the speed at which information (encoded as an electrical signal) travels from one nerve cell body to another or from a nerve cell to another type of cell in the body. It is thought that nervonic acid may enhance brain function and prevent demyelination of nerve cells, and that, therefore, it may be effective in retaining or improving the health of the brain, for example in preventing or ameliorating ADHD and ALD in children, Alzheimer's disease and mental degradation in the elderly and cerebrovascular disease, as well as promoting normal brain development in premature infants. The role of nervonic acid is also being studied with respect to psychotic illnesses, such as schizophrenia.
Nervonic acid is not present in many foods. Since it is considered to be an important biomarker for many neurological diseases, such as ADHD and ALD in children and neuro-degenerative diseases in the elderly, it is in high demand among those populations. The price of nervonic acid in the world market ranges from approximately $2,000 to approximately $6,000 per kilogram, depending on the purity.
In the past, nervonic acid was derived from the brains of sharks. However, the extraction process from that source is difficult and the cost is too high for commercialization. In addition, sharks are protected by the United Nations and many countries in the world. Another good source of nervonic acid is the Malania oleifera plant, which is native to southern China. That plant is said to have up to 40.9% to 50% nervonic acid; however, it is a threatened species in the world and is on the list of key wild plants for state protection. It was also found that the dried seeds of the Acer truncatum tree, which is a type of maple native to northern China, Mongolia and Korea, contain 5.8% nervonic acid. Therefore, the seed oil is considered to be a good source of natural nervonic acid, as well as other compounds such as Vitamin E.
The table below contains a list of natural plant and animal sources of nervonic acid, with nervonic acid content shown in milligrams/100 grams.
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Nervonic Acid Content (mg/100g)
| Plant Sources | ||||
| Acer truncatum | 580 | |||
| Brassica oil seeds | 69 - 83 | |||
| Sesame seeds | 35 | |||
| Macademia nuts | 18 | |||
| Tropaeolum speciosum | 10 | |||
| Lunaria (money plant) | 8 | |||
| Animal Sources | ||||
| King salmon (chinook) | 140 | |||
| Sockeye salmon | 40 | |||
| (Source: Herb Nutritionals, September 25, 2015, http://herbnutritionals.com) | ||||
The raw material sources of nervonic acid are insufficient to meet the demand in China. Therefore, Bao Feng has a contract with the Wengniuteqi government pursuant to which it obtains Acer truncatum seeds and seedlings both for use in making its products.
When Bao Feng was formed in 2012, its management was aware of only three major competitors engaged in nervonic acid biotechnology, making Bao Feng one of the first enterprises specializing in the production and application of nervonic acid in China. Our team of scientists has over 30 years combined experience in the field of Acer truncatum tree research, and more than 10 years in nervonic acid applications. In addition, Bao Feng achieved the National High-Tech Enterprise Award in 2017. This award recognizes the continuous research and development and the transformation of technological achievements in the high-tech fields supported by the state, forming the core independent intellectual property rights of the enterprise, and the carrying on of business activities on this basis in China (not including resident enterprises registered in Hong Kong, Macao and Taiwan) for more than one year.
The Science Behind Our Product Development
Bao Feng’s business is centered around lipids, especially nervonic acid, and their structural compounds as a means to screen for and intervene in diseases of the nervous system such as cognitive disorders, white matter atrophy and stroke. Nervonic acid, which falls within the fatty acid category of lipids, comprises up to 35% of the long chain fatty acids in the myelin sheath surrounding the nerve fiber and is, therefore, necessary for the repair of nerve degeneration and injury. Ideally, there is a balance between the breakdown of the myelin sheath around a nerve fiber, which serves as an insulator and allows faster transmission of electrical impulses, and its regeneration utilizing nervonic acid. However, due to the length of the fatty acid chain, the body’s efficiency in synthesizing nervonic acid is low. Studies have shown a correlation between the level of nervonic acid and such diseases as Alzheimer’s disease (Song et al., 2018; Vozella, Basit, Misto & Piomelli, 2017), multiple sclerosis (Tanaka, Shimizu, Ohtsuka, Kamashiro & Oshida, 2007), schizophrenia (Amminger et al, 2012), attention deficit disorder in children (Chen et al., 2011) and recurrent depression (Johanna et al., 2010), as well as premature versus full-term infants.
Bao Feng has participated in numerous studies, using metabolomics, mass spectrometry, artificial intelligence and big data mining technology, that have found a high correlation between nervonic acid deficiency and cognitive impairment, neuromyelitis and multiple sclerosis, confirming that nervonic acid is a core marker for leukoencephalopathy (brain white matter diseases).
Research in Cooperation with Hospitals
China Medical University. Bao Feng has conducted numerous academic and scientific research projects in cooperation with China Medical University, the first top-tier medical institution established in China. In 2017, China Medical University established the Research Center of Plateau Medicine, for which Dr. Xianyang Chen, Bao Feng’s Chief Technical Officer, served as deputy director of the academic department, to carry out systematic research on cerebral hypoxia. Bao Feng and the Research Center of Plateau Medicine have jointly conducted numerous research projects for which the results have been published, including ‘research on the biological process and molecular mechanism of nervonic acid participating in brain hypoxia nerve repair,’ ‘clinical research on the alleviation of high altitude hypoxia brain injury by nervonic acid,’ and ‘research on the mechanism of nervonic acid treating neonatal rats with hypoxic-ischemic brain injury in plateau area.’ In 2018, the ‘Demonstration Meeting of High Altitude Medical Research Center’ was called to demonstrate the effect of nervonic acid on alleviating brain nerve injury caused by high altitude hypobaric hypoxia and on alleviating nerve injury of pregnant women and infants caused by high altitude hypobaric hypoxia, as well as the use of nervonic acid in the development of new drugs for alleviating cognitive impairment. The Research Center of Plateau Medicine and Bao Feng are currently jointly conducting research on the repair effect of nervonic acid on demyelinating loss caused by hypoxia.
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Xuanwu Hospital of Capital Medical University. Xuanwu Hospital is a pre-eminent general hospital in both geriatrics and neuroscience. Bao Feng has participated in the following research projects in cooperation with the National Clinical Research Center for Geriatric Disorders of Xuanwu Hospital: (i) research on nervonic acid as a biomarker for nervous system diseases (the world's innovation technology); (ii) clinical research on the effectiveness of nervonic acid on nervous system diseases; and (iii) research on the metabolism of the nervous system data analysis and processing system. Bao Feng, which holds the relevant patents, had primary responsibility for providing the experiment technology and data analysis for these research projects; Xuanwu Hospital National Geriatric Disease Clinical Research Center has primary responsibility for clinical trial design, sample case collection and clinical effect evaluation.
Bao Feng has entered into a cooperation agreement with the National Geriatric Disease Clinical Medical Research Center at Xuanwu Hospital for a scientific research project on "White Matter and Parkinson's Disease Markers Verification Research and Drug Development." This cooperative project aims to verify the effectiveness of molecular markers and their combinations for leukoencephalopathy and Parkinson's Disease. The project involves research and development of plant extracts and small chemical molecules of drug efficacy.
In March 2024, Bao Feng entered into a cooperation agreement with Xuanwu Hospital for (i) evaluation of the efficacy of Acer truncatum seed oil (“ASO”) in the intervention of X-linked Adrenoleukodystrophy (X-ALD); (ii) comparative metabolomics of lipids in X-ALD before and after ASO intervention; and (iii) evaluation of the effect of ASO on improvement of clinical symptoms and changes in imaging diagnosis. Under the agreement, Bao Feng will, among other things, provide the products for the project and Xuanwu Hospital will be responsible for the design and implementation of the study and will provide the subjects.
Our Nervonic Acid Source
We extract the nervonic acid utilized in our products from the seeds of Acer truncatum trees. Our seeds are supplied by the Wengniuteqi District government farm in Inner Mongolia, which contains approximately 70,000 mu of wild 100-year old Acer truncatum trees. In March 2017, Bao Feng entered into a cooperation agreement with the Wengniuteqi District under which Bao Feng provides the seedlings for an additional 10,000 mu of Acer truncatum trees and the government farm provides the land and plants and maintains the seedlings. The government farm harvests the seeds, which are currently estimated to be approximately 400,000 tons per year, and Bao Feng has the exclusive right to purchase the seeds from both the old and the new trees.
Bao Feng’s breeding base of seedlings results from agricultural technology developed by scientists under contract with Bao Feng. The concentration of nervonic acid from young trees is significantly lower than that from older trees. Our breeding base serves as a strategic reserve for the supply of raw materials for non-high-content nervonic acid products. Low levels of nervonic acid are used for daily supplements, medium levels for health care and high levels for future use in medicine and therapy. As the young trees mature, the concentration of nervonic acid in the seeds of those trees will increase. Therefore, our breeding base is an important part of Bao Feng’s strategy for corporate sustainability.
The nervonic acid is extracted from the Acer truncatum seeds and our products are produced by Inner Mongolia Xingyuan Vegetable Oil Co., Ltd., located in Mongolia, and by Heze Zonghoo Jianyuan Biotech Co., Ltd., which is located in Shandong Province, China, under contract with Bao Feng. Under the agreements, Bao Feng provides the Acer truncatum seeds, the extraction technology and the formula for producing the products, while the other party extracts the nervonic acid from the seeds, provides the other raw materials and manufactures and packages the finished products in accordance with the specifications of Bao Feng.
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Our Current Products
Our main products are a nervonic acid series of dietary supplements (referred to as new food raw material products in China), marketed under the “Muzhiyuan-Neuro Enhancer" brand. Our nervonic acid products are 100% organic. Our current products consist of:
| 1. Life’s NA | |||
| NEURO ENHANCER--Acer Truncatum Seed oil (Nervonic Acid Oil) | |||
| · Acer Truncatum Seed oil (Nervonic Acid) Candy | |||
| · Acer Truncatum Seed oil (Nervonic Acid) Candy [Gift Set] | |||
| 2. Dietary Formula | |||
| · Miraculous Maple Edible Vegetable Blended Oil | |||
| 3. Re’Seen Series | |||
| · Re’Seen StarNight Drink | |||
| · Re’Seen Collagen Drink | |||
1. Life’s NA
Our Life’s NA group of products consists of dietary supplements (referred to as new food raw material products in China) containing high-purity and high-absorption natural nervonic acid extracted from Acer Truncatum seeds.
NEURO ENHANCER--Acer Truncatum Seed oil ( Nervonic Acid Oil)
 |
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| Content: Nervonic acid 6.43% | Content: Nervonic acid 6.89% |
There are 12 kinds of fatty acids in our Acer Truncatum acid oils, more than 90% of which are unsaturated fatty acids in our NEURO ENHANCER Nervonic Acid Oil and more than 80% of which are unsaturated fatty acids in our Acer Truncatum Seed Oil. The products contain 18 amino acids, 8 of which are essential to the human body, high levels of vitamin E and various trace elements. We have two products with different levels of nervonic acid, 6.43% and 6.89% respectively, both of which are intended to provide sufficient nutrition for the brain.
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Acer Truncatum Seed oil (Nervonic Acid) Candy
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Acer Truncatum Seed oil (Nervonic Acid) Candy
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Acer Truncatum Seed oil (Nervonic Acid) Candy [GIFT SET] |
Nervonic Acid Candy is a composite gel candy with omega 9 nervonic acid, omega 3 DHA and other omega 6 fatty acids. The formula was determined based on expert recommendations and preliminary clinical trials, and it contains a complex combination of neurotrophic agents which is prospectively designed and innovative. In addition, the product tastes good and the active ingredients are easy to absorb.
2. Dietary Formula
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Miraculous Maple Edible Vegetable Blended Oil |
Miraculous Maple Edible Vegetable Blended Oil integrates a combination of Acer Truncatum oil and Flaxseed oil and includes nervonic acid and alpha-linolenic acid, which are known to be the most brain-healthy unsaturated fatty acids. Our Miraculous Maple Edible Vegetable Blended Oil also can be used to provide nutrition for the body.
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3. Re’Seen Series
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| Re'Seen StarNight Drink | Re'Seen Collagen Drink |
Re'Seen StarNight Drink selects three core natural botanicals: patented Bao Feng nervonic acid with Double Nutri permeation technology, American NDI happy banana peel ingredients and high-purity GABA with theanine. Small molecules and high permeability promote absorption. Our Re'Seen Collagen Drink skin revitalizer includes safety grade, high-purity nervonic acid, Japanese NIPPI deep-sea, small-molecule bonito collagen peptide and elastin and Brazilian emerald cherry.
Products Under Development
Biomarker screening kits
At present, most early screening for brain diseases is not sensitive or requires expensive equipment, like MRI. Bao Feng has used lipidomics strategy based on LC-MS (liquid chromatography-mass spectrometry), a powerful technique used for separation, identification and quantification, to develop in vitro diagnostic (IVD) kits. This new LC-MS method could assist in the diagnosis of related diseases with an accuracy rate of more than 90%, which is extremely close to clinical golden standard.
Bao Feng has 20 patents to support findings in nervonic acid- like biomarkers assisting in the diagnosis of neurological diseases. It is in the process of developing the following early screening kits for brain diseases in an attempt to promote early detection:
| · | Brain white matter signal abnormalities screening kit | ||
| Originally, Bao Feng developed a blood test kit to screen for brain white matter signal abnormalities, which previously had been detected by MRI only. Abnormal white matter signal in the brain is a predictor of most degenerative neurological diseases, including attention deficit disorders, cognitive impairment, brain atrophy, demyelination, etc. Brain white matter disease screening routinely utilizes MRI technology, which is expensive, requires an appointment in queue and is not suitable for general screening. Bao Feng partnered with the National Research Center for Geriatric Clinical Diseases (Xuanwu Hospital) to use metabolomics strategy combined with machine learning techniques to discover a combination of core biomarkers for disease blood tests. Using novel biomarkers screening for cerebral white matter disease has achieved an accuracy of over 90%, which is close to MRI results. In the future, this type of screening can help in the early detection of white matter disease, for which the worldwide incidence is close to 50% over the age of 60. | |||
| · | Parkinson's screening kit | ||
| In collaboration with Dr. Chaodong Wang of Xuanwu Hospital (Profile: https://www.haodf.com/doctor/4773060060.html), a Parkinson's disease expert, Bao Feng has developed a blood test kit to help doctors quickly screen for Parkinson's disease, including multisystem atrophy. The diagnosis of clinical Parkinson's is very difficult and involves multiple weight scales, such as motor symptoms and non-motor symptoms, as well as medication use. Bao Feng has identified blood biomarkers suitable for universal screening through cohort studies to improve the clinical efficiency of Parkinson's diagnosis. | |||
| · | Ischemic stroke screening kit | ||
| Cerebrovascular stenosis or occlusion, caused by cerebral blood flow blockage, can produce ischemia anoxia, softening or even necrosis of brain tissue, resulting in cerebrovascular dysfunction and apoplexy related symptoms. Ischemic stroke is the primary type of cerebrovascular disease, with approximately 85% of cerebral strokes being ischemic. Through comparative pathology studies, Bao Feng has identified blood metabolic biomarkers for ischemic stroke, with white matter abnormalities as a complication. This technique provides an important assisted diagnostic function for prevention of ischemic stroke. |
All three early screening kits are in the development stage.
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Plant-based and synthetic drugs
Bao Feng has improved its purification process so as to produce high (medical) grade nervonic acid in the laboratory and intends to build factories in order to achieve mass production. The next step will be the development of pharmaceutical products or the sale of raw materials for nervonic acid products in China and abroad.
Based on Bao Feng’s findings about pharmacodynamic molecules in the body and the structures that can cross the blood-brain barrier after supplementation with Acer truncatum seed oil, it obtained a patent titled “A biomarker for the pharmaceutical effect of nervonic acid from Acer truncatum seed oil and its medicinal application.” The patent was authorized by the National Patent Office in only 61 working days due to its originality and huge market potential. This discovery - that a structural compound of nervonic acid could be used as a marker - laid the foundation for the development of a nervonic acid medicine. It also proved the effectiveness of nervonic acid products produced by Bao Feng for future disease interventions.
This research and patent are significant because they lay a theoretical foundation for Acer truncatum as a Chinese traditional medicine in that they prove the effect and molecular markers in vivo for Acer truncatum seed oil supplementation, which is central for a traditional Chinese medicine judgement. We recently obtained the identification of Acer truncatum as a local standard for Chinese medicinal materials. In the meantime, Bao Feng has also started the application for China's innovative botanicals. To date, botanical extracts have been obtained through the supercritical extraction scheme, and preliminary efficacy research in mice has been completed. Bao Feng is currently engaged in pre-clinical approval work with respect to these applications.
Additionally, Bao Feng has found that biomarkers for diagnosis of cognitive impairment are nervonic acid-like molecules. This discovery has been patented as "Biomarker for diagnosing cognitive impairment and its application." Based on the innovation and market value of the patent, the National Patent Office completed the authorization of this patent within 56 working days. The significance of this study and patent is that we have found that nervonic acid-like molecules can indicate cognitive impairment, especially demyelinating Alzheimer's disease, and can serve as a target molecule for our chemical drugs. A series of modified molecules based on nervonic acid-like biomarkers are being used in a pre-clinical study for a potential new drug. The discovery that nervonic acid structural compounds can be used as core markers of neurological diseases is of great significance in the development of chemical drugs. It also can be used as a detection method in the development of screening kits.
Adrenoleukodystrophy (“ALD”)
Recently, the Company has directed its resources to research and development of a plant-based drug for the pediatric disease, Adrenoleukodystrophy (“ALD”). The pathology of ALD is characterized by progressive demyelination of the central nervous system and/or atrophy or dysplasia in the adrenal cortex and it is characterized by abnormally high levels of medium and long chain fatty acids in the plasma.
The disease initially presents with inattention, memory loss, learning difficulties, gait instability and abnormal behavior; gradually, visual and auditory decline, dysarthria, seizures, ataxia, paralysis and dementia. The clinical manifestations progressively worsen and eventually lead to blindness or deafness and complete paralysis. In the late stage of the disease, the disease may manifest as a deafferentation tonic state and eventually death from central respiratory failure, brain herniation and infection. There is currently no cure for ALD.
Management is optimistic regarding Bao Feng’s ability to develop a plant-based drug that, although not a cure for ALD, will prolong and improve the lives of ALD patients. Our goal is to complete phase III clinical trials by mid-2027.
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Application of Acer truncatum seed oil for regulation of intestinal flora
Studies have shown that supplementation of Acer truncatum seed oil can regulate intestinal flora, and significant regulatory effects were observed on changes of Lactobacillus, Bacteroides, etc. Bao Feng has applied for a patent titled “Application of Acer truncatum seed oil in preparation of drugs for regulating intestinal flora” to protect future medical applications of this discovery. Bao Feng’s research in this area found that after taking nervonic acid oil, the abundance of Firmicobacterium, which increases with Alzheimer's disease, showed a downward trend, while the abundance of Bacteroidetes, which decreases with Alzheimer's disease, showed an upward trend. Therefore, we believe that taking nervonic acid oil may help to improve Alzheimer's disease.
Future potential pharmaceutical applications of nervonic acid
Alzheimer’s disease
The pathogenesis of Alzheimer’s disease is mainly concentrated in Aβ senile plaques, tau protein metabolic abnormalities, neuroinflammation and metabolic syndrome. Therefore, due to the above pathogenesis, drug target design focuses on β amyloid protein clearance, tau protein modification, neuroinflammatory inhibition and synaptic plasticity and protection.
At present, there are at least 15 types of Aβ disease modifying drugs, such as aducanumab, lecanemab, ALZ-801, etc.; 19 types of disease modifying drugs targeting neuritis, such as NE3107, AL002, BCG vaccine, etc.; and 15 drugs targeting synaptic plasticity and neuroprotection, including AGB101, AR1001, ATH-1017, etc. Pfizer, Roche, Eli Lilly, Biogen and other pharmaceutical companies all have relevant drug development plans for treating Alzheimer’s disease. In particular, Biogen’s aducanumab is a monoclonal antibody that selectively targets Aβ protein. It is the only pharmaceutical drug that has progressed to the stage of market application, but its marketing was temporarily frustrated because it did not obtain the support of the FDA expert advisory committee in November 2021.
As the main component of the myelin outer membrane, nervonic acid accounts for more than 30% of long-chain fatty acids, and it plays an important role in myelin synthesis (plasticity). It has been reported that nervonic acid can enhance the repair of the myelin sheath (Cell, 2019, 8 (8), 786), and Bao Feng’s work demonstrates that the supplementary intake of nervonic acid can improve the cognitive ability of rats (Food & Function, 2021, DOI: 10.1039 / d1fo03671h). Its mechanism is that nervonic acid regulates the lipid remodeling of blood and brain, which enriches the "beneficial" fat in the blood and brain. Ultimately, this achieves Omega 3 / Omega 6 / Omega 9 fatty acid re-balancing within the body. Especially for rats with hypoxia (low oxygen level) and ischemia (blood deficiency), supplementation with nervonic acid can effectively improve motor ability, cognitive ability and even mental health level (results not yet published). Meanwhile, clinical trials of nervonic acid extract as a nutritional food are being carried out in many hospitals. The registration number of the China Clinical Trial Registration Center is ChiCTR2000041229.
Hypoxic-ischemic encephalopathy (“HIE”)
HIE is a type of brain damage caused by a lack of oxygen to the brain before or shortly after birth. It affects the central nervous system and may cause mild to severe neurological or developmental problems. Bao Feng has conducted studies on HIE in rats that showed that intake of our extract including NA could significantly alleviate HIE damage and enhance learning and memory ability.
Presently, as with the research and development of biological drugs, the extraction process of nervonic acid extracts has undergone only small-scale testing. It is in the pilot testing stage, and management intends to obtain the certification of CMC (Chemical Manufacturing and Control).
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Future Business Plan
In the future, Bao Feng aims to achieve full coverage of products in the fields of food, health care products and medicine, and become the preeminent brand for brain dietary supplements (referred to as new food raw materials products in China).
| · | The company plans to develop different forms of food-based nervonic acid products targeted at different age groups, such as effervescent tablets, meal powder and others. |
| · | The company plans to develop new nervonic acid combination drugs which we expect will be superior to single-ingredient drugs for neurodegenerative disease, such as ALD. The procedure involves preclinical preparation, including target and biomarker analysis, determination of the drug dosage form and applying for clinical approval (IND). Bao Feng is currently engaged in preclinical preparation for an ALD drug and hopes to obtain clinical approval within two years. |
| · | The company plans to study the role of nervonic acid in our genetic metabolism laboratory through metabolomics and genomics. Our genetic metabolism laboratory was jointly established by Bao Feng and the National Health and Occupational Safety and Health Research Center. We believe that understanding the mechanism through which nervonic acid prevents brain disease will lay a theoretical foundation for the development of new products. |
| · | The company plans to continue to apply for patents related to nervonic acid and expects to apply for over 100 patents within five years to achieve technical barriers to competition in the field of nervonic acid, including the technology of extraction and purification. |
Sales and Marketing
We market and sell our products through multiple channels: (i) direct sales force, including our own employees and independent sales agents, and direct online sale platform; and (ii) distribution network, including our domestic and export distributors.
Direct Sales Force and Direct Online Sales Platform
Our Sales Team
As of the date of this Annual Report, our direct sales team consists of 10 employees. Our sales team provides us with direct access to our customers and is capable of addressing our customers’ needs quickly and efficiently. They also coordinate with our distributors and independent sales agents regarding marketing and sales of our products.
The compensation package for our sales team includes a fixed base salary plus commissions based on collected revenues from their sales. We provide our sales team with regular training and internally developed systems to assist them in quickly becoming proficient and productive sales personnel.
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Direct Online Sales Platform
We have established our own e-commerce channel on the WeChat Mini Program platform to promote and sell our products directly to individual customers. In addition, BF Internet markets and sells our Re’Seen drinks over online platforms.
Distribution Network
Bao Feng currently has approximately 55 domestic distributors and 2 export distributors, Distributors usually purchase products from us at a lower price and then resell our products to end customers both domestically and internationally at a comparatively higher price and earn the price difference.
Our partners mainly utilize the following channels:
| · | Basic wholesale channels: We supply nervonic acid products to wholesalers at wholesale prices, then they re-sell them at market retail prices. |
| · | TV shopping channels: Our distributors sell products through TV shopping channels because they believe that the people who watch TV shopping channels are the company’s primary target group, and the company offers its products in combination packages at lower cost. |
| · | Conference marketing: This entails marketing through conferences primarily aimed at eldercare and rehabilitation facility personnel. |
| · | E-commerce: including Alibaba and other third-party channels. |
| · | Special sales channels: chain pharmacies, eldercare and rehabilitation facilities, including specialized brain rehabilitation centers, and hospitals. The company also cooperates with hospital director experts who recommend its products through hospitals and other institutions. |
Baofeng Internet is engaged in online sales of Bao Feng’s products to increase Bao Feng’s market share. Management intends to further expand the marketing of Bao Feng’s products to include:
| · | Targeted advertising: for example, “X Doctor,” “Yang sheng tang” and other programs. The company also plans to advertise through “Kuaishou” and other network programs, as well as live broadcasts, and through video communication for fans, and hopes to guide viewers to the company’s store to purchase products. |
| · | Recruit city partners, accelerate the replication of successful models to big cities, such as Shanghai and Guangzhou, and expand sales channels. |
Our research and development services
By leveraging our registered patents and our own research and development capability, Bao Feng provides research and development services to third party research institutions and corporations. We recognize this revenue when we issue the research report.
Royalty charges
Beijing BF charges its usage-based royalties to customers when customers use its registered patents. The amount of the royalty is agreed and fixed with customers.
Event organization services
Conference meetings and seminars are held and charged to customers based on a fixed service fee contract.
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Customers
Bao Feng markets and sells its products both to individual customers and to distributors and also provides research development, royalty usage and event organization services to customers in China. For the fiscal years ended March 31, 2024, 2023 and 2022, sales revenue from our three largest customers, combined, was $1,395,584, $605,086 and $652,478, or approximately 59.4%, 36.4% and 28.0% of our total sales, respectively. There were two customers accounted for more than 10% of our total revenues for the fiscal year ended March 31, 2024. There was only one customer that accounted for more than 10% of our total revenues for the fiscal year ended March 31, 2023 and two customers that each accounted for more than 10% of our total revenues for the fiscal year ended March 31, 2022.
Raw Materials
Nervonic acid
We obtain Acer truncatum seeds, from which we extract nervonic acid, from the Inner Mongolia government farm and individual farmers, with whom we have cooperation agreements, and from large suppliers. We are not dependent on any individual suppliers.
It normally takes five to six years to get seeds from an Acer truncatum tree. Our company’s unique variety of Acer truncatum, developed with our proprietary technology, has a higher yield than other kinds of Acer truncatum trees and a shorter time to maturity, normally three to four years, which result in increased production of nervonic acid.
Seasonality
Nervonic acid product sales are not seasonal. The amount of sales is stable throughout the year, except for increased sales during the holidays.
Competition
The nervonic acid health product industry is in its early stages; therefore, Bao Feng does not face as much competition as it would in a more established industry. However, as more companies enter the market the competition may be expected to become more intense. Management of Bao Feng plans to preempt the effect of such competition by (i) increasing its Acer truncatum production; (ii) increasing its investment in research and development; (iii) obtaining certification for innovation class III products and drugs; and (iv) enhancing its purification of nervonic acid technology to enter the medical usage market. We will also continue to emphasize marketing in an effort to maintain and strengthen the company’s position in the nervonic acid health product market and will attempt to build the leading nervonic acid health product brand in China.
Currently, Bao Feng’s main competitors in the nervonic acid products market in China are:
| · | Yong Chuntang |
| · | DAZONG Group |
| · | Haizhiling |
| · | Weifang Lvyuan |
At present, these companies are still in the early stage of industrial development. They obtained raw materials of Acer truncatum seed oil and initially processed it into products for sale in the market at prices similar to Bao Feng’s, but the content of nervonic acid is about 4%-5% on average, while the content of nervonic acid produced by Bao Feng can reach 6.89%.
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In addition, Bao Feng enjoys the following competitive advantages:
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Cooperation with national laboratories.
Genetic Metabolism Key Laboratory is a joint project of Bao Feng and Health Commission Occupational Disease Research Center. Complete analytical and testing instruments are available, including LC-MS, GC-MS and LC- QTOF-MS, for targeted and untargeted metabolomics, etc. Excellent laboratories are necessary to develop and prove our theories on the applications of nervonic acid, and research on the mechanism through which nervonic acid works provides the direction for future applications of nervonic acid, giving Bao Feng a competitive edge in the future. |
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Clinical application of nervonic acid.
Bao Feng has formed strategic partnerships with the First Affiliated Hospital of Tsinghua University, Tiantan Hospital, Xuanwu Hospital and the First Hospital of Sanming City. The doctors of the hospital are our consultants. In the future, we plan to carry out clinical application trials of nervonic acid in different areas of medicine. Only through clinical trials can the application and effective concentration of nervonic acid be found, and effective combinations of nervonic acid and other drugs to improve the efficacy of a single target drug be determined. |
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Excellent Acer truncatum germplasm resources.
Although many manufacturers sell crude Acer truncatum oil, the content cannot reach our concentration of nervonic acid, because we have an excellent seed plasm resource. Our Acer truncatum forest has 70,000 mu, all of which are over 100-year-old trees with high and stable nervonic acid content, located in Inner Mongolia. The company cooperates with the government, and the annual limit capacity is estimated to be 400,000 tons. This germplasm resource is unmatched by other companies using newly sown Acer truncatum. Therefore, by using this high content, Acer truncatum crude oil, we can obtain a higher content of nervonic acid with the same process and cost as our competitors. |
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Price.
Through product innovation and exclusive formulae, we improve our products’ effectiveness and taste, while maintaining a low product cost and sales price. In this way we produce unique products at prices suitable for mass consumption. |
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Market-driven research and development allow for continual improvement and long-term client loyalty.
We adhere to a market-oriented R&D approach and actively cooperate with universities, hospitals, medical institutions, distributors and independent sales agents in sorting out our R&D orientation based on real market demand. We continuously upgrade and improve our products and technologies to better suit our customers. |
Business of BF Internet
BF Internet commenced operations in May 2022. It is owned 51% and 49%, respectively, by Bao Feng and Yong Sheng, a shareholder of the Company. Currently, the principal activities of BF Internet are selling and marketing Bao Feng’s recently developed Re’Seen nervonic acid-based drinks over the Tiktok platform. The Company intends that, in the future, BF Internet will also market and sell other products of the Company over the internet.
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Properties
Bao Feng
Bao Feng leases approximately 750 square meters of office space located at Room 525, South Building, No. 10 Anxiang Street, Shunyi District, Beijing, China as the Company’s headquarters. The lease term commenced on May 12, 2020 and expires on May 31, 2029. The lease provides for a rent-free period from May 12, 2020 to May 31, 2022; an annual rental of RMB700,478 (approximately US$102,270) for the period from June 1, 2022 to May 31, 2025 and an annual rental of RMB975,667 (approximately US$142,447) for the period from June 1, 2025 to May 31, 2029.
In addition, Bao Feng leases approximately 400 square meters of office space located at Room 1002, Building 1, East Shilibao Road, Chaoyang District, Beijing, China. The current lease term commenced on June 8, 2023 and expires on June 7, 2026. The lease provides for an annual rental of RMB553,176 (approximately US$80,764) for the first two years of the lease and RMB586,920 (approximately US$85,690) for the third year. Rent is payable semi-annually. Bao Feng is responsible for paying for all utilities.
Bao Feng also leases approximately 314 square meters of warehouse space in which it stores its inventory. The lease for this space, which commenced on February 15, 2021 and expires on February 14, 2026 provides for an annual rental of RMB60,000 (approximately US$8,388) to be paid quarterly. In addition, Bao Feng is responsible for paying for all utilities, management and maintenance fees, leasing tax and other expenses.
BF Internet
BF Internet uses office space of its shareholder, who is also a shareholder of the Company, free of charge.
We believe that our existing office facilities will be sufficient for our operations for the next year.
Employees
As of March 31, 2024, we employed a total of 23 full-time employees, 21 and 2 of whom were employed by Bao Feng and BF Internet, respectively.
Intellectual Property
Patents. The following table contains a list of all patents obtained by Bao Feng as of March 31, 2024.
| 55 |
| List of Patents | |||||
| No. | Name | Category | Registration Number | Date of Registration | Country |
| 1 | Biomarker R1 for the diagnosis of PD and its application | Patent for invention | ZL202210002328.1 | 2024 | China |
| 2 | Method for diagnosing and treating cognitive impairment and use thereof | Utility patent | US20230324418A1 | 2023 | US |
| 3 | Method for diagnosing acting of nervonic acid and use thereof | Utility patent | US20230324419A1 | 2023 | US |
| 4 | Biomarkers for the diagnosis of leukoencephalopathy and their applications | Patent for invention | ZL202110352935.6 | 2023 | China |
| 5 | Biomarkers F3 for the diagnosis of cognitive impairment and their applications | Patent for invention | ZL202110385947.9 | 2023 | China |
| 6 | Combination of biomarkers of leukoencephalopathy and their applications | Patent for invention | ZL202210169509.3 | 2022 | China |
| 7 |
Biomarkers of leukoencephalopathy and their applications
|
Patent for invention | ZL202210173953.2 | 2022 | China |
| 8 | Biomarkers for Parkinson's disease diagnosis and their applications | Patent for invention | ZL202210002332.8 | 2022 | China |
| 9 | Biomarkers for Parkinson's disease detection and their applications | Patent for invention | ZL202210002327.7 | 2022 | China |
| 10 | Combination of biomarkers for Parkinson's disease and their applications | Patent for invention | ZL202210002325.8 | 2022 | China |
| 11 | Biomarker for the diagnosis of Parkinson’s disease and its applications | Patent for invention | ZL202210002333.2 | 2022 | China |
| 12 |
Biomarkers for diagnosing the effect of Nervonic Acid supplementation on ischemic-hypoxic encephalopathy in a plateau environment and their applications |
Patent for invention | ZL202111046351.2 | 2021 | China |
| 13 |
Biomarkers for diagnosing the effect of Nervonic Acid supplementation in ischemic-hypoxic encephalopathy and their applications |
Patent for invention | ZL202111046352.7 | 2021 | China |
| 14 |
Biomarkers for the diagnosis of cerebral infarction and leukoencephalopathy and their applications |
Patent for invention | ZL202110999863.4 | 2021 | China |
| 56 |
| 15 |
Biomarkers used to diagnose cerebral infarction in patients with leukoencephalopathy and their applications |
Patent for invention | ZL202110999855.X | 2021 | China |
| 16 | Biomarkers used to diagnose cerebral infarction in patients with leukoencephalopathy and their applications | Patent for invention | ZL202110999834.8 | 2021 | China |
| 17 | Biomarkers used to diagnose cerebral infarction in patients with leukoencephalopathy and their applications | Patent for invention | ZL202110999853.0 | 2021 | China |
| 18 | Biomarkers F7 for diagnosis of leukoencephalopathy and their applications | Patent for invention | ZL202110385946.4 | 2021 | China |
| 19 | Biomarkers for the diagnosis of leukoencephalopathy and their applications | Patent for invention | ZL202110352946.4 | 2021 | China |
| 20 | Biomarkers for the diagnosis of cognitive impairment and their applications |
Patent for invention
|
ZL202010816217.5 | 2021 | China |
| 21 | Biomarkers for the diagnosis of cognitive impairment and their applications | Patent for invention | ZL202010816390.5 | 2020 | China |
| 22 | Biomarkers take the charge for the function after Acer truncatum Bunge supplement and their applications | Patent for invention | ZL202010816389.2 | 2017 | China |
The term for invention patents in China is 20 years from the filing date. The term for utility model patents in the U.S. is generally 20 years from the filing date.
Copyrights. The following table contains a list of all copyrights obtained by Bao Feng as of March 31, 2024.
| 57 |
| List of Copyrights | |||||
| No. | Name | Category | Registration Number | Date of Registration | Country |
| 1 | "Bao Feng plant source nervonic acid absorption rate test system V1.0" |
Computer software copyright registration certificate |
2019SR1392391 | 2019 | China |
| 2 |
"Bao Feng plant source nervonic acid production for temperature control management system V1.0"
|
Computer software copyright registration certificate |
2019SR1392056 | 2019 | China |
| 3 | “Bao Feng vegetable oil composition analysis management System V1.0” |
Computer software copyright registration certificate |
2019SR1392049 | 2019 | China |
| 4 | “Bao Feng nervonic acid effectiveness test management system V1.0” |
Computer software copyright registration certificate |
2019SR1392382 | 2019 | China |
| 5 | "Early screening and prevention system of Bao Feng nervous acid system disease V1.0" |
Computer software copyright registration certificate |
2019SR1392063 | 2019 | China |
| 6 | “Bao Feng nervonic acid extraction and purification control system V1.0” |
Computer software copyright registration certificate |
2019SR1390248 | 2019 | China |
| 7 | "Bao Feng nervonic acid structural diversity analysis system V1.0" |
Computer software copyright registration certificate |
2019SR1392398 | 2019 | China |
| 8 | "Bao Feng nerve disease drug effectiveness evaluation system V1.0" |
Computer software copyright registration certificate |
2019SR1392318 | 2019 | China |
| 9 | “Bao Feng brain disease personalized diagnosis system V1.0” |
Computer software copyright registration certificate |
2019SR1392311 | 2019 | China |
| 10 |
“Bao Feng old-age health care nutrition formula automatic control system V1.0”
|
Computer software copyright registration certificate |
2019SR1392078 | 2019 | China |
| 58 |
| 11 | "Bao Feng high throughput metabolite analysis platform V1.0" |
Computer software copyright registration certificate |
2019SR1384522 | 2019 | China |
| 12 |
"Bao Feng children growth nutrition components automatic collocation system V1.0"
|
Computer software copyright registration certificate |
2019SR1392461 | 2019 | China |
| 13 | "Dementia elderly emergency warning system V1.0" |
Computer software copyright registration certificate |
2017SR374539 | 2017 | China |
| 14 | "Acer truncatum health products health management platform V1.0" |
Computer software copyright registration certificate |
2017SR374809 | 2017 | China |
| 15 |
Acer truncatum seed oil dietary analysis and nutritional evaluation system V1.0"
|
Computer software copyright registration certificate |
2017SR374548 | 2017 | China |
| 16 | "Nervonic acid on the brain effect data analysis software V1.0" |
Computer software copyright registration certificate |
2017SR374521 | 2017 | China |
| 17 | “Acer truncatum online mall platform software V1.0” |
Computer software copyright registration certificate |
2017SR378613 | 2017 | China |
| 18 | "Acer truncatum high quality seedling Breeding management system V1.0" |
Computer software copyright registration certificate |
2017SR378623 | 2017 | China |
| 59 |
Trademarks. Bao Feng has registered the following trademarks as of March 31, 2024:
List of Trademarks
| No. | Trademark | Status | Registration No. | Validity Period | Country |
| 1 | 瑙优能 | Registered | 68122165 |
05/07/2023 to 05/06/2033 |
China |
| 2 | 瑙优能 | Registered | 68127189 |
05/21/2023 to 05/20/2033 |
China |
| 3 | 瑙优能 | Registered | 68120218 |
05/14/2023 to 05/13/2033 |
China |
| 4 | RE’SEEN | Registered | 65724282 |
04/07/2023 to 04/06/2033 |
China |
| 5 | RE’SEEN | Registered | 65736103 |
02/07/2023 to 02/06/2033 |
China |
| 6 | 图形 | Registered | 70093989 |
12/07/2023 to 12/06/2033 |
China |
| 7 |  logo |
Registered | 70112488 |
11/14/2023 to 11/13/2033 |
China |
| 8 |  logo |
Registered | 70469183 |
11/14/2023 to 11/13/2033 |
China |
| 9 | RE’SEEN | Registered | 64783680 |
01/28/2023 to 01/27/2033 |
China |
| 10 |  睿存 |
Registered | 59203171 |
05/14/2022 to 05/13/2032 |
China |
| 11 |  睿存 |
Registered | 59207484 |
03/07/2022 to 03/06/2032 |
China |
| 12 | 极光饮 | Registered | 65461654 |
12/07/2022 to 12/06/2023 |
China |
| 13 | 睿存 | Registered | 64524014 |
12/14/2022/ to 12/13/2032 |
China |
| 14 | RE’SEEN | Registered | 64783112 |
11/21/2022 to 11/20/2032 |
China |
| 15 | 睿存 | Registered | 64517029 |
10/28/2022/ to 10/27/2032 |
China |
| 16 | 瑙优能 | Registered | 64348674 |
10/21/2022 to 10/20/2032 |
China |
| 17 |
素颜姐姐 Pretty Ladies |
Registered |
55483069 |
11/28/2021 to 11/27/2031 |
China |
| 18 | 睿存 |
Registered | 53205611 |
10/07/2021 to 10/06/2031 |
China |
| 19 |  logo |
Registered |
49423266 |
08/21/2021 to 08/20/2031 |
China |
| 20 |
瑙优能 LIFE’S NA |
Registered | 50631290 |
06/28/2021 to 06/27/2031 |
China |
| 21 |
瑙动力 NEURO ENHANCER |
Registered | 50307049 |
07/14/2021 to 07/13/2031 |
China |
| 22 |
BAOFENG BIOTECH |
Registered | 49426820 |
07/14/2021 to 07/13/2031 |
China |
| 23 |
保卫五点零 Vision protection 5.0 |
Registered |
42961505 |
10/14/2020 to 10/13/2030 |
China |
| 24 |
木之源脑动力 Muzhiyuan Neuro enhancer |
Registered |
42187448 |
07/14/2020 to 07/13/2030 |
China |
| 25 |
木之源脑动力 Muzhiyuan Neuro enhancer |
Registered |
38984285 |
02/28/2020 to 02/27/2030 |
China |
| 60 |
| 26 |
春草秋灌 CHUN CAO QIU GUAN |
Registered |
37113375 |
02/07/2020 to 02/06/2030 |
China |
| 27 |
春草秋灌 CHUN CAO QIU GUAN |
Registered |
37108814 |
12/28/2019 to 12/27/2029 |
China |
| 28 |
木之源脑动力 Muzhiyuan Neuro enhancer |
Registered |
34025681 |
06/14/2019 to 06/13/2029 |
China |
| 29 |
木之源脑动力 Muzhiyuan Neuro enhancer |
Registered |
33318371 |
06/28/2019 to 06/27/2029 |
China |
| 30 |
木之源 Muzhiyuan |
Registered |
31473050 |
05/21/2019 to 05/20/2029 |
China |
| 31 | 脑世家 | Registered | 31887147 |
03/28/2019 to 03/27/2029 |
China |
| 32 |
高原伴旅 Plateau partner |
Registered |
23778723 |
04/21/2018 to 04/20/2028 |
China |
| 33 |
古茶枫润 Gu Cha Feng Run |
Registered |
23358402 |
03/21/2018 to 03/20/2028 |
China |
| 34 |
赤枫 Chi Feng |
Registered |
23358307 |
06/07/2018 to 06/06/2028 |
China |
| 35 |
枫之吻 Fantastic Kiss |
Registered |
22551933 |
02/14/2018 to 02/13/2028 |
China |
| 36 | FANTASTIC KISS | Registered | 22518641 |
02/14/2018 to 02/13/2028 |
China |
| 37 |  logo |
Registered |
20241222 |
07/28/2017 to 07/27/2027 |
China |
| 38 |
木之源 Muzhiyuan |
Registered |
16233849 |
04/14/2016 to 04/13/2026 |
China |
Regulations In China Applicable To Our Business
Consumer Protection
According to the Law of the People’s Republic of China on the Protection of Consumer Rights and Interests (the “Consumer Protection Law”), as amended in October 2013 and effective in March 2014, the rights and interests of consumers who buy or use commodities or receive services for the purposes of daily consumption are protected and all producers, service providers and distributors involved (collectively, the “Operator”) must ensure that the products and services will not cause damage to persons and properties. The amended Consumer Protection Law further strengthens the protection of consumers and imposes more stringent requirements and obligations on the Operators selling through the Internet. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within seven days after receipt of such goods for no reason. Violations of the Consumer Protection Law may result in indemnification liabilities and/or the imposition of fines. In addition, if the circumstances are serious, the Operators will be ordered to suspend their operations and their business licenses will be revoked. Criminal liability may be incurred in some serious cases in accordance with the relevant PRC laws.
Product Quality
According to the Product Quality Law of the People’s Republic of China (the “Product Quality Law”) as amended and effective in December 2018, consumers who sustain losses or damages from defective products are entitled to be indemnified by either manufacturers or distributors. Nevertheless, if manufacturers are responsible for the defective products and the losses or damage caused thereby, the distributors which have indemnified consumers for their losses may seek claims on the indemnities against the manufacturers. In addition, products offered for sale must satisfy the relevant quality and safety standards. Enterprises shall not produce or sell counterfeit products in any fashion. Violations of the Product Quality Law may result in civil liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as confiscation of products illegally produced and sold and the proceeds from such sales. Severe violations may subject the responsible individual or enterprise to criminal liabilities.
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Competition Law
Pursuant to the Anti-unfair Competition Law of the People’s Republic of China (the “Competition Law”), as amended and effective in April 2019, business operators shall abide by the principles of voluntariness, equality, fairness, honesty and credibility, comply with laws and business ethics, and shall not conduct any act that disrupts the order of market competition or causes damage to the lawful rights and interests of other operators or consumers in violation of the Competition Law. Violations of the Competition Law may result in civil liability, the imposition of fines and, in serious cases, revocation of the operator’s business license as well as incurrence of criminal liability.
Administrative Measures for the Administration of Sales Promotion Activities of Retailers
According to the Administrative Measures for the Sales Promotion Activities of Retailers as promulgated in September 2006 and effective in October 2006, when undertaking sales promotion activities, retailers should follow the principles of lawfulness, fairness and good faith and may not impair the lawful rights and interests of consumers or other business operators. Furthermore, when undertaking sales promotion activities, a retailer should display the promotion contents at an eye-catching place in its business site and clearly mark the prices with the price tags; a retailer shall not cheat or induce the consumers to buy commodities by giving them a discount on the basis of a false original price or by marking a misleading price or taking a misleading price method; and a retailer shall not reduce the quality or after-sale service level for the promotion commodities. No retailer may undertake any sales promotion activity by making up a reason such as rummage sale, store dismantlement, termination of business, suspension of business or shifting to another business. Violations of the above rules may result in relevant administrative or criminal responsibilities.
Regulations Related to Online Trading
Administrative Measures for Online Trading. According to the Protection of Consumer Rights and Interests (the “Consumer Protection Law”), as amended in October 2013 and effective in March 2014, and the Supervision and Administrative Measures for Online Trading as promulgated in March 2021 and effective in May 2021, where a company engages in online commodity trading and related services, it shall (a) obtain relevant administrative license for the commodities sold or services provided as required by law; (b) disclose the basic information indicated on its business license or give a hyperlink to its business license at a notable position of the homepage of its website or the webpage on its business operations; (c) state integral information of its commodities and the dealing details; (d) ensure the integrity of such commodities or services; (e) issue such purchase vouchers or service receipts such as invoices to consumers; (f) allow consumers to return the commodities within seven days from receiving the commodities without cause and refund the prices paid by consumers; (g) remind consumers of clauses of significant interest to consumers; (h) not, by standard terms and conditions or other means, impose unfair or unreasonable rules on consumers to exclude or restrict consumer rights, reduce or remit the responsibilities of dealers, aggravate the responsibilities of consumers, among others, or force consumers into any transactions by standard terms and conditions and technical means; and (i) protect the consumers’ private information. In addition, online commodity operators may not use unauthorized similar domain name, name or logo to mislead consumers, conduct misleading and false propaganda, make lottery sales, harm competitors’ business reputation or conduct other unfair competition acts. Violations of the above rules may result in the imposition of warning and the order to make corrections, and fines may be imposed if the violator refuses to do so.
Electronical Commerce Law. According to the Electronical Commerce Law of the People’s Republic of China (the “E-commerce Law”) as promulgated in August 2018 and effective in January 2019, a series of requirements on e-commerce are stipulated, i.e. natural persons, legal persons and unincorporated associations that are engaged in business activities of selling products or providing services over the Internet and other information networks, which shall include e-commerce platform operators, persons doing online business over e-commerce platforms, and e-commerce operators that sell products or provide services over their own websites or through other network services. Pursuant to the currently effective Administrative Measures for Online Trading, a natural person engaging in online trading of commodities and provision of relevant services shall conduct business activities through a third-party trading platform, and provide the platform with his or her valid and true contact and identity information, and if registration conditions are met, the natural person shall undergo industrial and commercial registration formalities in accordance with the law. However, the E-Commerce Law requires all e-commerce operators to go through the formalities for the registration of market entities, i.e. industrial and commercial registration formalities in accordance with the law, except for certain limited cases as stipulated in the E-commerce Law. According to Measures for the Investigation and Punishment of Unpermitted and Unlicensed Business Operations as promulgated in August 2017 and effective in October 2017, whoever engages in business operation without going through industrial and commercial registration formalities may be subject to punishment by local administrative authority for industry and commerce, including but not limited to being ordered to stop illegal conduct, confiscation of the illegal gains and imposition of fines of not more than RMB10,000. The E-commerce Law also requires e-commerce operators to protect consumers’ right to know as well as their right to choose, protect their personal information, and also requires e-commerce operators to clearly point out to consumers their tie-in sales in which additional services or products are added by merchants to a purchase, and not to assume consumers’ consent to such tie-in sales by default.
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Regulations related to Foreign Invested Enterprises
According to the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021) (the “Negative List”) as promulgated and effective in January 2022, the original Special Administrative Measures (Negative List) for the Access of Foreign Investment (2020 was repealed. Overseas investors are not allowed to invest in any foreign investment prohibited field on the Negative List and shall have an access permit for investing in a non-prohibited investment field on the Negative List. Fields not included in the Negative List for the market entry of foreign investment must be managed according to the principle of equal treatment of domestic and foreign investment.
The business scope of Bao Feng is nervonic acid research, the development of nervonic acid based herbal and chemical drugs and the sale of dietary supplements (referred to as new food raw materials products in China) containing nervonic acid. According to the Negative List, the business scope of Bao Feng does not fall in any field on the Negative List and therefore is not subject to any special management measures for the access of foreign investment.
The Foreign Investment Law of the People’s Republic of China (the “Foreign Investment Law”), which was promulgated in March 2019 and became effective on January 1, 2020, replaced the three legacy laws on foreign invested enterprises including the Wholly Foreign-owned Enterprises Law of the People’s Republic of China (the “Wholly Foreign-owned Enterprises Law”) which was previously applicable to Bao Feng. The organizational form, organization structure and activities of a foreign-invested enterprise are now governed by the provisions of the Company Law of the People’s Republic of China, the Partnership Enterprise Law of the People’s Republic of China and other relevant laws. However, the Foreign Investment Law sets up a transitional period of 5 years after the implementation of the Foreign Investment Law, during which foreign-invested enterprises established according to the Wholly Foreign-owned Enterprise Law before the implementation of the Foreign Investment Law may maintain their original organization forms, etc. Specific implementing measures are to be prescribed by State Council.
Regulations on Intellectual Property Protection
Intellectual property rights, also known as “knowledge ownership rights,” refer to “property rights enjoyed by right holders for the intellectual work created by their intellectual work,” and are generally only valid for a limited time. Various intellectual creations such as inventions, designs, literary and artistic works, as well as signs, names and images used in commerce, can all be considered intellectual property owned by a person or organization. Since the 1980s, while continuously improving the construction of the domestic legal system, China has successively joined some major international conventions, treaties and agreements for the protection of intellectual property rights. In particular, on December 11, 2001, China became a member of the World Trade Organization’s Agreement on Trade-related Intellectual Property Rights.
Trademark. The Trademark Law of the PRC was passed by the National People’s Congress on August 23, 1982 and last amended in April 2019 (effective November 1, 2019). The law states that an applicant for trademark registration should fill in the product category and product name of the used trademark in accordance with the stipulated commodity classification form and file an application for registration. Trademark registration applicants can apply for registration of the same trademark for multiple categories of goods through one application. A registered trademark is valid for a period of ten years from the date of approval of the registration. If the registered trademark has expired and it needs to continue to be used, the trademark registrant must go through the renewal formalities within 12 months before the expiration of the time limit; if it cannot be handled during this period, it may grant a grace period of six months. Each renewal registration is valid for a period of ten years, counting from the date following the expiration of the previous validity period of the mark. If registrants fail to complete the renewal formalities at the expiration of the time limit, their registered trademarks are cancelled. In addition, if the registered trademark is a well-known trademark, it is managed in accordance with the Regulations on the Recognition and Protection of Well-known Trademarks issued by the State Administration of Industry and Commerce on July 3, 2014. The regulation states that well-known trademarks are trademarks that are well-known to the relevant public in China. The relevant public includes consumers who are related to the use of a certain type of goods or services marked by the trademark, other operators who produce the aforementioned goods or provide services and the sellers and related personnel involved in the distribution channels. The recognition of well-known trademarks follows the principle of case identification and passive protection.
As of March 31, 2024, Bao Feng has registered, or filed applications to register, 38 trademarks in the PRC.
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Copyright. The Copyright Law as amended in February 2010 and effective in April 2010, and the Regulations for the Implementation of Copyright Law as amended in January 2013 and effective in March 2013, provide protection to copyright of the works of Chinese citizens, legal persons or other organizations, whether published or not. The copyright includes multiple types of personal rights and property rights: right of publication, authorship, alteration, integrity, reproduction, distribution, rental, exhibition, performance, projection, broadcasting, dissemination via information network, cinematography, adaptation, translation, compilation and so on. The protection of an author’s rights of authorship, alteration and integrity shall not be subject to a limit, while the term of protection with respect to a citizen’s work for the right of publication, reproduction and others is the lifetime of the author plus 50 years. The term of protection for the right of publication and other rights to the work of a legal person or other organization, or a work for hire in which the copyrights (excluding the right of authorship) shall vest in a legal person or other organization, shall be 50 years, and shall end on December 31 of the 50th year after the work’s first publication. Use of another’s work shall be subject to conclusion of a licensing contract while under certain circumstances a work may be used without authorization and without payment of remuneration, such as for personal study, research or enjoyment.
As of March 31, 2024, Bao Feng owns 18 computer software copyrights in the PRC.
Patent. According to the Patent Law as amended in December 2008 and effective in October 2009, and Rules for the Implementation of the Patent Law as amended in January 2010 and effective in February 2010, inventions, utility models and designs are encouraged and the lawful rights and interests of patentees are protected. Invention patents are valid for 20 years, while design patents and utility model patents are valid for 10 years, from the date of application. The Chinese patent system adopts a first-to-file principle, which means that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first. To be patentable, invention or utility models must meet three criteria: novelty, inventiveness and practicability. Any organization or individual that intends to exploit the patent of another person shall conclude a license contract with the patentee and pay the royalties. The use of a patent without the consent of or a proper license from the patent owner constitutes an infringement of the owner’s patent rights.
As of March 31, 2024, Bao Feng owns 20 invention patents in the PRC and two utility patents in the United States.
Foreign Currency Exchange
The Regulations on Foreign Exchange Management of the PRC were promulgated by the State Council of the PRC on January 29, 1996 and revised on January 14, 1997 and August 1, 2008, respectively. The regulations stipulate that foreign exchange income from current accounts of domestic institutions shall be sold to the designated foreign exchange bank in accordance with the provisions of the State Council concerning the management of foreign exchange, sales of foreign exchange and payment of foreign exchange, or be approved to open foreign exchange accounts in designated foreign exchange banks. The remittances used by domestic institutions for the current account shall be paid in accordance with the provisions of the State Council concerning the management of foreign exchange, sales of foreign exchange and payment of foreign exchange, with valid certificates and commercial documents, to foreign exchange designated banks. Foreign exchange collections and import payments made by domestic institutions shall be subject to verification procedures in accordance with the regulations of the State on the management of the cancellation of foreign exchange receipts for export and the verification of the import payment and foreign exchange cancellation. Foreign exchange earnings from capital accounts of domestic institutions shall be subject to the opening of foreign exchange accounts in designated foreign exchange banks in accordance with the relevant regulations of the State and shall be approved by the foreign exchange administrative authority if they are sold to designated foreign exchange banks.
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On October 21, 2005, the State Administration of Foreign Exchange (“SAFE”) issued a Circular on the Relevant Issues Concerning Domestic Investors Financing through Overseas Special Purpose Vehicles and Foreign Exchange Management of Return Investment, namely Circular 75, which came into effect on November 1, 2005. The term “special purpose company” as mentioned in the circular refers to an overseas company directly established or indirectly controlled for the purpose of overseas equity financing (including convertible bond financing) by a domestic resident legal person or a domestic resident natural person with the assets or equity of a domestic company held by it. The “return investment” in the circular refers to the direct investment activities carried out by domestic residents through the special purpose company, including but not limited to the following methods: purchasing or replacing the Chinese company’s equity in a domestic company, setting up a foreign-invested enterprise in the country and purchasing or negotiating the control of domestic assets through the company, negotiating the purchase of domestic assets, establishing a foreign-invested enterprise with the investment in the asset and increasing the capital of the domestic enterprise. The “domestic resident legal person” in the circular refers to a legal person and other economic organization legally established in China; “domestic resident natural person” refers to a natural person holding a legal ID card such as an ID card or passport of the PRC, or natural persons habitually residing in China because of economic interests although they do not have legal status in China. The term “control” in this circular refers to the acquisition, trust, holding, voting right, repurchase, convertible bonds, etc. of domestic residents to acquire the operating right, income right or decision-making right of a special purpose company or a domestic company. Before a domestic resident establishes or controls an overseas special purpose company, he must, with relevant materials, apply to the local foreign exchange branch and foreign exchange administration department (hereinafter referred to as the SAFE) to apply for foreign exchange registration procedures for overseas investment. Domestic residents who inject the assets or equity of domestic enterprises owned by them into special purpose companies or conduct overseas equity financing after injecting assets or equity into special purpose companies, must go through the formalities for the change in the foreign exchange registration of overseas investment in relation to their equity in the special purpose company and their changes, and they should provide relevant materials when handling. After injecting a special purpose company or investing in foreign equity financing after injecting assets or equity into a special purpose company, the company shall handle the foreign exchange registration change procedures for overseas investment in relation to the equity of the special purpose company and its changes and shall provide relevant material. After completing procedures for the foreign exchange registration and change of overseas investment in accordance with regulations, the domestic residents may pay special purpose companies for profits, dividends, liquidation, equity conversion, capital reduction, etc. If a special purpose company has any significant capital changes such as capital increase or reduction, equity transfer or replacement, merger or division, long-term equity or debt investment, external guarantee, etc. and does not involve return investment, the domestic residents must apply to SAFE for handling the change of foreign exchange registration of overseas investment or filing procedures within 30 days from the occurrence of major events. If a domestic resident set up or controlled a special purpose company abroad before the implementation of this notice and completed the return investment but failed to register the foreign investment registration of the foreign investment according to the provisions, he was required to go to the local SAFE to renew the foreign investment registration of the foreign investor before March 31, 2006 according to the provisions of this notice. After completing the renewing registration of foreign exchange registration of overseas investment, SAFE may handle foreign exchange registration procedures for foreign investment and foreign debt for the relevant domestic enterprise.
On August 29, 2008, SAFE issued a Circular on the Improvement of the Business Operations Related to Foreign Exchange Capital Payment and Foreign Exchange Capital Management of Foreign-invested Enterprises, that is, Circular No. 142. The circular indicates that the RMB funds received from the foreign exchange enterprise’s capital gains shall be used within the business scope approved by the government approval department. Unless otherwise specified, the RMB funds obtained through settlement shall not be used for domestic equity investment. Excluding commercial real estate investment enterprises, foreign-funded enterprises may not purchase domestic real estate that is not for their own use in the form of RMB funds obtained through capital settlement. The use of RMB funds from foreign exchange-funded enterprises for capital investment in securities shall be implemented in accordance with relevant state regulations.
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On November 9, 2011, SAFE issued a circular on further clarifying and standardizing issues concerning the management of foreign exchange operations for certain capital accounts, namely Circular 45, which clarified the scope of application of Circular 142. The circular pointed out that foreign-invested enterprises must not use the RMB funds derived from the foreign exchange capital settlement for domestic equity investment. Foreign-invested enterprises with equity investment approved by the relevant competent authorities must use their foreign exchange capital and domestic Chinese-funded institutions must use the foreign exchange funds in the asset liquidation account for domestic equity investments, with reference to the principle of foreign exchange capital contribution management of foreign-invested companies. Foreign-funded enterprises must not issue entrusted loans, repay inter-enterprise loans (including third-party advances) or repay bank loans that are re-lending to third parties in the form of RMB funds derived from foreign exchange capital settlement. Foreign-funded enterprises may not, in principle, deliver various types of deposits in the form of RMB funds derived from foreign exchange capitalization. Funds in the dedicated deposit account may not be settled.
On July 4, 2014, SAFE issued a circular on the issues relating to the pilot reform of foreign exchange capital management of foreign-invested enterprises in certain regions (i.e., Circular 36). The circular pointed out that since August 4, 2014, pilot projects for the reform of the management of foreign exchange capital in foreign exchange enterprises will be carried out in some regions. The foreign exchange capital recognized in the capital contribution account of a foreign-invested enterprise through the foreign exchange administration where it is located can be processed at the bank according to the actual business needs of the enterprise. The capital of a foreign-invested enterprise and the RMB funds derived from its settlement of foreign exchange shall not be used for the following purposes:
| (i) | it shall not be used directly or indirectly for expenditures outside the scope of business operations or prohibited by national laws and regulations; |
| (ii) | unless otherwise provided by laws and regulations, no direct or indirect investment in securities may be used; |
| (iii) | may not directly or indirectly be used to issue RMB entrusted loans (except for business scope permits), repayment of inter-enterprise loans (including third-party advances), and repayment of bank-denominated loans that have been transferred to third parties; and |
| (iv) | except for commercial investment in real estate companies, they may not be used to pay for the purchase of non-self-use real estate. |
Also, on July 14, 2014, SAFE issued a circular on the related issues concerning Domestic Residents’ Foreign Investment through Special Purpose Companies and Foreign Exchange Management for Return Investment (“Circular 37”), which replaced Circular 75. Compared with Circular 75, Circular 37 further simplified and facilitated the cross-border capital transactions of domestic residents involved in investment and financing activities through special purpose companies. The circular stipulates that SAFE shall exercise registration management for the establishment of special purpose companies for domestic residents. Before a domestic resident can use the legal assets or rights at home and abroad to invest in a special purpose company, he shall apply to SAFE for the foreign exchange registration formalities for overseas investment. If the domestic residents’ profits and bonuses obtained from special purpose companies are transferred back to China, they shall be handled in accordance with the current regulations on foreign exchange management; if the foreign exchange income from capital changes is transferred back to China, they shall be handled in accordance with the foreign exchange management provisions for capital accounts.
On March 30, 2015, SAFE issued a notice on reforming the foreign exchange capital management of foreign-invested enterprises, namely, Circular No. 19, which took effect on June 1, 2015. The circular indicates that SAFE has decided to implement the reform of foreign exchange capital management of foreign-invested enterprises on a nation-wide basis after summarizing the pilot experience in previous regions. At the same time, Circular 142 and Circular 36 were repealed.
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Regulations on Dividend Distribution
The principal regulations governing dividend distributions by wholly foreign owned enterprises include the Company Law, as amended and effective in October 2018, the Foreign Investment Law and Regulation on the Implementation of the Foreign Investment Law as promulgated and effective in January 2020. Under these laws and regulations, wholly foreign owned enterprises in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with the PRC accounting standards and regulations. Additionally, a wholly foreign owned enterprise is required, as other enterprises subject to PRC laws, to set aside at least 10% of its after-tax profits each year, if any, to fund statutory reserve funds of the enterprise until the cumulative amount of such funds reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Under the relevant PRC law, no net assets other than the accumulated after-tax profits can be distributed in the form of dividends.
Regulations on Labor
According to the Labor Law of the PRC (promulgated in 1994, amended in 2009 and 2018), Labor Contract Law of the PRC (promulgated in 2007, amended in 2012) and Implementation Regulations of the Labor Contract Law of the PRC (promulgated in 2008), it is stipulated that employers and laborers should establish labor contracts when they establish labor relations. The labor contract concluded according to law is binding, and employers and laborers shall perform the obligations stipulated in the labor contract. Where a labor relationship has been established and a written labor contract has not been concluded at the same time, a written labor contract shall be concluded within one month from the date of employment. Where an employer and a laborer conclude a labor contract prior to employment, the labor relationship shall be established from the date of employment. The state implements a minimum wage security system. The specific standards for minimum wages are stipulated by the people’s governments of provinces, autonomous regions and municipalities directly under the Central Government and reported to the State Council for the record. The employer’s payment of laborers’ wages must not be less than the local minimum wage standard. The employer must provide laborers with labor safety and hygiene conditions that are in compliance with the state regulations and necessary labor protection supplies. Workers engaged in occupational hazard operations should carry out regular health checks.
The provisions concerning the employment of foreigners in China are mainly based on the Regulations on the Administration of Employment of Foreigners in China jointly issued by the Ministry of Labor, the Ministry of Public Security, the Ministry of Foreign Affairs and the Ministry of Foreign Trade and Economic Cooperation on January 22, 1996, as amended on November 12, 2010 and March 13, 2017. The regulation states that employers employing foreigners must apply for employment permits for the foreigner. Foreigners can only be hired after obtaining permission and obtaining the Employment License for Foreigners of the PRC (hereinafter referred to as “permit”). Foreigners employed in China should enter the country on a Z-visa (if they have a mutual visa exemption agreement, they should be dealt with according to the agreement). After entering China and obtain the Foreigner’s Employment Permit (hereinafter referred to as “employment permit”), they will be able to obtain employment in China. Foreigners who have not obtained a residence permit (namely, those with F, L, C and G visas), foreigners studying in China or performing internships and dependents of foreigners holding a Z visa may not be employed in China. In exceptional circumstances, the employer may apply for a permit in accordance with the approval procedures stipulated in these Regulations. Foreigners employed with a permit to the public security agency change their status and apply for an employment permit or residence permit. Employing units and foreigners hired shall conclude labor contracts according to law. The duration of a labor contract must not exceed five years. When the employment contract signed between the foreigner and the employing unit expires, the employment permit will be invalid.
The circular concerning the Handling of Work Permits for Foreign Experts Coming to China issued by the State Administration of Foreign Experts Affairs on September 30, 2005, states that foreign experts hired to work in China should obtain the Work Permit for Foreign Experts to Come to China. Foreign experts applying for Work Permits for Foreign Experts to Work in China shall abide by Chinese laws and regulations, be in good health, have no criminal record and meet one of the following conditions:
| (i) | to implement intergovernmental agreements and agreements between international organizations, and foreign trade contracts, foreign professional skills or management personnel working for employment in China; |
| (ii) | foreign professionals who are engaged in education, scientific research, journalism, publishing, culture, arts, health, sports, etc. in China; |
| (iii) | appointed as a deputy general manager or above in an enterprise in China, or a foreign professional or technical person enjoying equal treatment; |
| (iv) | foreign experts or human agency agencies accredited by the State Administration of Foreign Experts Affairs Representatives of nationalities; and |
| (v) | applicants for work in the fields of economy, technology, engineering, trade, finance, accounting, taxation, tourism, etc., with special expertise, foreign professional skills or management personnel in short supply in China. |
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Foreign experts in paragraphs (ii) and (iii) shall have a bachelor’s degree or above and more than 5 years of relevant work experience. All units intending to hire foreign experts shall be entitled to Accreditation of Foreign Experts Units and obtain the Certificate of Employment of Foreign Expert Units. This certificate is the basic proof of foreign nationals applying for work permits, invitation letters, foreign expert certificates and residence procedures in China. The Provincial Foreign Experts Bureaus, State Council related ministries and commissions, and the directly affiliated agencies’ foreign affairs divisions (bureaus) are responsible for the annual inspection work of the local or department according to the annual inspection notice issued by the State Administration of Foreign Experts Affairs and submit the regional annual inspection report to the State Administration of Foreign Experts Bureau by the end of December. The National Bureau of Foreign Experts conducts annual inspections of all eligible units from January 1 to January 31 every year.
According to the decision regarding the cancellation of 13 administrative licenses of the State Council issued by the State Council on February 13, 2016, the accreditation of foreign experts by the State Foreign Experts Bureau was cancelled.
On March 28, 2017, the State Administration of Foreign Experts Affairs, the Ministry of Human Resources and Social Security, the Ministry of Foreign Affairs and the Ministry of Public Security jointly issued a notice on the Full Implementation of the Work Permit System for Foreigners to Come to China. The circular states that foreigners allowed to work in China will receive Work Permits for Foreigners to Come to China to replace Foreigner Employment Permits and Foreign Experts to Work Permits in China since April 1, 2017.
Although Bao Feng does not currently employ any foreigners, management hopes to employ foreigners and foreign experts in the future as part of its expansion plan.
Tax regulations
PRC corporate income tax. On March 6, 2007, the National People’s Congress of the PRC issued the Enterprise Income Tax Law of the PRC, which was implemented on January 1, 2008 and revised on February 24, 2017. The tax law stipulates that foreign-invested enterprises and domestic enterprises have an income tax rate of 25%.
On April 22, 2009, the State Administration of Taxation issued a notice on Relevant Issues of Overseas Registered Chinese-Funded Controlled Enterprises Recognized as Resident Enterprises on the Basis of Actual Management Institutional Standards, which became effective on January 1, 2008. The circular states that overseas Chinese-invested enterprises that meet the following conditions shall determine that they are resident companies of the actual administrative agency in China (hereinafter referred to as non-domestically registered resident enterprises), implement corresponding tax administration and collect corporate income tax on their income from inside and outside China:
| (i) | the places where senior management personnel responsible for the implementation of daily production and operation management operations and their senior management departments perform their duties are mainly located in China; |
| (ii) | the company’s financial decisions (such as borrowings, lending, financing, financial risk management, etc.) and personnel decisions (such as appointments, dismissals, remunerations, etc.) are determined by institutions or personnel located in China or need to be approved by an organization or person located in China; |
| (iii) | the company’s main property, accounting book, company seal, board of directors and minutes of shareholders’ meetings, etc. are located or stored in China; and |
| (iv) | 50% or more of the voting directors or senior executives of the corporation often reside in China. |
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On July 27, 2011, the State Administration of Taxation issued an announcement on the issuance of the Administrative Measures on the Income Tax of Overseas-registered Chinese-controlled Holding Enterprises (Trial), which took effect on September 1, 2011. The measure points out that non-domestic-registered resident enterprises shall, in accordance with relevant Chinese laws and regulations and regulations of the competent departments of finance and taxation under the State Council, formulate financial and accounting statements, and shall, within 15 days from the date of receipt of tax registration certificates, submit the enterprise’s financial and accounting systems or financial accounting, the handling methods and related information to the competent tax authorities for the record. Non-domiciled registered resident companies that obtain dividends, bonuses and other equity investment income derived from China, income from interest, rent, royalties, transfer of property income and other income, shall issue a copy of the company’s Certificate of Resident Identity of Overseas-registered Chinese-controlled Enterprises issued by the company. According to Article 26 of the Corporate Income Tax Law of the PRC and Articles 17, 18 and 91 of the Implementation Regulations on Enterprise Income Tax Law of the PRC, the following income of enterprises is tax exempt income:
| (i) | interest income from government bonds; |
| (ii) | dividends, bonuses and other equity investment gains among eligible resident companies; |
| (iii) | non-resident enterprises that have established establishments in China obtain dividends, dividends, and other equity investment income from resident enterprises that are actually in contact with the institution or site; and |
| (iv) | income of qualified non-profit organizations. |
The applicable tax rate for income obtained by non-resident enterprises is 20%. Corporate income tax on income earned by non-resident enterprises is levied at the rate of 10%. That is to say, general overseas companies transferring 10% of the corporate income tax shall be subject to the transfer of equity in Chinese enterprises or the dividend distribution of Chinese enterprises. However, if the non-resident enterprise is a resident enterprise belonging to a country or region that has signed a tax treaty or arrangement with China, it may enjoy preferential tax treaty provisions.
Small-scale and low-profit enterprises that meet certain conditions are subject to a 10% income tax rate. According to Notice 13 (2019) on Implementing the Policy of Inclusive Tax Relief for Small and Micro Enterprises issued by the Ministry of Finance and State Administration of Taxation on January 17, 2019 that become effective from January 1, 2019 to December 31, 2021, in order for an enterprise to qualify as a small-scale and low-profit enterprise, its annual taxable income must not be more than RMB3 million; its number of employees must not exceed 300; and its total assets must not exceed RMB50 million. A qualified small-scale and low-profit enterprise can enjoy a reduced income tax rate of 5%, as compared with a general income tax rate of 25%, on annual taxable income not exceeding RMB1 million, and the remaining income (i.e. annual taxable income from RMB1 million to RMB3 million) can enjoy a reduced income tax rate of 10%.
High and new technology enterprises that satisfy regulatory requirements on high and new technology area, science and technology personnel, R&D expense, high and new technology income, innovation capability, etc., are taxed at a preferential income tax rate of 15%.
Bao Feng qualifies as a small scale and low-profit enterprise as well as a high and new technology enterprise, and is subject to the following income tax rates:
| Annual taxable income | Corporate Income tax rate | |||
| Not more than RMB1 million | 5 | % | ||
| RMB1 million to RMB3 million | 10 | % | ||
| Exceeding RMB3 million | 15 | % | ||
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PRC withholding tax. Foreign enterprises have no institutions or places in China, but have obtained profits, interest, rent, royalties and other income from China, or have established institutions or places, but the above-mentioned income has no actual connection with institutions and places. The amount of income is subject to withholding income tax. In accordance with the accrued method, the payer (payer) pays the tax on the proceeds (payments) to the beneficiary (the payee). The withholding income tax belongs to personal income tax or corporate income tax, but it is only a source of income tax control. It is a taxation of a personal income tax or corporate income tax.
In 2008, China began to impose a dividend withholding income tax on foreign-invested enterprises at a tax rate of 20%, generally levied at 10%. Hong Kong, Macao, Singapore, Seychelles and others have signed tax treaties with China or have special taxes. The preferential national tax rate for the countries in the arrangement is as low as 5%. Therefore, when a Hong Kong company affiliated to the group obtains the after-tax profits distributed by the mainland Chinese company it invests, the mainland Chinese company must withhold and pay 5% of the withholding income tax.
In addition, Notice No. 88 (2017) on “the Issues Concerning the Direct Investment of Foreign Investors in Distributing the Withholding Income Tax Policy” stipulates that foreign investors who meet the conditions of direct investment shall not be subject to withholding tax.
PRC Business Tax and Value-Added Tax (VAT). On March 23, 2016, the Ministry of Finance and the State Administration of Taxation issued a circular on the Full Implementation of the Business Tax Levy of VAT Pilots. The circular indicates that since May 1, 2016, pilots for the change of business tax to VAT have been fully promoted throughout the country, and all business tax taxpayers, including Bao Feng, were included in the scope of the pilot and were changed from paying business tax to paying VAT. According to notice No. 36 (2016) issued by the Ministry of Finance and the State Administration of Taxation, the Comprehensive Project replaces Business Tax with Value-added Tax. VAT standard rates are 6% to 17% of the gross sales price. A credit is available whereby VAT paid on the purchase of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products and services.
According to notice No. 13 (2019), the VAT small-scale taxpayers with monthly sales of less than RMB100,000 are exempt from VAT. The implementation date of this paper is from January 1, 2019 to December 31, 2021. According to the "Notice of the State Administration of Taxation on Issues Concerning the Exemption of Value-Added Tax for Small and Micro Enterprises" (State Administration of Taxation Announcement No. 52 of 2017, now abolished), from January 1, 2018 to December 31, 2020 sales of small-scale VAT taxpayers shall not exceed RMB 30,000 (tax payment of RMB90,000 per quarter) and enjoy the preferential policy of exemption from VAT.
Bao Feng currently pays a value-added tax of either 9% or 13% on sales, depending on the product, and 6% on services income.
Item 4A. Unresolved Staff Comments
Not Applicable
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Item 5. Operating and Financial Review and Prospects
The following discussion should be read in conjunction with the Company's consolidated financial statements appearing elsewhere in this Annual Report.
Results of Operations
For the fiscal years ended March 31, 2024 and 2023
Revenue
We generated $2,278,246 of net revenue for the fiscal year ended March 31, 2024 as compared to $1,662,600 for the fiscal year ended March 31, 2023, resulting in the increase of $615,646, or 37.0% over the prior fiscal year. The increase is broken down as follows
| For the fiscal year ended March 31, | 2024 | 2023 | Increase (Decrease) | % | |||||||||
| $ | $ | $ | |||||||||||
| Nervonic acid-based dietary supplements | 1,256,169 | 1,489,053 | (232,884 | ) | (15.6) | ||||||||
| Research and development services | 564,870 | 173,547 | 391,323 | 125.5 | |||||||||
| Royalty revenue | 193,434 | — | 193,434 | N/A | |||||||||
| Event organizing revenue | 263,773 | — | 263,773 | N/A | |||||||||
| Total net revenue | 2,278,246 | 1,662,600 | 615,646 | 37.0 | |||||||||
| (i) | Nervonic acid-based dietary supplements |
The sales of nervonic acid-based dietary supplements decreased from $1,489,053 for the fiscal year ended March 31, 2023 to $1,256,169 for the fiscal year ended March 31, 2024, by $232,884, or 15.6%, over the prior fiscal year primarily attributable to a slowdown of the economy in China after the COVID-19 pandemic that, in turn, resulted in less consumer demand for our nervonic acid-based dietary supplements. However, the cost of sales of nervonic acid-based dietary supplements increased from $144,483 for the fiscal year ended March 31, 2023 to $206,374 for the fiscal year ended March 31, 2024, by $61,691, or 42.6%, over the prior fiscal year. The decrease in sales but increase in cost of sales for the fiscal year ended March 31, 2024 resulted in decrease in gross profit of $294,575, or 21.9%, over the prior fiscal year. The gross profit margin also decreased from 90.3% for the fiscal year ended March 31, 2023 to 83.6% for the fiscal year ended March 31, 2024, the decrease by 6.7% over the prior fiscal year mainly because we launched a big discount promotion to increase in our inventory turnover especially the slow moving inventories to maintain the liquidity of the Company. The gross profit margin is analyzed as follows:
For the fiscal year ended March 31, |
2024 |
2023 | Increase (Decrease) | % | ||||||||||||
| $ | $ | $ | ||||||||||||||
| Net sales | 1,256,169 | 1,489,053 | (232,844 | ) | (15.6 | ) | ||||||||||
| Cost of sales | 206,374 | 144,683 | 61,691 | 42.6 | ||||||||||||
| Gross profit | 1,049,795 | 1,344,370 | (294,575 | ) | (21.9 | ) | ||||||||||
| Gross profit margin (%) | 83.6 | 90.3 | (6.7 | ) | ||||||||||||
| (ii) | Research and development services |
The research and development services income significantly increased by $391,323, or 125.5% over the prior fiscal year because of our active promotion of these services to individual researchers in China by leveraging our registered patents in China and USA.
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| (iii) | Royalties revenue |
During the fiscal year ended March 31, 2024, we introduced the new services by charging royalties to our customers based on their usage of our registered patents. There were no such services for the fiscal year ended March 31, 2023.
| (iv) | Event organizing revenue |
We organized conference meeting or seminars and charged to customers on an event basis. As a result, we generated event organizing revenue of $263,773 during the fiscal year ended March 31, 2024, whereas no such revenue was generated for the prior fiscal year.
General and Administrative Expenses
During the fiscal year ended March 31, 2024, we incurred total general and administrative expenses of $897,517 as compared to $917,773 incurred during the fiscal year ended March 31, 2023. Excluding the non-cash stock-based compensation charge of $54,506 and write off of amounts due from related companies of $156,826 from total general and administrative expenses for the fiscal year ended March 31, 2023, general and administrative expenses were $897,517 and $706,441, respectively, for the fiscal years ended March 31, 2024 and 2023. The increase of $191,076, or 27.0%, over the fiscal year was mainly due to the inclusion of one-off PRC legal and professional fees regards to the CSRC filing for the fiscal year ended March 31, 2024.
Research and Development Expenses
Total research and development expenses decreased by $32,921, or 6.2%, from $526,760 for the fiscal year ended March 31, 2023 to $493,839 for the fiscal year ended March 31, 2024 primarily attributable to a decrease in salaries and related benefits resulting from a reduction of headcounts working in the research and development department.
Selling and Marketing Expenses
Total selling and marketing expenses were $413,959 and $1,679,720 for the fiscal years ended March 31, 2024 and 2023, respectively. The decrease of $1,265,761, or 75.4%, mainly resulted from a significant decrease in online promotion activities during the fiscal year ended March 31, 2024 because no new products were launched to the market during that period.
Operating Profit/ Loss
During the fiscal year ended March 31, 2024, we had an operating profit of $266,557 as compared to an operating loss of $1,606,336 for the fiscal year ended March 31, 2023. The increase in operating profit of $1,872,893, or 116.6% was mainly because of an increase in total revenues of $615,646 and a significant decrease in total operating expenses of $1,318,938 over the prior fiscal year.
Total Other Income /Expenses, net
Total other income, net for the fiscal year ended March 31, 2024 was $4,718 whereas total other expenses, net for the fiscal year ended March 31, 2023 was $71,150. Excluding the loss on disposal of a subsidiary of $90,493, the prior fiscal year had total other income, net of $19,343. The increase in total other income, net of $14,625 over the prior fiscal year was mainly due to an increase in government grant of $11,688 and an increase in interest income of $23,868, offset by an increase in interest expenses of $34,594.
Net Profit / Loss from Continuing Operations
For the fiscal year ended March 31, 2024, the Company had a net profit from continuing operations of $271,869 as compared to a net loss from continuing operations of $1,668,646 for the fiscal year ended March 31, 2023. The increase in net profit from continuing operations of $1,940,515, or 116.3%, resulted primarily from an increase in operating profit of $1,872,893.
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For the fiscal years ended March 31, 2023 and 2022
Revenue
We generated $1,662,600 of net revenue for the fiscal year ended March 31, 2023 as compared to $2,328,526 for the fiscal year ended March 31, 2022.
| For the fiscal year ended March 31, | 2023 | 2022 | Increase (Decrease) | % | ||||||||||||
| $ | $ | $ | ||||||||||||||
| Nervonic acid-based dietary supplements | 1,489,053 | 1,799,074 | (310,021 | ) | (17.2 | ) | ||||||||||
| Research and development services | 173,547 | 529,452 | (355,905 | ) | (67.2 | ) | ||||||||||
| Total net revenue | 1,662,600 | 2,328,526 | (665,926 | ) | (28.6 | ) | ||||||||||
Net revenue decreased by $665,926 or 28.6%, over the year as a result of the following:
| (i) | the decrease in sales of nervonic acid-based dietary supplements by $310,021 or 17.2%, over the year ended March 31, 2023 resulted from a decrease in sales of old dietary supplement products from $1,799,074 for the year ended March 31, 2022 to $1,436,161 for the year ended March 31, 2023. The decrease in sales of old dietary supplement products by $362,913 or 20.2%, over the year ended March 31, 2023 was attributable to the widespread restrictive COVID-19 lockdown of cities in China for the second half of the fiscal year ended March 31, 2023 that significantly affected the production and delivery of our products. Such decrease was offset by the introduction of our new “Re’Seen” drink products; however, those drink products only generated $52,892 of revenue for the year ended March 31, 2023; and |
| (ii) | the decrease in research and development service income by $355,905 or 67.2% over the fiscal year ended March 31, 2023, which resulted from a change in the Company’s focus in this service provision. During the year ended March 31, 2023, the Company redirected its resources to research and development of a plant-based drug for the pediatric disease, ALD.. |
Cost of Sales
The cost of sales was $144,683 for the fiscal year ended March 31, 2023 compared to the cost of sales of $420,273 for the fiscal year ended March 31, 2022, for a decrease of $275,590 or 65.6%. A breakdown of our cost of sales by product or service is as follows:
| For the fiscal year ended March 31, | 2023 | 2022 | Increase (Decrease) | % | ||||||||||||
| $ | $ | $ | ||||||||||||||
| Nervonic acid-based dietary supplements | 144,683 | 158,563 | (13,880 | ) | (8.8 | ) | ||||||||||
| Research and development services | — | 261,710 | (261,710 | ) | (100.0 | ) | ||||||||||
| Total cost of sales | 144,683 | 420,273 | (275,590 | ) | (65.6 | ) | ||||||||||
The decrease in total cost of sales during the fiscal year ended March 31, 2023 primarily resulted from the absence of direct cost of sales for research and development services, which resulted from the Company’s not outsourcing any work to external parties whereas the Company outsourced and incurred a cost of $261,710 for these works to external parties for the year ended March 31, 2022. The decrease in the cost of sales of nervonic acid-based dietary supplements by $13,880 or 8.8% was in line with the decrease in sales of nervonic acid-based dietary supplements over the prior year.
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Gross Profit
Gross profit for the fiscal years ended March 31, 2023 and 2022 was $1,517,917 and $1,908,253, respectively. The following table shows the breakdown of the increase in gross profit by product or service:
For the fiscal year ended March 31, |
2023 |
2022 | Increase (Decrease) |
% | ||||||||||||
| $ | $ | $ | ||||||||||||||
| Nervonic acid-based dietary supplements | 1,344,370 | 1,640,511 | (296,141 | ) | (18.1 | ) | ||||||||||
| Research and development services | 173,547 | 267,742 | (94,195 | ) | (35.2 | ) | ||||||||||
| Total gross profit | 1,517,917 | 1,908,253 | (390,336 | ) | (20.5 | ) | ||||||||||
The decrease in gross profit for the fiscal year ended March 31, 2023 over the fiscal year ended March 31, 2022 by $390,336 or 20.5 % was the result of the decreases in revenue and cost of sales, as discussed above.
Gross Profit Margin
Gross profit margin for the fiscal years ended March 31, 2023 and 2022 was 91.3% and 82.0%, respectively. The increase in gross profit margin over the year was mainly attributable to the absence of cost of sales for technical support services for the fiscal year ended March 31, 2023.
Gross profit margin of nervonic acid-based dietary supplements was 90.3% for the fiscal year ended March 31, 2023 as compared to 91.2% for the fiscal year ended March 31, 2022. The slight decrease in gross profit margin of nervonic acid-based dietary supplements by 0.9% was attributable to the lower gross profit margin of 73.5% of Re’Seen drinks, which were introduced to the market in September 2022.
Because no direct costs of sale of research and development services were incurred for the year ended March 31, 2023, the gross profit margin of research and development services was 100% for the year ended March 31, 2023 as compared to a gross profit margin of 50.6% for the year ended March 31, 2022.
Total Operating Expenses
During the year ended March 31, 2023, we incurred operating expenses of $3,124,253 as compared to $2,594,012 incurred during the year ended March 31, 2022. Operating expenses are comprised of general and administrative expenses, research and development expenses and selling and marketing expenses. The increase in total operating expenses of $530,241 or 20.4%, was attributable to an increase in selling and marketing expenses of $791,746, or 89.2%, offset by decreases in general and administrative and research and development expenses of $107,952 or 10.5%, and $153,553 or 17.3%, respectively.
| a) | General and administrative expenses |
General and administrative expenses decreased from $1,025,725 for the fiscal year ended March 31, 2022 to $917,773 for the fiscal year ended March 31, 2023. The decrease of $107,952 or 10.5% was mainly attributable to a decrease in stock-based compensation expense of $263,631, from $318,137 for the year ended March 31, 2022 to $54,506 for the year ended March 31, 2023, offset by a write off of amounts due from related companies of $156,826 during the fiscal year ended March 31, 2023. There was no such write off for the fiscal year ended March 31, 2022.
| b) | Research and development expenses |
Research and development expenses decreased by $153,553 or 17.3% from $680,313 for the fiscal year ended March 31, 2022 to $526,760 for the fiscal year ended March 31, 2023 primarily because of a significant decrease in related parties’ research and development expenses by $395,001 from $609,397 for the year ended March 31, 2022 to $214,396 for the year ended March 31, 2023, which was offset by an increase in external research and development expenses of approximately 157,000 and an increase in staff salaries and related benefits by approximately $36,000, an increase in patent registration fees of approximately $24,300 and an increase in testing related expenses of $19,100 over the prior year.
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| c) | Selling and marketing expenses |
Selling and marketing expenses increased significantly by $791,746 or 89.2% from $887,974 for the fiscal year ended March 31, 2022 to $1,679,720 for the fiscal year ended March 31, 2023. The increase was mainly due to an increase in online marketing and promotional expenses by $386,164 and the inclusion of a packaging design fee of $168,866 for launching new products - Re’Seen drinks - to the market during the year ended March 31, 2023.
Loss on Disposal of a Subsidiary - Dandong Bao Feng Seedling Technology Co. Limited
On September 30, 2022, the Company’s PRC subsidiary, Bao Feng, sold its 100% interest in Dandong BF to Zhong Yuan Nervonic Acid Bio-technology Co. Ltd., of which Mr. Yu Chang, father of Ms. Ting-ting Chang, CEO and director of the Company, is a director and has a controlling interest, in exchange for cash consideration of RMB1 million (US$140,500) and a 7% equity interest in Yanbian Bao Feng Bio-technology Co., Ltd. (“Yanbian BF”) that was valued at RMB4 million ($562,000). The consideration and net assets of Dandong BF at the date of disposal on September 30, 2022 were as follows:
| Consideration | RMB | $ | ||||||
| Fair value of 7% equity interest in Yanbian BF | 4,000,000 | 562,000 | ||||||
| Cash | 1,000,000 | 140,500 | ||||||
| Total | 5,000,000 | 702,500 | ||||||
| Analysis of assets and liabilities disposed: | ||||||||
| Property, plant and equipment | 2,401 | |||||||
| Right of use assets | 21,770 | |||||||
| Accounts receivable | 102,284 | |||||||
| Inventories, net | 615,009 | |||||||
| Prepaid expenses and other current assets | 18,965 | |||||||
| Cash at banks | 1,264 | |||||||
| Accrued expenses and other current liabilities | (42,150 | ) | ||||||
| Lease liabilities - non-current | (4,817 | ) | ||||||
| 714,726 | ||||||||
| Release of exchange reserve | 68,498 | |||||||
| Translation adjustment | 9,769 | |||||||
| 792,993 | ||||||||
| Total sale consideration | 702,500 | |||||||
| Loss on disposal of a subsidiary | 90,493 | |||||||
Net Loss from Continuing Operations
For the fiscal year ended March 31, 2023, the Company had a net loss from continuing operations of $1,668,646 as compared to a net loss from continuing operations of $682,663 for the fiscal year ended March 31, 2022. The increase in net loss from continuing operations by $985,983 or 144.4% was mainly attributable to a decrease in gross profit by $390,336, an increase in total operating expenses of $530,241 and a $90,493 loss on disposal of a subsidiary.
Discontinued Operation
During the year ended March 31, 2023, the Company’s wholly owned subsidiary, Bao Feng, disposed of its entire interest in Dandong BF. Dandong BF is principally engaged in the research, development and growing of Acer truncatum seedlings in Dandong City, Liaoning Province, in the northeastern region of the PRC.
Accordingly, the results relating to Dandong BF have been presented in the consolidated statements of operations and comprehensive income as “loss from discontinued operations.” Dandong BF was not presented as discontinued operations for the year ended March 31, 2022; therefore, the comparative statement of operations and comprehensive income has been re-presented to show the discontinued operation separately from continuing operations. Dandong BF was de-consolidated from the Company on September 30, 2022
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The results from the discontinued operation were as follows:
| For the period from April 1, 2022 to September 30, 2022 (date of disposal) | For the year ended March 31, 2022 | ||||||
| Net sales | $ | — | $ | — | |||
| Cost of sales | 510,298 | 426,695 | |||||
| Gross loss | 510,298 | 426,695 | |||||
| Operating expenses | 25,109 | 16,732 | |||||
| Other (income) expenses, net | 73 | (525 | ) | ||||
| Loss before income tax | 535,480 | 442,902 | |||||
| Income tax expense | — | — | |||||
| Net loss for the period/year | $ | 535,480 | $ | 442,902 | |||
Liquidity and Capital Resources
As of March 31, 2024, the Company had cash of $145,257, total current assets of $2,026,173 and total current liabilities of $2,482,686. Net current liabilities were $456,513 and working capital ratio was 0.82. As of March 31, 2024, the Company’s total assets and total liabilities amounted to $3,168,233 and $2,133,728, respectively. As of March 31, 2024, the Company’s total stockholders’ deficit amounted to $204,549 and its non-controlling interest was $14,245). The Company’s gearing ratio (total bank loans divided by the Company’s stockholders’ deficit) was 922.7%.
The following is a summary of our cash flows provided by (used in) operating, investing and financing activities for the fiscal years ended March 31, 2024 and 2023.
| Fiscal Year ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net Cash (Used in) Operating Activities | $ | (746,410 | ) | (970,490) | ||||
| Net Cash Provided by Investing Activities | $ | - | 118,131 | |||||
| Net Cash Provided by Financing Activities | $ | 715,090 | 1,295,763 | |||||
Net cash used in operating activities, as reflected in the consolidated statements of cash flows, was $746,410 during the fiscal year ended March 31, 2024 compared to $970,490 during the fiscal year ended March 31, 2023. The decrease in cash operating outflows of $224,080 was due primarily to an increase in cash outflow from working capital for continuing operations of $1,378,400, offset by an increase in cash generated from continuing operations of $1,003,508 and inclusion of net cash used in discontinued operations of $56,422 for the prior fiscal year.
Investing Activities
For the fiscal year ended March 31, 2024, net cash provided by investing activities was $nil compared to $118,131 for the fiscal year ended March 31, 2023. The increase during the fiscal year ended March 31, 2024 was the result of cash consideration received from the disposal of Dandong BF on September 30, 2022.
Financing Activities
For the fiscal year ended March 31, 2024, net cash provided by financing activities was $715,090 compared to $1,295,763 during the fiscal year ended March 31, 2023. This decrease in net cash provided by financing activities during the fiscal year ended March 31, 2024 was the result of a decrease in proceeds received from private placement of $423,121 and a decrease in net repayment from related companies of $167,511.
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Bank Loans
As of March 31, 2024 and 2023, our bank loans consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Unsecured loan from China Construction Bank wholly repayable within 1 year | $ | 498,600 | $ | 218,400 | ||||
| Unsecured loan from China Construction Bank wholly repayable within 1 year | 193,900 | — | ||||||
| Unsecured loan from Bank of Beijing wholly repayable within 1 year | — | 363,773 | ||||||
| Unsecured loan from Bank of Beijing wholly repayable within 1 year | — | 146,328 | ||||||
| Unsecured loan from China Citic Bank wholly repayable within 1 year | — | 291,200 | ||||||
| Secured loan from China Construction Bank wholly repayable within 1 year | — | 338,520 | ||||||
| Unsecured loan from Ping An Bank wholly repayable within 1 year | 378,798 | — | ||||||
| Unsecured loan from Bank of Nanjing wholly repayable within 1 year | 277,000 | — | ||||||
| Unsecured loan from WeBank wholly repayable within 1 year | 213,685 | — | ||||||
| Total unsecured bank loan wholly repayable within 1 year | 1,561,983 | 1,358,221 | ||||||
| Secured loan from China Construction Bank wholly repayable more than 1 year | 325,475 | — | ||||||
| Total | $ | 1,887,458 | $ | 1,358,221 | ||||
As of March 31, 2024, the outstanding loan from China Construction Bank of $498,600 (RMB3,600,000) with an annual interest rate of 3.85% was unsecured and denominated in RMB for a term of 12 months starting from May 22, 2023 to May 22 2024. Subsequent to March 31, 2024, RMB2,417,000 (approximately $334,700) of the loan amount was repaid and the balance of RMB1,183,000 (approximately $163,900) was rolled over for another year.
As of March 31, 2024, the outstanding loan from China Construction Bank of $193,900 (RMB1,400,000) with an annual interest rate of 3.85% was unsecured and denominated in RMB for a term of 12 months starting from May 10, 2023 to May 10, 2024. Subsequent to March 31, 2024, RMB150,000 (approximately $20,800) of the loan amount was repaid and the balance of RMB1,250,000 (approximately $173,100) was rolled over for another year.
As of March 31, 2024, the outstanding loan from Ping An Bank of $378,798 (RMB2,735,000) with an annual interest rate of 5% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from August 31, 2023 to August 28, 2024. Subsequent to March 31, 2024, the loan was fully paid.
As of March 31, 2024, the outstanding loan from Bank of Nanjing of $277,000 (RMB2,000,000) with an annual interest rate of 4% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from October 24, 2023 to October 23, 2024. Subsequent to March 31, 2024, the loan was fully paid.
As of March 31, 2024, the outstanding loan from WeBank of $213,685 (RMB1,542,857) with an annual interest rate of 4.46% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 24 months starting from June 7, 2023 to June 5, 2025.
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As of March 31, 2024, the outstanding loan from China Construction Bank of $325,475 (RMB2,325,000) with an annual interest rate of 0.15% over the PRC 1-year prime lending rate was secured by a pledge of property of the Company’s CEO and executive director, Ms. Ting Ting Chang, and denominated in RMB for a term of 36 months. This RMB2,325,000 credit facility was obtained on May 18, 2023 and will expire on May 18, 2026. See Item 7. “Major Shareholders and Related Party Transactions – Related Party Transactions.”
As of March 31, 2023, the outstanding loan from China Construction Bank of $218,400 (RMB1,500,000) with an annual interest rate of 0.5% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from May 13, 2022 to May 13 2023.
As of March 31, 2023, the outstanding loan from Bank of Beijing of $363,773 (RMB2,498,439) with an annual interest rate of 1.65% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from June 7, 2022 to June 1, 2023.
As of March 31, 2023, the outstanding loan from Bank of Beijing of $146,328 (RMB1,005,000) with an annual interest rate of 2% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from June 2, 2022 to June 1, 2023.
As of March 31, 2023, the outstanding loan from China Citic Bank of $291,200 (RMB2,000,000) with an annual interest rate of 0.35% over the 1-year PRC prime lending rate was unsecured and denominated in RMB for a term of 12 months starting from September 29, 2022 to September 29, 2023.
As of March 31, 2023, the outstanding loan from China Construction Bank of $338,520 (RMB2,325,000) with an annual interest rate of 4.4% was secured by a pledge of property of the Company’s CEO and executive director, Ms. Ting Ting Chang, and denominated in RMB for a term of 36 months. This RMB2,325,000 credit facility was obtained on May 19, 2020 and expired on May 19, 2023. It carried a floating interest rate of 0.7% over the PRC 1-year loan prime rate. See Item 7. “Major Shareholders and Related Party Transactions – Related Party Transactions.”
The following is a schedule, by years, of maturities of loans as of March 31, 2024:
| 2025 | $ | 1,561,983 | ||||
| 2026 | 325,475 | |||||
| 2027 | — | |||||
| 2028 | — | |||||
| 2029 and thereafter | — | |||||
| $ | 1,887,458 |
Interest expenses for the years ended March 31, 2024 and 2023 were $81,317 and $46,723, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with US GAAP, which requires management to make certain estimates and apply judgments. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our consolidated financial statements.
While we believe that the historical experience, current trends and other factors considered support the preparation of our consolidated financial statements in conformity with US GAAP, actual results could differ from our estimates, and such differences could be material.
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Item 6. Directors, Senior Management and Employees
Directors and Executive Officers
The names, titles and ages of the members of the Company’s Board of Directors and executive officers as of the date of this Annual Report are as set forth in the below table. Our directors are elected annually and serve until their successors take office or until their death, resignation or removal. The executive officers serve at the pleasure of the Board of Directors.
| Name | Age | Position | ||
| Ting Ting Chang | 34 | President, Chief Executive Officer, Secretary and Director | ||
| Fung Ming Pang | 54 | Chief Financial Officer and Director | ||
| Chi Wai (Gabriel) Tse | 57 | Independent Director | ||
| Dr. Shuo Dong | 60 | Independent Director | ||
| Dr. Chinghai Ning | 52 | Independent Director | ||
Ting Ting Chang serves as our Chief Executive Officer, President, Secretary and director, and has held those positions since May 4, 2017. Since 2013, Ms. Chang has worked at Beijing Acer Truncatum Century Agricultural Science and Technology Co., Limited ("Beijing Acer"), which changed its name to Bao Feng Bio-Technology (Beijing) Limited in August 2017. From 2013 to 2016, she served as Beijing Acer's sales manager responsible for planning, implementing and directing the sales activities of the company including developing strategic plans, budget preparation and coordination of the sales teams. From 2016 to the present, Ms. Chang has served as Beijing Acer's Chief Executive Officer responsible for setting strategy and direction, modeling and setting the company's culture and values, leading and training the senior executive team and allocating capital. In 2013, Ms. Chang received a Master of Sciences degree in Technology and Innovation Management from Sussex University in the United Kingdom and in 2012 she received a Bachelor of Science degree in Product Design from the same university. Ms. Chang is not compensated for serving as the Company’s Chief Executive Officer, President and Secretary.
Fung Ming Pang has served as our Chief Financial Officer and director since May 2020. Ms. Pang is a member of the Hong Kong Institute of Certified Public Accountants and of the Association of Chartered Certified Accountants. Since July 2005, Ms. Pang has served as Managing Director of AGCA CPA Limited, a certified public accounting firm registered with the Hong Kong Institute of Certified Public Accountants, which provides audit, tax and advisory services to individuals and corporations. In 1995, she helped start Able Secretarial Services Limited, which currently provides corporate management services to, and serves as government liaison for, approximately 50 companies registered in Hong Kong, and she has served as its Managing Director since February 2012. Ms. Pang holds a Bachelor of Business Administration degree from the Chinese University of Hong Kong.
Chi Wai (Gabriel) Tse was appointed as an independent non-executive director effective August 1, 2022. Mr. Tse has more than 30 years of experience in handling audit related matters, financial advisory and compliance matters as well as market development. He has served as an independent non-executive director of Hollwin Urban Operation Service Group Co., Ltd., a company listed on the Main Board of The Stock Exchange of Hong Kong Limited (Stock Code:2529) since May 2024. Hollwin Urban Operation Service Group Co., Ltd. specializes in property management and urban services including landscaping, lighting, system operation and parking lots operation. He has also served as an independent non-executive director of China Environmental Technology Holdings Limited, a company listed on the Main Board of The Stock Exchange of Hong Kong Limited (Stock Code: 0646), since May 2015 and Great Water Holdings Limited, a company listed on the GEM of The Stock Exchange of Hong Kong Limited (Stock Code: 8196), since December 2015. China Environmental Technology Holdings Limited and Great Water Holdings Limited both specialize in the provision of waste management services in China. From January 2011 until August 2021, Mr. Tse was an executive director of Jihsun Financial Holding Company Limited, a Taiwan listed company that operates bank, securities brokerage and other financial services in Taiwan. From June 2010 to July 2019, Mr. Tse was an executive director, company secretary and chief financial officer of China Information Technology Development Limited (“CITD”), a company listed on the GEM of The Stock Exchange of Hong Kong Limited (Stock Code: 8178) that specializes in the development and implementation of IT related services in Mainland China. In July 1989, he joined Arthur Andersen & Co., then the largest audit and accounting firm worldwide, where he became a qualified accountant, and he left the firm as an audit manager in April 1999. Mr. Tse graduated from the University of Hong Kong in June 1989 with a bachelor’s degree in social science studies (Economics and Management Studies). He is a practicing member of the Hong Kong Institute of Certified Public Accountants and a member of the Institute of Certified Accountants in England and Wales.
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Shuo Dong was appointed as our independent non-executive director effective August 1, 2022. Since November 2019, Dr. Dong has been the vice president of research and innovation for Kindstar Global (Beijing) Medicine Technology, Inc. From February 2015 through October 2019, Dr. Dong was an associate professor at Sbarro Institute for Cancer Research, Department of Biology, College of Science and Technology at Temple University in Philadelphia, PA. From January 2003 through July 2014, Dr. Dong was an assistant professor in the Department of Medicine at Baylor College of Medicine in Houston, Texas. From March 1999 through February 2008, Dr. Dong was an associate professor at the Shanghai Institute of Hematology/Shanghai Ruijin Hospital, Shanghai Jiaotong University Medical School and from February l996 through February 1999, Dr. Dong held a post-doctoral fellowship in the Department of Biochemistry at the University of Hong Kong. The focus of Dr. Dong's research has been the characterization of the mechanisms of transcriptional regulation that are corrupted in hematological malignancies. By identification and molecular dissection of the transcriptional and especially epigenetic networks deregulated by leukemogenic/chimeric 2 transcription factors and epigenetic modulators, his work has been providing novel and important mechanistic insights into the molecular basis of hematological malignancies and, based on these works, providing fruitful avenues for the development of specific therapeutic interventions. In June 1986, Dr. Dong earned a B.S.M. (equivalent to an M.D.) in Medicine at the Tong-Ji Medical University in Wuhan, China. In June 1992, Dr. Dong earned a Master of Science in Molecular Hematology at the Shanghai Jiao Tong University School of Medicine where he won the Best Graduate Student Award. In June 1995, Dr. Dong earned a Ph.D. in Molecular Hematology at the Shanghai Jiao Tong University School of Medicine. Dr. Dong has received several other awards, including: (i) The Award for Improving National Science and Technology (1995); (ii) Chao Award, Department of Medicine at Baylor College of Medicine (2003); and (iii) Science & Technology Progress Awards of Shanghai, First Class (1997). Dr. Dong was touted as one of the top ten authors of high-citation papers by the China Ministry of Science and Technology in Beijing. He has over fifty publications, including the award of Spotlight on Faculty, "Exploring Chromosomal Translocations in Acute Promyelocytic Leukemia:” MEDICINE Summer 2005 Vol. 6; No. 3:3, Baylor College of Medicine, Houston, Texas.
Chinghai Ning was appointed as an independent non-executive director effective June 16, 2023. Dr. Ning has over 30 years of experience serving in the medical field. While attending medical school at the University of Buenos Aires, Argentina, Dr. Ning was: (i) employed as a counselor in the Department of Biophysics from 1994-1995; (ii) assistant professor at the Department of Biophysics from 1996-1997; (iii) lab director for the Department of Biophysics from 1998-2001; and (iv) intern at the Federal Police Hospital Churruca Vizca from 1997-1999. After graduation in 1999, Dr. Ning was employed as an associate professor of physics science in the Department of Radiology at the University of Buenos Aires, Argentina from 1999-2001, a resident physician at the Federal Police Hospital Churruca Vizca from 1999-2002 and a doctor at IOMA where he reviewed medical insurance claims from 2002-2003.
From approximately 2003 through 2011, Dr. Ning was employed as a medical director at Argentina DANDT S.A., an importer and seller of medical equipment, devices and consumables, where he worked with importing and wholesaling, among other things. Subsequently, Dr. Ning served as the director of the purchasing department, where he was responsible for managing foreign trade, and as a vice-president responsible for the planning, strategy and design of all of the company’s product marketing.
From 2011 to 2013, Dr. Ning was employed as the project supervisor of the U.S. in China at OSG Holding Corporation, where he was responsible for orchestrating financing in China. From 2013 through 2016, he was employed at Anhui ZST, an import/export company, where he was responsible for the sale of medical consumables in Latin America. Lastly, from 2016 to the current date, Dr. Ning is employed by SOMECO Electronic S.A., where he is responsible for all of China. Dr. Ning has also been made an independent partner in that company. In addition, Dr. Ning is the chief representative of Argentina’s Salta province in China where he is responsible for promoting bilateral relations and developing economic trade between the sister cities.
Dr. Ning received his medical degree from the University of Buenos Aires, Argentina, in 1999. He is a Member of the Argentina China Industry and Commerce Association.
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Family Relationships
There are no family relationships among the directors or executive officers of the Company.
Committees of the Board of Directors
Audit Committee
Mr. Tse, Dr. Dong and Dr. Ning serve on the audit committee, which is chaired by Mr. Tse. Our Board of Directors has determined that each are “independent” for audit committee purposes as that term is defined by the rules of the SEC and Nasdaq, and that each has sufficient knowledge in financial and auditing matters to serve on the audit committee. Our Board of Directors has designated Mr. Tse as an “audit committee financial expert,” as defined under the applicable rules of the SEC. The audit committee’s responsibilities include:
| ● | Appointing, approving the compensation of and assessing the independence of our independent registered public accounting firm; | ||
| ● | Pre-approving audit and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm; | ||
| ● | Reviewing the overall audit plan with our independent registered public accounting firm and members of management responsible for preparing our financial statements; | ||
| ● | Reviewing and discussing with management and our independent registered public accounting firm our annual and interim financial statements and related disclosures as well as critical accounting policies and practices used by us; | ||
| ● | Coordinating the oversight and reviewing the adequacy of our internal control over financial reporting; | ||
| ● | Establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns; recommending, based upon the audit committee’s review and discussions with management and our independent registered public accounting firm, whether our audited financial statements shall be included in our Annual Report on Form 20-F; | ||
| ● | Monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters; | ||
| ● | Reviewing all related person transactions for potential conflict of interest situations and approving all such transactions; | ||
| ● | Reviewing earnings releases; and | ||
| ● | Such other responsibilities as may be delegated to it from time to time by the Board of Directors. | ||
Audit committee charter. On November 4, 2024, our Board of Directors authorized and approved an amendment to the Audit Committee Charter pursuant to which it adopted a cybersecurity policy (the “Cybersecurity Policy”) and further approved that the Audit Committee will have full authority and power to implement the Cybersecurity Policy. The Audit Committee Charter provides the members of the Audit Committee with authorization and authority to conduct continuous analysis of and review for any potential cybersecurity risks as part of the Company’s overall risk management program and to create a cyber-resilient organization, which will contribute to the value preservation of the Company. The Audit Committee Charter further provides authority and responsibility to the members of the Audit Committee to: (i) understand the economic drivers and impact of cyber risk, including the financial impact to our Company; (ii) align cyber-risk management policies with our business needs by integrating cyber-risk analysis into significant business decisions; (iii) ensure our organizational structure supports cybersecurity goals; and (iv) incorporate cybersecurity expertise into board governance.
For additional information regarding our Cybersecurity Policy, please refer to Item 16J included in this Annual Report on Form 20-F for the year ended March 31, 2024.
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Compensation Committee.
Mr. Tse, Dr. Dong and Dr. Ning serve on the compensation committee, which is chaired by Dr. Ning. Our Board of Directors has determined that each such member satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market. The compensation committee’s responsibilities include:
| ● | Reviewing and approving annually the corporate goals and objectives applicable to the compensation of the chief executive officer ("CEO"), evaluating at least annually the CEO's performance in light of those goals and objectives and determining and approving the CEO's compensation level based on this evaluation; | |
| ● | Reviewing and approving the proposed compensation for all officers of the Company other than the CEO and the aggregate amount of compensation being paid or potentially payable to the Company's officers; | |
| ● | Reviewing and making recommendations to the Board of Directors regarding the compensation policy for executive officers and directors of the Company, and such other officers of the Company as directed by the Board, and regarding all forms of compensation, including all plan and non-plan compensation to be provided to the executive officers of the Company; | |
| ● | Reviewing and making recommendations to the Board of Directors regarding general compensation goals and guidelines for the Company's employees and the criteria by which bonuses to the Company's employees are determined; | |
| ● | Acting as Administrator of any stock option plan and administering, within the authority delegated by the Board of Directors, any Employee Stock Purchase Plan adopted by the Company; | |
| ● | Reviewing and approving grants and awards under incentive-based compensation plans and equity-based plans, in each case consistent with the terms of such plans; | |
| ● | Reviewing and making such recommendations to the Board of Directors as the compensation committee deems advisable with regard to policies and procedures for the grant of equity-based awards by the Company; | |
| ● | Reviewing and making recommendations to the Board of Directors regarding other plans that are proposed for adoption or adopted by the Company for the provision of compensation to employees of, directors of and consultants to the Company; | |
| ● | preparing the compensation committee report required by SEC rules, if and when required; and | |
| ● | Authorizing the repurchase of shares from terminated employees pursuant to applicable law. |
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Nomination Committee
Mr. Tse, Dr. Dong and Dr. Ning serve on the nomination committee, which is chaired by Dr. Dong. Our Board of Directors has determined that each member of the nomination committee is “independent” as defined in the applicable Nasdaq rules. The nomination committee’s responsibilities include:
| ● | Reviewing the composition and size of the Board of Directors, determining the criteria for membership on the Board and conducting an annual evaluation of the Board; | |
| ● | Identifying, considering and recommending candidates to fill new positions or vacancies on the Board of Directors, and reviewing any candidates recommended by stockholders in accordance with our Articles of Association; | |
| ● | Establishing procedures to be followed by security holders in submitting recommendations for director candidates to the nomination committee; | |
| ● | Periodically reviewing the composition of each committee of the Board of Directors, making recommendations to the Board for the creation of additional committees or the change in mandate or dissolution of committees and annually recommending to the Board persons to be members of the various committees and Committee Chairperson; and | |
| ● | Reviewing and monitoring compliance with the Company's Code of Business Conduct and Ethics, considering questions of possible conflicts of interest of directors and officers and reviewing actual and potential conflicts of interest of directors and officers and clearing any involvement of such persons in matters that may involve a conflict of interest. |
While we do not have a formal policy regarding Board diversity, our nomination committee and Board of Directors will consider a broad range of factors relating to the qualifications and background of nominees, which may include diversity (not limited to race, gender or national origin). Our nomination committee’s and Board of Directors’ priority in selecting Board members is identification of persons who will further the interests of our shareholders through their established record of professional accomplishment, the ability to contribute positively to the collaborative culture among Board members, knowledge of our business, understanding of the competitive landscape and professional and personal experience and expertise relevant to our growth strategy.
Auditor
On February 25, 2022, we dismissed Centurion ZD CPA & Co. (“Centurion ZD”) as our independent registered public accounting firm. The reports of Centurion ZD on our financial statements for the fiscal years ended March 31, 2020 and 2021 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During our fiscal years ended March 31, 2020 and 2021 and the subsequent interim period preceding Centurion ZD’s dismissal, there were no disagreements with Centurion ZD, whether or not resolved, on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Centurion ZD, would have caused them to make reference to the subject matter of the disagreement in connection with their report on our financial statements. The decision to change our independent accountant was approved and ratified by our Board of Directors on February 25, 2022.
During our fiscal years ended March 31, 2020 and 2021 and the subsequent interim period preceding Centurion ZD’s dismissal, there were no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted by the Securities and Exchange Commission (the “SEC”).
We provided Centurion ZD with a copy of the disclosure before filing our Report on Form 6-K regarding our change of accountants. We requested that Centurion ZD provide us with a letter addressed to the SEC stating whether or not it agreed with the above statements, and we received a letter from Centurion ZD stating that it agreed with the above statements. A copy of such letter, dated as of February 28, 2022, was filed as Exhibit 99.1 to the Report.
We engaged K. R. Margetson Ltd. (“Margetson”) as our new independent registered public accounting firm effective February 25, 2022. During the two preceding fiscal years and through the date of Margetson’s engagement, we did not consult with Margetson regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that was either the subject of a disagreement or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). In approving the selection of Margetson as our new independent registered public accounting firm, our Board of Directors considered all relevant factors, including the fact that Margetson is not located in China or Hong Kong.
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On May 4, 2023, we accepted the resignation of Margetson as our independent registered public accounting firm for the fiscal year ended March 31, 2023 and thereafter, and on September 13, 2023 we accepted the resignation of Margetson as our independent registered public accounting firm for the fiscal year ended March 31, 2022. The report of Margetson on our financial statements for the fiscal year ended March 31, 2022 contained no adverse opinion or disclaimer of opinion and was not modified. During our fiscal year ended March 31, 2022 and the subsequent interim period preceding Margetson’s resignation, we had no disagreements with Margetson on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Margetson, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such period. The decision to accept the resignation and change our independent accountant for the fiscal year ended March 31, 2023 and thereafter was approved and ratified by our Board of Directors on May 4, 2023. The decision to accept the resignation and change our independent accountant for the fiscal year ended March 31, 2022 was approved and ratified by our Board of Directors on September 13, 2023.
During our fiscal year ended March 31, 2022 and the subsequent interim period preceding Margetson’s resignation, there were no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K.
We provided Margetson with a copy of the disclosure before filing our Report on Form 6-K regarding our change of accountants. We requested that Margetson provide us with a letter addressed to the SEC stating whether or not it agreed with the above statements, and we received a letter from Margetson addressed to the SEC stating that it agreed with the above statements. A copy of such letter, dated May 11, 2023, was filed as Exhibit 99.1 to the Report.
We re-engaged Centurion ZD as our new independent registered public accounting firm effective May 4, 2023, and on September 14, 2023 we engaged Centurion ZD to re-audit our financial statements for the fiscal year ended March 31, 2022. During the fiscal year ended March 31, 2022 and through the date of Centurion ZD’s re-engagement, we did not consult with Centurion ZD regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that was either the subject of a disagreement or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). In approving the selection of Centurion ZD as our new independent registered public accounting firm, our Board of Directors considered all relevant factors, including that Centurion ZD was previously engaged as our independent registered public accounting firm, which audited our financial statements for the fiscal years ended March 31, 2020 and 2021.
On June 4, 2024, we accepted the resignation of Centurion ZD as our independent registered public accounting firm. The report of Centurion ZD on our financial statements for the fiscal years ended March 31, 2022 and 2023 contained no adverse opinion or disclaimer of opinion and was not modified. The decision to accept the resignation of the independent accountant was approved and ratified by our Board of Directors on June 4, 2024. During our fiscal year ended March 31, 2024 and through the date of this Annual Report, we have had no disagreements with Centurion ZD on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Centurion ZD, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such period.
During our fiscal year ended March 31, 2024 and through the date of this report, there have been no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted by the Securities and Exchange Commission (the “SEC”).
We provided Centurion ZD with a copy of this disclosure before the filing was made with the SEC. We requested that Centurion ZD provide us with a letter addressed to the SEC stating whether or not it agrees with the above statements, and we received a letter from Centurion ZD stating that it agrees with the above statements. A copy of such letter, dated as of June 14, 2024, was filed as Exhibit 99.1 to the 6-K report filed with the Securities and Exchange Commission on June 14, 2024.
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Officers, Directors and Key Employees of Bao Feng
| Name | Age | Positions | ||
| Ting Ting Chang | 34 | Chief Executive Officer | ||
| Xianyang Chen | 41 | Chief Technical Officer | ||
| Yu Gao | 41 | Chief Marketing Officer | ||
Ms. Chang has served as Bao Feng’s Chief Executive Officer since May 2016. For Ms. Chang’s biographical information, see “Officers and Directors of the Company,” above.
Dr. Chen has served as Bao Feng’s Chief Technical Officer since 2016. His work at Bao Feng primarily involves the establishment of a prediction model for Alzheimer's disease and the extraction and purification of nervonic acid from Acer truncatum and its application in the field of brain health. Dr. Chen has served as an honorary professor of the academic department at the Research Center of Plateau medicine at China Medical University since April 2021. Prior to joining Bao Feng, from 2011 to 2015, Dr. Chen was employed as an assistant professor at the Institute of Botany, Chinese Academy of Sciences where his work primarily involved metabolomics and data modeling, and where he presided over a natural science foundation project. Dr. Chen has published five articles and co-authored fifteen articles in various scientific journals. Dr. Chen holds a bachelor's degree in grass science from the School of Resources and Environment, Beijing Forestry University and a doctorate degree in developmental biology from the Institute of Botany, Chinese Academy of Sciences.
Mr. Gao, Bao Feng’s CMO, received his master’s degree from the School of Management of Renmin University of China in 2005. From May 2017 to October 2018, he was employed as sales director of Kang Tai Chang Long Biotechnology Co., Limited, a private pharmaceutical/bioengineering company. Prior to that position, Mr. Gao was engaged in sales management for several other large and medium-sized companies.
Compensation Of Executive Officers And Directors
The following table summarizes all compensation received or to be received by our directors and our Chief Executive Officer, President, Secretary and Chief Financial Officer and by the directors, executive officers and key employees of Bao Feng in the fiscal years ended March 31, 2024, 2023 and 2022.
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Summary Compensation Table
| Compensation Paid | ||||||||||||
| Name and Principal Position | Year | Salary(1) ($) | Bonus(1) ($) | Other Compensation(1) ($) | ||||||||
| Ting Ting Chang | 2024 | 16,776 | (2) | Nil | N/A | |||||||
| CEO, President, Secretary and Director | 2023 | 17,520 | (2) | Nil | N/A | |||||||
| 2022 | 18,696 | (2) | Nil | N/A | ||||||||
| Fung Ming Pang | 2024 | 72,000 | (3) | Nil | N/A (3) | |||||||
| CFO and Director | 2023 | 72,000 | (3) | Nil | N/A (3) | |||||||
| 2022 | 72,000 | (3) | Nil | N/A (3) | ||||||||
| Daphne Huang | 2024 | 3,750 | (4) | Nil | N/A | |||||||
| Independent Director | 2023 | 20,000 | (4) | Nil | N/A | |||||||
| 2022 | Nil | (4) | Nil | N/A | ||||||||
| Chi Wai (Gabriel) Tse | 2024 | 24,000 | (5) | Nil | N/A | |||||||
| Independent Director | 2023 | 16,000 | (5) | Nil | N/A | |||||||
| 2022 | Nil | (5) | Nil | N/A | ||||||||
| Shuo Dong | 2024 | 24,000 | (5) | Nil | N/A | |||||||
| Independent Director | 2023 | 16,000 | (5) | Nil | N/A | |||||||
| 2022 | Nil | (5) | Nil | N/A | ||||||||
| Chinghai Ning | 2024 | 19,000 | (6) | Nil | N/A | |||||||
| Independent Director | 2023 | Nil | (6) | Nil | N/A | |||||||
| 2022 | Nil | (6) | Nil | N/A | ||||||||
| Lingxiao Dai | 2024 | N/A | (7) | N/A | N/A | |||||||
| Independent Director | 2023 | Nil | (7) | Nil | Nil | |||||||
| 2022 | Nil | (7) | Nil | Nil | ||||||||
| Jen-Chuan Yeh | 2024 | N/A | (7) | N/A | N/A | |||||||
| Independent Director | 2023 | Nil | (7) | Nil | Nil | |||||||
| 2022 | Nil | (7) | Nil | Nil | ||||||||
| Xianyang Chen | 2024 | Nil | (8) | Nil | N/A | |||||||
| 2023 | Nil | (8) | Nil | N/A | ||||||||
| 2022 | Nil | (8) | Nil | N/A | ||||||||
| Xia Li (9) | 2024 | — | Nil | N/A | ||||||||
| Vice President of | 2023 | 8,760 | Nil | N/A | ||||||||
| Finance of Bao Feng | 2022 | 18,696 | Nil | N/A | ||||||||
| Yu Gao | 2024 | 16,776 | Nil | N/A | ||||||||
| CMO of Bao Feng | 2023 | 17,520 | Nil | N/A | ||||||||
| 2022 | 18,696 | Nil | N/A | |||||||||
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| (1) | Expressed in U.S. Dollars based on the annual average exchange rate as reported by the Federal Reserve Bank of New York of 7.153 RMB for each US dollar in 2024; 6.8493 RMB for each US dollar in 2023; and 6.4184 RMB for each U.S. dollar in 2022. | ||
| (2) | Paid to Ms. Chang by Bao Feng as compensation for her services to that company. | ||
| (3) | Ms. Pang became an officer and director of the Company on May 4, 2020. Compensation amounts do not include the value of 600,000 cashless options to purchase Ordinary Shares of the Company at $0.50 per Ordinary Share issued to Ms. Pang in May 2020. | ||
| (4) | Ms. Huang was appointed to the Board of Directors of the Company on August 1, 2022 and resigned as an independent director effective May 15, 2023. | ||
| (5) | Mr. Tse and Dr. Dong were appointed to the Board of Directors of the Company on August 1, 2022. | ||
| (6) | Dr. Ning was appointed to the Board of Directors of the Company on June 16, 2023. | ||
| (7) | Ms. Dai and Mr. Yeh were appointed to the Board of Directors of the Company on April 30, 2021 and resigned as independent directors on August 1, 2022. They were not compensated for serving as independent directors of the Company during the period. | ||
| (8) | In lieu of a cash salary, Mr. Chen received shares of Bao Feng, which were later transferred to Zhong Yuan-SZ in exchange for shares of Zhong Yuan Investment as part of a corporate reorganization. | ||
| (9) | Ms. Li resigned as Vice President of Finance of Bao Feng on August 30, 2022. | ||
We did not set aside or accrue any amounts to provide pension, retirement or similar benefits for directors and officers for the fiscal year ended March 31, 2024 or 2023, other than contributions to our Provident Fund Plan as social insurances and housing provident fund, which aggregated approximately $13,500 and $14,000, respectively, for officers and directors.
Stock Option Grants and Exercises
On May 4, 2020, the Company issued cashless options (the “Options”) to purchase 600,000 (post-Reverse Stock Split) Ordinary Shares of the Company at $0.50 per Ordinary Share (as adjusted for the Reverse Stock Split) to Ms. Pang, our Chief Financial Officer and director. The Options vested 50% upon commencement of trading of the Company’s Ordinary Shares on the OTCQB on July 15, 2021 and 50% on July 15, 2022. The Options are exercisable for five years after the date of vesting.
On December 2, 2021, Ms. Pang exercised her Options to acquire 300,000 of our Ordinary Shares on a cashless basis. As a result of this exercise, 272,118 Ordinary Shares were issued to Ms. Pang. Ms. Pang’s remaining 300,000 Options remain unexercised as of the date of this Annual Report.
Other than the Options issued to Ms. Pang, we have not issued any Options or stock appreciation rights to any officers, employees or directors. We may issue additional Ordinary Share options to our directors and officers in the future at the discretion of our Board of Directors.
Stock Option and Bonus Plans
We currently have not authorized any compensation plans or stock option plans, except the Options issued to Ms. Pang as mentioned above.
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Compensation of Directors
Mr. Tse, Dr. Dong and Ms. Huang, a former independent director of the Company, have entered into Director’s Agreements effective on August 1, 2022. Dr. Ning entered into a Director’s Agreement effective on June 16, 2023. The terms and conditions of each such Director’s Agreement are similar in all material respects. Each Director’s Agreement is for an initial term of one year and will continue until the director’s successor is duly elected and qualified. Each director will be up for re-election each year at the annual shareholders’ meeting and, upon re-election, the terms and provisions of her or his Director’s Agreement will remain in full force and effect. Any Director’s Agreement may be terminated for any or no reason by the director or at a meeting called expressly for that purpose by a vote of the shareholders holding more than 50% of the Company’s issued and outstanding Ordinary Shares entitled to vote.
Under the Director’s Agreements, the initial annual fee that is payable to each of our independent directors is as follows:
| Independent Director | Annual Compensation | ||
| Daphne Huang(1) | $ | 30,000 | |
| Chi Wai (Gabriel) Tse | $ | 24,000 | |
| Shuo Dong | $ | 24,000 | |
| Chinghai Ning | $ | 24,000 | |
(1) Ms. Huang was paid $23,750 as compensation for her service as an independent director from August 1, 2022 to May 15, 2023, the date of her resignation from our Board of Directors.
Other than the above-mentioned Director’s Agreements, we do not have any agreements for compensating our directors for their services in their capacity as directors.
Employment Contracts
The employment agreements between the Company or Bao Feng and their executive officers are summarized below.
Ting Ting Chang, CEO of both the Company and Bao Feng, entered into a five-year Employment Agreement with Bao Feng for a term which commenced May 16, 2017 and terminated on May 15, 2022. On May 16, 2022, Ms. Chang entered into a Supplement to her five-year Employment Agreement with the same terms and conditions as the five-year Employment Agreement, but without any fixed period. The Employment Agreement, as supplemented, may be terminated by mutual agreement or by either party under certain specified conditions. Ms. Chang is currently paid a monthly salary of RMB10,000. In addition, Ms. Chang has entered into an Indemnification Agreement with the Company pursuant to which the Company has agreed to indemnify her, to the fullest extent permitted by the laws of the Cayman Islands and the Memorandum and Articles of Association of the Company, against any and all expenses, liability and loss that she may incur as a result of any proceeding based on her alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer of the Company.
Fung Ming Pang, CFO of the Company, has entered into a three-year Employment Agreement with the Company for a term which commenced May 4, 2020 and terminated on May 3, 2023. The Employment Agreement was renewed for an additional one-year term and may be renewed for additional one-year terms unless earlier terminated. Under the Agreement, Ms. Pang is paid a monthly salary of $2,000 until November 2020 and $6,000 thereafter. In addition, Ms. Pang is entitled to annual bonuses as determined by the Board of Directors and payable either in stock, stock options or cash, or any combination thereof. Pursuant to the Agreement, Ms. Pang was granted cashless options to purchase 600,000 (post-Reverse Stock Split) Ordinary Shares of the Company at $0.50 per share (as adjusted for the Reverse Stock Split), 50% of which vested on July 15, 2021 and 50% of which vested on July 15, 2022. The options are exercisable for five years after the date of vesting. Ms. Pang may be granted additional options upon approval of the Board of Directors. The Agreement may be terminated by the Company with or without cause, voluntarily by Ms. Pang or by Ms. Pang upon a change in control of the Company. The Agreement contains a covenant not to compete and a non-disclosure clause. In addition, Ms. Pang has entered into an Indemnification Agreement with the Company pursuant to which the Company has agreed to indemnify her, to the fullest extent permitted by the laws of the Cayman Islands and the Memorandum and Articles of Association of the Company, against any and all expenses, liability and loss that she may incur as a result of any proceeding based on her alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer of the Company.
Xianyang Chen, CTO of Bao Feng, entered into a Technology Shareholding Cooperation Agreement, dated June 1, 2017, with Bao Feng pursuant to which he received shares equal to a 20% interest in Bao Feng in lieu of a salary, rather than an Employment Agreement. Pursuant to the re-organization of China Bio, his 20% interest in Bao Feng was transferred to Zhong Yuan-SZ on January 19, 2018 in exchange for a 16% interest in Zhong Yuan Investment. If the Company is listed on either Nasdaq or the NYSE, Mr. Chen’s salary will be determined according to the salary structure of the listed Company. The Agreement contains a 5-year non-competition clause and a non-disclosure clause.
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Yu Gao, CMO of Bao Feng, is currently employed by Bao Feng for an unlimited term. His employment may be terminated by mutual agreement or by either party under certain specified conditions. Mr. Gao is currently paid a monthly salary of RMB10,000.
Limitation on Liability and Other Indemnification Matters
The Companies Act does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our Memorandum and Articles permit indemnification of officers and directors for actions, proceedings, claims, losses, damages, costs, liabilities and expenses (“Indemnified Losses”) incurred in their capacities as such unless such Indemnified Losses arise from dishonesty of such directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Share Ownership
The following table shows the number of Ordinary Shares beneficially owned by our directors and executive officers as of the date of this Annual Report:
| Name and Address | Ordinary Shares Directly Owned | Ordinary Shares Beneficially Owned | Total Number of Ordinary Shares Beneficially Owned | Percent of Beneficial Ownership(1) | ||||||||||||
| Ting Ting Chang Suite 901, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong | 2,656,388 | (2) | — | 2,656,388 | (2) | 15.00 | % | |||||||||
| Fung Ming Pang Suite 901, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong | 272,118 | (3) | 2,956,388 | (2)(4) | 3,228,506 | (2)(3)(4) | 18.23 | % | ||||||||
| Chinghai Ning Suite 901, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong | — | — | — | 0.00 | % | |||||||||||
| Chi Wai (Gabriel) Tse Suite 901, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong | — | — | — | 0.00 | % | |||||||||||
| Shuo Dong Suite 901, Tesbury Centre 28 Queen’s Road East Wanchai, Hong Kong | — | — | — | 0.00 | % | |||||||||||
| All Directors and Officers as a group (5 persons) | 2,928,506 | 2,956,388 | 5,884,894 | 33.23 | % | |||||||||||
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| (1) | Based on 17,709,718 Ordinary Shares outstanding as of the date of this Annual Report. | |
| (2) | On December 30, 2021, Zhong Yuan Investment transferred 6,425,287 Ordinary Shares, 2,656,388 Ordinary Shares, 2,656,388 Ordinary Shares, 2,125,111 Ordinary Shares, and 318,767 Ordinary Shares of the Company (totaling 14,181,941 of our Ordinary Shares) to Yu Chang, father of Ting Ting Chang, our Chief Executive Officer and director, Ting Ting Chang, Prime Legend Limited which is 100% owned of record by Fung Ming Pang, our Chief Financial Officer and director, Xianyang Chen, Bao Feng’s Chief Technical Officer and Shuju Chen, respectively. After these Share transfers, Zhong Yuan Investment does not hold any of our Ordinary Shares.
| |
| (3) | On May 4, 2020, we granted 600,000 cashless Options to Ms. Pang. The Options are exercisable at $0.50 per Ordinary Share, vested 50% on July 15, 2021 and 50% on July 15, 2022 and are exercisable for five years after the date of vesting. On December 2, 2021, Ms. Pang exercised her Options to acquire 300,000 Ordinary Shares of the Company on a cashless basis. As a result of this exercise, 272,118 Ordinary Shares were issued to Ms. Pang.
| |
| (4) | Includes 2,656,388 Ordinary Shares held of record by Prime Legend Limited, which is 100% owned of record by Ms. Pang, our Chief Financial Officer and director, who is also its sole director, and 300,000 Ordinary Shares underlying cashless Options that vested on July 15, 2022 and will be exercisable until July 14, 2027. |
In May 2020, Ting Ting Chang, our Chief Executive Officer, sold an aggregate of 8,000,000 Ordinary Shares owned of record by her, and Zhong Yuan Investment sold an aggregate of 9,911,920 Ordinary Shares owned of record by it, to existing, non-affiliated shareholders of the Company in private transactions under Regulation S (the “Private Sales”).
In addition, Zhong Yuan Investment sold 180,000 (post Reverse Stock Split) Ordinary Shares that were registered under the registration statement declared effective by the SEC on June 29, 2020 (“Registered Shares), in private transactions to two non-affiliates and 120,000 (post Reverse Stock Split) Registered Shares to Yau Sing Tang, the husband of Fung Ming Pang, our Chief Financial Officer and director. In addition to the sales of 300,000 Registered Shares, Zhong Yuan Investment sold 676,867 (post Reverse Stock Split) Ordinary Shares that were not registered under the registration statement declared effective by the SEC on June 29, 2020 to 35 non-affiliates of the Company under Regulation S (the “Private Sale”).
On May 4, 2020, we granted 600,000 cashless Options to Ms. Pang. The Options are exercisable at $0.50 per Ordinary Share, vested 50% on July 15, 2021 and 50% on July 15, 2022 and are exercisable for five years after the date of vesting. On December 2, 2021, Ms. Pang exercised her Options to acquire 300,000 Ordinary Shares on a cashless basis. As a result of this exercise, 272,118 Ordinary Shares of the Company were issued to Ms. Pang.
On December 30, 2021, Zhong Yuan Investment transferred 6,425,287 Ordinary Shares, 2,656,388 Ordinary Shares, 2,656,388 Ordinary Shares, 2,125,111 Ordinary Shares and 318,767 Ordinary Shares (totaling 14,181,941 of our Ordinary Shares) to Yu Chang, father of Ting Ting Chang, our Chief Executive Officer and director, Ting Ting Chang, Prime Legend Limited, which is 100% owned of record by Fung Ming Pang, our Chief Financial Officer and director, Xianyang Chen, Bao Feng’s Chief Technical Officer and Shuju Chen, respectively. After these Share transfers, Zhong Yuan Investment does not hold any Ordinary Shares.
There are no arrangements known to us that may at a subsequent date result in a change in control of the Company.
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Item 7. Major Shareholders and Related Party Transactions
Major shareholders
We are not directly or indirectly owned or controlled by any foreign government or by another corporation, other than as indicated in the table below. The following table sets forth information regarding beneficial ownership of our share capital by:
| ● | each person, or group of affiliated persons, known by us to beneficially own more than 5% of our Shares; | |
| ● | each of our named executive officers; | |
| ● | each of our directors and director nominees; and | |
| ● | all of our current executive officers, directors and director nominees as a group. |
Applicable percentage ownership is based on 17,709,718 Ordinary Shares of the Company issued and outstanding as of the date of this Annual Report.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the SEC and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within sixty (60) days through the conversion or exercise of any convertible security, warrant, option or other right. More than one (1) person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within sixty (60) days, by the sum of the number of shares outstanding as of such date, plus the number of shares as to which such person has the right to acquire voting or investment power within sixty (60) days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below, we believe that the beneficial owners of our Shares listed below have sole voting and investment power with respect to the Shares shown.
The address of each person listed on the table is Suite 901, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
| Name | Ordinary Shares Directly Owned | Ordinary Shares Beneficially Owned | Percent of Beneficial Ownership(1) | |||||||||
| Yu Chang | 6,425,287 | (2) | — | 36.28 | % | |||||||
| Ting Ting Chang | 2,656,388 | (2) | — | 15.00 | % | |||||||
| Prime Legend Limited | 2,656,388 | (2) | — | 15.00 | % | |||||||
| Fung Ming Pang | 272,118 | (3) | 2,956,388 | (2)(4) | 18.23 | % | ||||||
| Xianyang Chen | 2,125,111 | (2) | — | 12.00 | % | |||||||
| (1) | Based on 17,709,718 Ordinary Shares outstanding as of the date of this Annual Report. |
| (2) | On December 30, 2021, Zhong Yuan Investment transferred 6,425,287 Shares, 2,656,388 Shares, 2,656,388 Shares, 2,125,111 Shares, and 318,767 Shares of the Company (totaling 14,181,941 Shares of the Company) to Yu Chang, father of Ting Ting Chang, our Chief Executive Officer and director, Ting Ting Chang, Prime Legend Limited which is 100% owned of record by Fung Ming Pang, our Chief Financial Officer and director, Xianyang Chen, Bao Feng’s Chief Technical Officer and Shuju Chen respectively. After these Share transfers, Zhong Yuan Investment does not hold any Ordinary Shares of the Company. |
| (3) | On May 4, 2020, the Company granted 600,000 cashless Options to Ms. Pang. The Options are exercisable at $0.50 per Ordinary Share, vested 50% on July 15, 2021 and 50% on July 15, 2022 and are exercisable for five years after the date of vesting. On December 2, 2021, Ms. Pang exercised her Options to acquire 300,000 Shares of the Company on a cashless basis. As a result of this exercise, 272,118 Shares of the Company were issued to Ms. Pang. |
| (4) | Includes 2,656,388 Ordinary Shares held of record by Prime Legend Limited, which is 100% owned of record by Ms. Pang, our Chief Financial Officer and director, who is also its sole director, and 300,000 Ordinary Shares underlying cashless Options that vested on July 15, 2022 and will be exercisable until July 14, 2027. |
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In May 2020, Ting Ting Chang, our Chief Executive Officer, sold an aggregate of 8,000,000 Ordinary Shares owned of record by her, and Zhong Yuan Investment sold an aggregate of 9,911,920 Ordinary Shares owned of record by it, to existing, non-affiliated shareholders of the Company in private transactions under Regulation S (the “Private Sales”). The sales by Zhong Yuan Investment, reduced the beneficial ownership of our principal shareholders proportionately to their interest in Zhong Yuan Investment as described in footnote 2, above.
In addition, Zhong Yuan Investment sold 180,000 (post Reverse Stock Split) Shares that were registered under the registration statement declared effective by the SEC on June 29, 2020 (“Registered Shares), in private transactions to two non-affiliates and 120,000 (post Reverse Stock Split) Registered Shares to Yau Sing Tang, the husband of Fung Ming Pang, our Chief Financial Officer and director. In addition to the sales of 300,000 Registered Shares, Zhong Yuan Investment sold 676,867 (post Reverse Stock Split) Ordinary Shares that were not registered under the registration statement declared effective by the SEC on June 29, 2020 to 35 non-affiliates of the Company under Regulation S (the “Private Sale”).
There are no arrangements known to us that may at a subsequent date result in a change in control of the Company.
Related Party Transactions
The following discussion is a brief summary of certain material arrangements, agreements and transactions we have had with related parties since April 1, 2020, other than the compensation arrangements we describe in “Compensation of Executive Officers and Directors.”
The Company utilizes the office space and equipment of a business associate of management in Hong Kong at no cost. Management estimates the value of such office space and equipment to be immaterial.
During the year ended March 31, 2022, the Company generated service income of $44,094 and $38,215 by providing research and development services to Beijing Guo Bao Feng Bio-technology Co. Ltd. and Zhong Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd., respectively. There was no such service income generated for the fiscal year ended March 31, 2023. Mr. Yu Chang, the Company’s major shareholder and father of Ting Ting Chang, our CEO and director, had interests in and/or served as a director of both of those companies. Subsequent to March 31, 2022, Mr. Yu Chang sold all of his interest in Beijing Guo Bao Feng and, as a result, Beijing Guo Bao Feng is no longer a related party of the Company.
On September 30, 2022, Bao Feng sold its 100% interest in Dandong BF to Zhong Yuan Nervonic Acid Bio-technology Co. Ltd., of which Yu Chang, the Company’s major shareholder and father of Ting Ting Chang, our Chief Executive Officer and director, is a director, general manager and a major shareholder, for a total consideration of RMB5 million. RMB1million was paid in cash and the balance of RMB4 million was exchanged for a 7% interest in Yanbian Bao Feng Biotechnology Co., Ltd. (“Yanbian BF”), of which Yu Chang is the legal representative and the ultimate majority beneficial shareholder. Yanbian BF was incorporated in the PRC on May 24, 2018 and is in the process of building an extraction factory to extract nervonic acid from Acer truncatum seeds. As a result of the sale, Dandong BF is no longer owned by Bao Feng and is not a subsidiary of the Company.
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During the fiscal years ended March 31, 2023 and 2024, the following related companies in which Yu Chang, the Company’s major shareholder and father of Ting Ting Chang, our Chief Executive Officer and director, has a significant equity interest and/or for which he serves as a director, provided research and development services to the Company:
| Recognized as R&D expenses | ||||||||||||||
Name | Description of R&D project | Contract sum | For the year ended March 31, 2023 | For the year ended March 31, 2024 | ||||||||||
| $ | $ | $ | ||||||||||||
| Dunhua
Acer Truncatum Seedling Planting Co. Ltd. | Seedling analysis | 109,060 | 43,624 | — | ||||||||||
| Zhong
Yuan Nervonic Acid Bio-technology Co. Ltd. | Nervonic
acid analysis | 155,800 | 38,950 | — | ||||||||||
| Zhong
Yuan Nervonic Acid Bio-technology Co. Ltd. | Nervonic
acid analysis | 67,306 | — | — | ||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | Chemical
elements, lignin, cellulose testing | 94,337 | 18,867 | — | ||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | Chemical
elements, lignin, cellulose testing | 124,640 | 31,160 | — | ||||||||||
| Zhong
Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd. | Metabolomics testing and analysis | 272,650 | 81,795 | — | ||||||||||
| Total | 823,793 | 214,396 | — | |||||||||||
As of March 31, 2024, an outstanding loan from China Construction Bank of $325,475 (RMB2,325,000) with an annual interest rate of 0.15% over the PRC 1-year prime lending rate was secured by a pledge of property of the Company’s CEO and executive director, Ms. Ting Ting Chang, and denominated in RMB for a term of 36 months.
As of March 31, 2023, an outstanding loan from China Construction Bank of $338,520 (RMB2,325,000) with an annual interest rate of 0.15% over the PRC 1-year prime lending rate was secured by a pledge of property of the Company’s CEO and executive director, Ms. Ting Ting Chang, and denominated in RMB for a term of 36 months.
As of March 31, 2024 and 2023, there was an amount due to Ting Ting Chang, our CEO and executive Director of the Company of $12,703 and $nil, respectively. The amount due to Ting Ting Chang was unsecured, non-interest bearing and repayable on demand.
Except as otherwise indicated herein, there have been no other related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 and Item 407(a) of Regulation S-K.
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Interests of Experts and Counsel
Not Applicable
Item 8. Financial Information
Financial Statements
Our Consolidated Financial Statements are set forth under Item 18. - "Financial Statements."
Item 9. The Offer and Listing
Offer and Listing Details
Our Ordinary Shares are currently trading on the Expert Market of OTC Markets under the symbol ZHYBF. We have applied for our Ordinary Shares to be listed on the Nasdaq Capital Market; however, there can be no assurance that our Ordinary Shares will be accepted for trading on that market or that a viable public market will ever develop.
Item 10. Additional Information
Share Capital
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our Amended and Restated Memorandum and Articles of Association, the Companies Act, the common law of the Cayman Islands, our corporate governance documents and rules and regulations of the stock exchange on which our Shares may, in the future, be traded.
Our authorized capital is $50,000, consisting of 50,000,000 shares, $0.001 par value per share. The Board of Directors has the right, in its absolute discretion and without approval of the existing shareholders, to issue shares, grant rights over existing shares or issue other securities in one or more series as it deems necessary and appropriate and to determine designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers and rights associated with the Shares held by existing shareholders, at such times and on such other terms as it deems proper. No preferred shares have been issued.
As of the date of this Annual Report, there are 17,699,618 of our Ordinary Shares issued and outstanding, including 16,150,000 (as adjusted for the Reverse Stock Split) which were issued in July 2019 in consideration for 100% of the outstanding shares of China Bio pursuant to the Share Exchange. All Ordinary Shares are fully paid. Except for the remaining 300,000 Options issued to Ms. Pang and the 13,000 Warrants that were issued in the 2021 private securities offering, we do not have any options to purchase Ordinary Shares or any preferred shares outstanding.
Amended and Restated Memorandum and Articles of Association
We are registered in the Cayman Islands and have been assigned company number 313036 in the register of companies. Our registered office is Quality Corporate Services Ltd., P.O. Box 712, Suite 102, Cannon Place, North Sound Road, George Town, Grand Cayman KY1-9006, Cayman Islands. The objects for which the Company was established are unrestricted and the Company has full power and authority to carry out any object that is not prohibited under Cayman Islands law as set forth in Paragraph 4 of our Amended and Restated Memorandum of Association. As a Cayman Islands exempted company, we are (subject to certain qualifications) prohibited from trading in the Cayman Islands with any person, firm or corporation except in furtherance of our business carried on outside the Cayman Islands, owning land in the Cayman Islands and making any invitation to the public in the Cayman Islands to subscribe for any of our Shares or debentures. We do not believe that these restrictions materially affect our operations.
Objects of the Company
Under our Amended and Restated Memorandum and Articles of Association, the objects of our Company are un-restricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Powers of Directors
Paragraph 107 of our Amended and Restated Articles of Association (our “Articles”) provides that a director who is in any way, whether directly or indirectly, interested in a contract or a proposed contract with the Company shall declare the nature of his interest at a meeting of the directors or by general notice to the directors. The director may vote in respect of the contract or arrangement notwithstanding his interest therein and his vote shall be counted, and he may be counted in the quorum at any meeting at which the contract or arrangement is considered. Paragraph 86 of the Articles allows the directors to vote compensation to themselves in respect of services rendered to the Company. Paragraph 98 of the Articles provides that the directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. Such borrowing powers can be altered by an amendment to the Articles. There is no provision in the Articles for the mandatory retirement of directors. Paragraph 85 of the Articles provides that directors are not required to own Shares of the Company in order to serve as directors.
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Our Ordinary Shares
Our authorized share capital is $50,000, divided into 50,000,000 Shares, $0.001 par value. Holders of our Ordinary Shares are entitled to one vote for each whole Share on all matters to be voted upon by shareholders, including the election of directors. Holders of our Ordinary Shares do not have cumulative voting rights in the election of directors. All of our fully paid Ordinary Shares are equal to each other with respect to dividend rights. Holders of our Ordinary Shares are entitled to receive dividends if and when declared by our Board of Directors out of funds legally available therefor under Cayman Islands law. In the event of our liquidation, the liquidator will, after having discharged the debts, if any, of the Company, divide among the shareholders on a pari passu basis, in specie or kind, the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any property to be divided as aforesaid. Holders of our Ordinary Shares have no pre-emptive rights to purchase any additional unissued Ordinary Shares. No preferred shares have been issued; however, the Board of Directors has the ability to determine the rights, preferences and restrictions of preferred shares at their discretion.
Paragraph 8 of the Articles provides that the powers, preferences and relative, participating, optional and other special rights of each series of preferred shares, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.
Amendment
Paragraph 153 of the Articles provides that our Amended and Restated Memorandum and Articles of Association may be amended by a special resolution of members. A special resolution requires passage by a majority of not less than two-thirds of the shareholders entitled to vote on the matter, in person or, where proxies are allowed, by proxy at a general meeting of the Company or in writing by all of the shareholders entitled to vote.
General Meetings
Provisions in respect of the holding of annual general meetings and extraordinary general meetings are set out in Paragraphs 55 through 69 of the Articles and under the Companies Act of the Cayman Islands. The directors may convene meetings of the shareholders at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of shareholders holding not less than one-third of the share capital of the Company as at that date carries the right to vote at general meetings of the Company.
Limitations on Right to Own Shares
Cayman Islands law and our Amended and Restated Memorandum and Articles of Association impose no limitations on the right of non-resident or foreign owners to hold or vote our securities. There are no provisions in the Amended and Restated Memorandum and Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
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Anti-Takeover Provisions
Some provisions of our Articles may discourage, delay or prevent a change of control of our Company or management that shareholders may consider favorable, including provisions that:
| ● | authorize our Board of Directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders (subject to variation of rights of shares provisions in our Amended and Restated Memorandum and Articles of Association); and
| |
| ● | limit the ability of shareholders to requisition and convene general meetings of shareholders. Our Amended and Restated Memorandum and Articles of Association allow our shareholders holding Shares representing in aggregate not less than one-third of our share capital as carries the right to vote to requisition an extraordinary general meeting of our shareholders, in which case our directors are obliged to call such meeting and to put the resolutions so requisitioned to a vote at such meeting. |
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Amended and Restated Memorandum and Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests of our Company.
Issuance of Additional Shares
Paragraph 6 of our Articles authorize our Board of Directors to issue additional Ordinary Shares from time to time as our Board of Directors shall determine, to the extent there are available authorized but unissued Shares.
Paragraph 7 of our Articles also authorizes our Board of Directors to establish from time to time one or more series of preferred shares and to determine, subject to compliance with the variation of rights of shares provision in the Articles, with respect to any series of preferred shares, the terms and rights of that series, including:
| ● | the designation of the series; | |
| ● | the number of shares of the series; | |
| ● | the dividend rights, dividend rates, conversion rights and voting rights; and | |
| ● | the rights and terms of redemption and liquidation preferences. |
Our Board of Directors may issue preferred shares without action by our shareholders to the extent there are authorized but unissued shares available. Issuance of additional shares may dilute the voting power of holders of our Ordinary Shares. However, no shares may be issued in excess of the authorized share capital specified in our Amended and Restated Memorandum of Association and to the extent the rights attached to any class may be varied, the Company must comply with the provisions in our Articles relating to variations in rights of shares.
A copy of our Amended and Restated Memorandum and Articles of Association was filed as Exhibit A to the Definitive Schedule 14(C) filed with the SEC by the Company on January 16, 2018.
Material Contracts
Summaries of our employment contracts with executive officers and key employees are disclosed under “Compensation of Executive Officers and Directors - Employment Contracts” and were filed as Exhibits 10.9 through 10.11 to our Report on Form 6-K filed with the SEC on September 5, 2019.
Summaries of our leases are disclosed under “Our Business - Properties” and were filed as Exhibits 10.13 and 10.14 to our registration statement on Form F-1 filed with the SEC on April 28, 2020.
On September 19, 2022, Bao Feng entered into an Equity Acquisition Agreement with Zhong Yuan Nervonic Acid Biotechnology Co. (“ZYNAB”) pursuant to which Bao Feng transferred its 100% equity interest in Dandong BF to ZYNAB for a purchase price of RMB5,000,000 to be settled as follows: (i) RMB1,000,000 in cash; plus (ii) a 7% equity interest in Yanbian Baofeng Biotechnology Co., Ltd., a PRC company which is in the process of building an extraction factory to extract nervonic acid from Acer truncatum seeds. An English translation of the Equity Acquisition Agreement was filed as Exhibit 10.26 to our registration statement filed with the SEC on October 26, 2022.
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Exchange Controls
The government of the PRC imposes restrictions on the convertibility of the RMB and the collection and use of foreign currencies by Chinese entities. Under the current regulations, the RMB can be freely exchanged in current account transactions, including dividend distribution, interest payments and import and export of goods and services. However, the conversion of RMB into foreign currency and the conversion of foreign currency into RMB for capital account transactions, such as direct investment, securities investment and loans, generally require prior approval from the SAFE.
According to the current PRC regulations, foreign-invested enterprises, such as our subsidiaries in China, must apply for a Foreign Exchange Registration Certificate for Foreign-Invested Enterprise. With such a certificate, a foreign-invested enterprise may open foreign exchange bank accounts with banks authorized by SAFE to conduct foreign exchange business and may purchase, sell and remit foreign exchange through such banks, subject to documentation and approval requirements. Foreign-invested enterprises are required to open and maintain separate foreign exchange accounts for capital account transactions and current accounts. In addition, there are restrictions on the amount of foreign currency that foreign-invested enterprises can retain in such accounts.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
Taxation
No reciprocal tax treaty regarding withholding exists between the United States and the Cayman Islands. Under current Cayman Islands law, dividends, interest or royalties paid by us to individuals are not subject to tax. If we were to pay a dividend, we would not be liable to withhold any tax, but shareholders would receive gross dividends, if any, irrespective of their residential or national status.
Dividends, if any, paid to any United States resident or citizen shareholder are treated as dividend income for United States federal income tax purposes. Such dividends are not eligible for the 50% dividends-received deduction allowed to United States corporations on dividends from a domestic corporation under Section 243 of the Internal Revenue Code. Various Internal Revenue Code provisions impose special taxes in certain circumstances on non-United States corporations and their shareholders. You are urged to consult your tax advisor with regard to such possibilities and your own tax situation.
A foreign corporation will be treated as a passive foreign investment company (“PFIC”) for United States federal income tax purposes if, after applying relevant look-through rules with respect to the income and assets of subsidiaries, 75% or more of its gross income consists of certain types of passive income or 50% or more of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. For this purpose, passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived in the active conduct of a trade or business), annuities and gains from assets that produce passive income. We presently believe that we are not a PFIC and do not anticipate becoming a PFIC. This is, however, a factual determination made on an annual basis and is subject to change. If we were to be classified as a PFIC in any taxable year, (i) United States holders would generally be required to treat any gain on sales of our Shares held by them as ordinary income and to pay an interest charge on the value of the deferral of their United States federal income tax attributable to such gain; and (ii) distributions paid by us to our United States holders could also be subject to an interest charge. In addition, we would not provide information to our United States holders that would enable them to make a “qualified electing fund” election under which, generally, in lieu of the foregoing treatment, our earnings would be currently included in their United States federal income.
In addition to United States federal income taxation, shareholders may be subject to state and local taxes upon their receipt of dividends. Further, non-U.S. shareholders may be subject to taxation upon their receipt of dividends in their tax jurisdiction.
Documents on Display
You may read and copy documents referred to in this Annual Report that have been filed with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC’s website at http://www.sec.gov.
The SEC allows us to “incorporate by reference” the information we file with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this Annual Report.
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Item 11. Quantitative and Qualitative Disclosures About Market Risk
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 12. Description of Securities Other Than Equity Securities
Not Applicable
Item 13. Defaults, Dividend Arrearages and Delinquencies
None
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
On August 21, 2018, the Company, a Delaware corporation, completed a redomicile merger to reorganize itself as a Cayman Islands company. A comparison of the rights of shareholders under Delaware and Cayman Islands law appears in the Definitive Schedule 14(C) filed with the SEC by the Company on January 16, 2018, which is incorporated herein by this reference.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our principal executive officer, Ting Ting Chang, and principal financial officer, Fung Ming Pang, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act, as of March 31, 2024. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective at such time to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls, which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, were inappropriate to allow timely decisions regarding required disclosure.
Based on management's assessment, the Company determined that there were material weaknesses in its internal control over financial reporting as of March 31, 2024. The material weaknesses identified were as follows:
| ● | Due to the small size of the Company and the lack of an accounting and finance department or a sufficient number of experienced accounting and finance personnel, there were limited controls over information processing. |
| ● | There was an inadequate segregation of duties consistent with control objectives, as management was composed of only two persons at fiscal year-end, and there remains an issue with inadequate segregation of duties as of the date of filing this Annual Report. In order to remedy this situation, we would need to hire additional managers and staff to provide greater segregation of duties. Currently, it is not financially feasible to hire additional managers and staff to obtain optimal segregation of duties. Management will reassess this matter on an ongoing basis to determine whether improvement in segregation of duties is feasible. |
| ● | Although the financial statements and footnotes are reviewed by our management, we did not have formal policies and procedures necessary to adequately review significant accounting transactions and the accounting treatment of those transactions. |
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As a result of these material weaknesses, our management concluded that our internal control over financial reporting was not effective as of March 31, 2024. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company's financial reporting.
Evaluation of Internal Controls and Procedures
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive, principal operating and principal financial officers, or persons performing similar functions, and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting at March 31, 2024 and determined that, as of March 31, 2024, our internal control over financial reporting was not effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the exemption provided to issuers that are not "large accelerated filers" nor "accelerated filers" under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Controls over Financial Reporting
There were no changes to our internal controls over financial reporting that occurred during our last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. However, in August 2022, our Board of Directors appointed three independent directors and formally formed an audit committee with financial experts that is comprised of those three independent directors. Even though our financial statements and footnotes are now reviewed by our management and our audit committee, we still do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions.
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Item 16. Reserved
Item 16A. Audit Committee Financial Expert
The Board of Directors has determined that Mr. Chi Wai (Gabriel) Tse, the Chairman of our audit committee, qualifies as a financial expert under the applicable SEC rules.
Item 16B. Code of Ethics
Our Board of Directors adopted a Code of Business Conduct and Ethics that applies to our directors, officers, employees and representatives effective as of November 24, 2022. The Company will provide to any person without charge, upon request, a copy of such code of ethics. Such request must be in writing and sent to Ms. Ting Ting Chang, our CEO, either by email to tinachang@zybioholdings.com or by mail, postage prepaid, to Ms. Ting Ting Chang, CEO, Zhong Yuan Bio-Technology Holding Limited, Suite 901, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
Item 16C. Principal Accountant Fees and Services
On February 25, 2022, we engaged Centurion ZD CPA & Co. (“Centurion ZD”) to replace K. R. Margetson Ltd. as our independent registered public accounting firm to audit our financial statements for the fiscal year ended March 31, 2023 and onward. Fees billed to the Company by Centurion ZD for the fiscal year ended March 31, 2023 are set forth below in the column for that fiscal year.
On June 4, 2024, we accepted the resignation of Centurion ZD as our independent registered public accounting firm and we engaged TAAD, LLC, a PCAOB registered firm (“TAAD”), located at 20955 Pathfinder Road, Suite 370, Diamond Bar, California 91765. Fees billed to the Company by TAAD for the fiscal years ended March 31, 2024 and 2023 are set forth below.
|
Fiscal Year Ended March 31, |
Fiscal Year Ended March 31, |
|||||||
| 2024 | 2023 | |||||||
| Audit Fees | $ | 92,700 | 162,700 | (1) | ||||
| Audit Related Fees | $ | — | 8,000 | |||||
| Tax Fees | — | — | ||||||
| All other Fees | — | — | ||||||
| Total | $ | 92,700 | 170,700 | |||||
(1) Includes audit fees of $70,000 charged by Centurion ZD and $92,700 charged by TAAD for the fiscal year ended March 31,2023.
Audit Fees consisted of fees billed for services rendered for the audit of the Company's annual consolidated financial statements included in the Company's annual reports on Form 20-F and other regulatory filings, and "audit related fees" are for review of the consolidated financial statements included in the Company's interim reports on Form 6-K.
Audit Related Fees consist of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.
Tax Fees consist of the aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. Included in such Tax Fees are fees for preparation of our tax returns and consultancy and advice on other tax planning matters.
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All Other Fees consist of the aggregate fees billed for products and services provided by our independent auditor and not otherwise included in Audit Fees, Audit Related Fees or Tax Fees. Included in such Other Fees would be fees for services rendered by our independent auditor in connection with any private and public offerings conducted during such periods.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Our Ordinary Shares are not currently listed on an exchange.
In conjunction with our proposed public offering, we have applied for our Ordinary Shares to be listed on the Nasdaq Capital Market. As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. However, our audit committee is required to comply with the provisions of Rule 10A-3 of the Exchange Act, which is applicable to U.S. companies listed on Nasdaq. Therefore, we have a fully independent audit committee in accordance with Rule 10A-3 of the Exchange Act. However, because we are a foreign private issuer, our audit committee is not subject to additional Nasdaq corporate governance requirements applicable to listed U.S. companies, including the requirements to have a minimum of three members and to affirmatively determine that all members are “independent,” using more stringent criteria than those applicable to us as a foreign private issuer.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Item 16F. Changes in Registrant's Certifying Accountants
On May 4, 2023, we accepted the resignation of K. R. Margetson Ltd. (“Margetson”) as our independent registered public accounting firm. The report of Margetson on our financial statements for the fiscal year ended March 31, 2022 contained no adverse opinion or disclaimer of opinion and was not modified. During our fiscal years ended March 31, 2022 and 2023 and the subsequent interim period preceding Margetson’s resignation, we had no disagreements with Margetson on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Margetson, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such period. The decision to accept the resignation and change our independent accountant was approved and ratified by our Board of Directors on May 4, 2023.
During our fiscal years ended March 31, 2022 and 2023 and the subsequent interim period preceding Margetson’s resignation, there were no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K.
We provided Margetson with a copy of the disclosure before filing our Report on Form 6-K regarding our change of accountants. We requested that Margetson provide us with a letter addressed to the SEC stating whether or not it agreed with the above statements, and we received a letter from Margetson addressed to the SEC stating that it agreed with the above statements. A copy of such letter, dated May 11, 2023, is filed as Exhibit 99.1 to the Report on Form 6-K filed with the Securities and Exchange Commission on May 11, 2023.
We engaged Centurion ZD as our new independent registered public accounting firm effective May 4, 2023. During the prior two fiscal years and through the date of Centurion ZD’s engagement, we did not consult with Centurion ZD regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that was either the subject of a disagreement or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). In approving the selection of Centurion ZD as our new independent registered public accounting firm, our Board of Directors considered all relevant factors, including that Centurion ZD was previously engaged as our independent registered public accounting firm, which audited our financial statements for the fiscal years ended March 31, 2020 and 2021.
| 101 |
On June 4, 2024, we accepted the resignation of Centurion ZD as our independent registered public accounting firm. The report of Centurion ZD on our financial statements for the fiscal year ended March 31, 2023 contained no adverse opinion or disclaimer of opinion and was not modified. The decision to accept the resignation of the independent accountant was approved and ratified by our Board of Directors on June 4, 2024.
During our fiscal year ended March 31, 2023 and the subsequent interim period preceding Centurion ZD’s resignation, we had no disagreements with Centurion ZD on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Centurion ZD, would have caused it to make reference to the subject matter of such disagreements in its report on our financial statements for such period.
During our fiscal year ended March 31, 2023 and the subsequent interim period preceding Centurion ZD’s resignation, there were no reportable events as defined under Item 304(a)(1)(v) of Regulation S-K adopted by the Securities and Exchange Commission (the “SEC”).
We provided Centurion ZD with a copy of the disclosure before filing our Report on Form 6-K regarding our change of accountants. We requested that Centurion ZD provide us with a letter addressed to the SEC stating whether or not it agrees with the above statements, and we received a letter from Centurion ZD stating that it agrees with the above statements. A copy of such letter, dated as of June 14, 2024, is filed as Exhibit 99.1 to the Report on Form 6-K filed on June 14, 2024.
We engaged TAAD, LLP (“TAAD”) as our new independent registered public accounting firm effective June 4, 2024. During the two most recent fiscal years and through the date of TAAD’s engagement, we did not consult with TAAD regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that was either the subject of a disagreement or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K). In approving the selection of TAAD as the Company’s new independent registered public accounting firm, our Board of Directors considered all relevant factors, including the fact that TAAD is located in the United States and is not located in China or Hong Kong.
Item 16G. Corporate Governance
Not Applicable
Item 16H. Mine Safety Disclosure
Not applicable
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable
Item 16J. Insider Trading Policy
The Company has adopted an Insider Trading Policy governing the purchase, sale and other dispositions of its securities by directors, senior management, and employees that is reasonably designed to promote compliance with applicable insider trading laws, rules and regulations and the listing standards of the Nasdaq Capital Market. A copy of our Insider Trading Policy is filed as Exhibit 11.1 to this Annual Report for the fiscal year ended March 31, 2024.
| 102 |
Item 16K. Cybersecurity
The Company has adopted a Cybersecurity Policy governing the establishment and application of certain procedures and safeguards to identify potential cybersecurity risks and, in the event of a cybersecurity breach, the protocol for disclosing to the Securities and Exchange Commission, including possible remedies. We review cybersecurity risk as part of our overall risk-management program. This ensures that cybersecurity risk management remains a meaningful priority in our business strategy and operations. Our risk management strategy for cybersecurity generally includes:
| 1. | Identification: We aim to proactively identify the manners in which our business could be materially impacted by cybersecurity risks including: |
| a. | Cybersecurity Incidents - an unauthorized occurrence on or conducted through its information system that jeopardizes the confidentiality, integrity, or availability of its information systems or any information residing therein | |
| b. | Cybersecurity Threats - any potential occurrence that may result in an unauthorized effort to adversely affect the confidentiality, integrity, or availability of its information systems or any information residing therein. |
| 2. | Assessment: We periodically assess our risks relating to cybersecurity threats, including risks relating to our reliance on third parties. In so doing, we consider the likelihood and impact that could result from the manifesting of such risks, together with the sufficiency of existing policies, procedures, systems, and safeguards in place to manage such risks, together with the sufficiency of existing policies, procedures, systems, and safeguards in place to manage such risks, including evaluating and if available obtaining cyber liability insurance, and aligning such cyber-risk management policies with the Company’s business needs by integrating cyber-risk analysis into significant business decisions. | |
| 3. | Management: If deemed appropriate, we design and implement reasonable safeguards to address any identified gaps in our existing processes and procedures, including annual cybersecurity awareness training emphasizing the use of strong passwords on all systems and aligning cyber-risk management policies with the Company’s needs by integrating cyber-risk analysis into significant business decisions and ensuring that the Company’s organization structure supports such cybersecurity goals. | |
| 4. | Evaluation: If a cybersecurity breach occurs, the Audit Committee will determine whether the Incident or Threat is “material” (.i.e. is there a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision or if it would have significantly altered the “total mix” of information made available?), assessing among other factors potential or actual financial impacts, reputational damage, and operational disruptions. | |
| 5. | Report: Establish and monitor an incident response approach requiring our Chief Financial officer to report to us, the full Board of Directors and legal counsel any cybersecurity concerns or events. | |
| 6. | Disclosure: To ensure compliance with SEC requirements and maintain overall stakeholder confidence in the Company, all material and known facts regarding the cybersecurity breach will be recorded, including their nature, scope, and financial implications; and a Form 6-K will be prepared and filed within four (4) business days after the determination that a “material” cybersecurity incident has occurred. |
We presently do not engage third parties to assist with evaluating the effectiveness of our risk-management and cybersecurity practices. The Company did not have any material cybersecurity breaches during the year ended March 31, 2024.
The Audit Committee of our Board of Directors is the governance body involved in, and ultimately responsible for, cybersecurity oversight. They will generally coordinate with our Chief Financial Officer in this regard. If needed, the full Board would be updated on cybersecurity risks and incidents. None of our directors on the Audit Committee nor our Chief Financial Officer have particular experience in cybersecurity matters.
| 103 |
PART III
Item 17. Financial Statements
Not Applicable
Item 18. Financial Statements
The following Financial Statements are filed as part of this Annual Report:
Item 19. Exhibits
| 104 |
| 10.6 | Honorary Consultant Cooperation Agreement between Bao Feng Biotech (Beijing) Co., Ltd. and Jiang Nan (incorporated by reference to Exhibit 10.6 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.7 | Honorary Consultant Cooperation Agreement between Bao Feng Biotech (Beijing) Co., Ltd. and Lin Feng (incorporated by reference to Exhibit 10.7 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.8 | Technology Shareholding Cooperation Agreement between Bao Feng Bio-Technology (Beijing) Limited and Xianyang Chen (incorporated by reference to Exhibit 10.8 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.9 | Labor Contract between Bao Feng Bio-Technology (Beijing) Limited and Ting Ting Chang (incorporated by reference to Exhibit 10.9 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.10 | Labor Contract between Bao Feng Bio-Technology (Beijing) Limited and Xia Li (incorporated by reference to Exhibit 10.10 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.11 | Labor Contract between Bao Feng Bio-Technology (Beijing) Limited and Yu Gao (incorporated by reference to Exhibit 10.11 to the Company’s Report on Form 6-K filed with the SEC on September 5, 2019) | |
| 10.12 | Labor Contract between Bao Feng Bio-Technology (Beijing) Limited and Yu Gao dated December 24, 2019 (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form F-1 filed with the SEC on January 17, 2020) | |
| 10.13 | Langfang Lease Contract between Liu Wen and Bao Feng Biotechnology (Beijing) Limited (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form F-1/A filed with the SEC on April 28, 2020) | |
| 10.14 | Housing Rental Contract between Beijing Century Changying Investment Management Co., Ltd. and Baofeng Biotechnology (Beijing) Co., Ltd. (incorporated by reference to Exhibit 10.14 to the Company’s Registration Statement on Form F-1/A filed with the SEC on April 28, 2020) | |
| 10.15 | Processing and Production Cooperation Agreement between Beijing Acer Truncatum Century Agricultural Science and Technology Co., Ltd. and Inner Mongolia Xingyuan Vegetable Oil Co., Ltd. (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form F-1/A filed with the SEC on June 11, 2020) | |
| 10.16 | Supply and Marketing Contract between Heze Zonghoo Jianyuan Biotech Co., Ltd. and Baofeng Biotech (Beijing) Co., Ltd. (incorporated by reference to Exhibit 10.16 to the Company’s Registration Statement on Form F-1/A filed with the SEC on June 11, 2020) | |
| 10.17 | Executive Employment Agreement between Zhong Yuan Bio-Technology Holdings Limited and Fung Ming Pang (incorporated by reference to Exhibit 10.17 to the Company’s Registration Statement on Form F-1/A filed with the SEC on June 11, 2020) | |
| 10.18 | Form of Indemnification Agreement Form of Indemnification Agreement (incorporated by reference to Exhibit 10.18 to the Company’s Registration Statement on Form F-1/A filed with the SEC on September 11, 2020) | |
| 105 |
| 10.19 | Equity Transfer Agreement between Dandong Baofeng Seedling Technology Co., Ltd and Baofeng Biotechnology (Beijing) Co., Ltd. (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 20-F filed with the SEC on August 17, 2020) | |
| 10.19B | Form of Leases for real property in Dandong city leased by Dandong Bao Feng Seedling Technology Co., Limited (incorporated by reference to Exhibit 10.19 to the Company’s Post-Effective Amendment on Form POS AM filed with the SEC on June 1, 2021) | |
| 10.20 | Audit Committee Charter (incorporated by reference to Exhibit 10.20 to the Company’s Report on Form 6-K filed with the SEC on August 4, 2022) | |
| 10.21 | Compensation Committee Charter (incorporated by reference to Exhibit 10.21 to the Company’s Report on Form 6-K filed with the SEC on August 4, 2022) | |
| 10.22 | Nomination Committee Charter (incorporated by reference to Exhibit 10.22 to the Company’s Report on Form 6-K filed with the SEC on August 4, 2022) | |
| 10.23 | Code of Ethics (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form F-1/A filed with the SEC on November 25, 2022) | |
| 10.24 | Agreement dated March 28, 2022 between Dandong Bao Feng Seedling Technology Co. and Fanyuan Meng (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 20-F filed with the SEC on September 26, 2022). | |
| 10.25 | Supplemental Agreement dated April 11, 2022 between Dandong Bao Feng Seedling Technology Co. and Fanyuan Meng (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 20-F filed with the SEC on September 26, 2022). | |
| 10.26 | Equity Acquisition Agreement dated September 19, 2022 between ZhongYuan Nervonic Acid Biotechnology Co. and Bao Feng Bio-Technology (Beijing) Co. (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form F-1 filed with the SEC on October 27, 2022). | |
| 10.27 | Revised Audit Committee Charter (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form F-1/A filed with the SEC on November 25, 2022) | |
| 10.28 | Housing Lease Agreement between Beijing Century Changwin Investment Management Co. and Baofeng Biotechnology (Beijing) Co. (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form F-1/A filed with the SEC on August 22, 2023) | |
| 10.29 | Resident Management Agreement for Zhongguancun Medical Engineering Health Industrial Base (incorporated by reference to Exhibit 10.29 to the Company’s Registration Statement on Form F-1/A filed with the SEC on August 22, 2023) | |
| 10.30 | Cooperative Agreement between Baofeng Biotechnology (Beijing) Co., Ltd and Xuanwu Hospital, Capital Medical University (incorporated by reference to Exhibit 10.30 to the Company’s Registration Statement on Form F-1/A filed with the SEC on March 26, 2024) | |
| 10.31* | Amended and Restated Audit Committee Charter | |
| 11.1* | Insider Trading Policy | |
| 12.1* | Certification of Principal Executive Officer Pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
| 12.2* | Certification of Principal Financial Officer Pursuant to Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | |
| 13.1* | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
| 13.2* | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
* Filed herewith
| 106 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED | ||
| Dated: November 7, 2024 | /s/ CHANG Ting Ting | |
| CHANG Ting Ting | ||
| President, Chief Executive Officer, Secretary and Director | ||
| Dated: November 7, 2024 | /s/ PANG Fung Ming | |
| PANG Fung Ming | ||
| Chief Financial Officer and Director | ||
| Zhong Yuan Bio-Technology Holdings Limited |
| Index to Consolidated Financial Statements |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Zhong Yuan Bio-Technology Holdings Limited and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Zhong Yuan Bio-Technology Holdings Limited and its subsidiaries (the "Company") as of March 31, 2024 and 2023, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity (deficit) and cash flows for each of the years in the two-year period ended March 31, 2024, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flow for each of the years in the two-year period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has accumulated losses to date that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Restatement of Previously Issued Financial Statements
As discussed in Note 22 to the consolidated financial statements, the 2023 consolidated financial statements have been restated to correct certain misstatements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company's auditor since 2024.
November 7, 2024
| F-2 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| As of March 31 | ||||||||||||
| 2024 | 2023 | |||||||||||
| Assets | Notes | As Restated | ||||||||||
| Current assets | ||||||||||||
| Cash at banks | $ | $ | ||||||||||
| Accounts receivable, net | 4 | |||||||||||
| Loan receivable, net | 5 | |||||||||||
| Inventories | 6 | |||||||||||
| Deferred offering costs | 7 | |||||||||||
| Prepaid expenses and other current assets | 8 | |||||||||||
| Total current assets | ||||||||||||
| Non-current assets | ||||||||||||
| Equity investment | 9 | |||||||||||
| Right-of-use assets | 20(b) | |||||||||||
| Property, plant and equipment, net | 10 | |||||||||||
| Total non-current assets | ||||||||||||
| Total assets | $ | $ | ||||||||||
Liabilities and Stockholders’ Deficit | ||||||||||||
| Current liabilities | ||||||||||||
| Bank loans, current | 12 | $ | $ | |||||||||
| Accrued liabilities and other current payables | 11 | |||||||||||
| Amount due to a director | 13 | |||||||||||
| Lease liabilities, current | 20(b) | |||||||||||
| Total current liabilities | ||||||||||||
| Non-current liabilities | ||||||||||||
| Bank loan, non-current | 12 | |||||||||||
| Lease liabilities, non-current | 20(b) | |||||||||||
| Total non-current liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Contingencies and commitment | 20(a) | |||||||||||
| Total stockholders’ deficit | ||||||||||||
| Ordinary shares, shares authorized at par value of $ each; and shares issued and outstanding as of March 31, 2024 and 2023, respectively | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||||||
| Accumulated other comprehensive income | ||||||||||||
| Total Zhong Yuan Bio-Technology Holdings Limited stockholders' deficit | ( | ) | ( | ) | ||||||||
| Non-controlling interest | ( | ) | ||||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-3 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
| Year ended March 31, | ||||||||||||||||
| Notes | 2024 | 2023 | 2022 | |||||||||||||
| As Restated | As Reclassified | |||||||||||||||
| Net product sales | 3 | $ | $ | $ | ||||||||||||
| Research and development services | ||||||||||||||||
| Royalty revenues | ||||||||||||||||
| Event organizing revenues | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ||||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating profit (loss) | ( | ) | ( | ) | ||||||||||||
| Other income (expenses) | ||||||||||||||||
| Loss on disposal of a subsidiary | 15 | ( | ) | |||||||||||||
| Other income (expenses) | ( | ) | ||||||||||||||
| Government grant | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | 12 | ( | ) | ( | ) | ( | ) | |||||||||
| Total other income (expenses), net | ( | ) | ||||||||||||||
| Profit (Loss) before income tax | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | 16(a) | ( | ) | |||||||||||||
| Net profit (loss) from continuing operations | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net loss from discontinued operation | 17 | ( | ) | ( | ) | |||||||||||
Net profit (loss) before allocation to non-controlling interest | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Comprehensive (loss) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Comprehensive income attributable to ordinary stockholders | $ | $ | ( | ) | $ | ( | ) | |||||||||
Net profit (loss) from continuing operations attributable to: | ||||||||||||||||
| Ordinary stockholders | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net loss from discontinued operations attributable to: | ||||||||||||||||
| Ordinary stockholders | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Non-controlling interest | ||||||||||||||||
| Total | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net profit (loss) attributable to: | ||||||||||||||||
| Ordinary stockholders | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Profit (Loss) per share - Basic | ||||||||||||||||
| Continuing operations | $ | ( | ) | ( | ||||||||||||
| Discontinued operation | ( | ) | ( | |||||||||||||
| Profit (Loss) per share | $ | ( | ) | ( | ||||||||||||
| Profit (Loss) per share – Fully Diluted | ||||||||||||||||
| Continuing operations | $ | ( | ) | ( | ||||||||||||
| Discontinued operation | ( | ) | ( | |||||||||||||
| Profit (Loss) per share | $ | ( | ) | ( | ||||||||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| - Basic | ||||||||||||||||
| - Fully diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Attributable to Ordinary Stockholders | ||||||||||||||||||||||||||||||||
| Ordinary Shares | ||||||||||||||||||||||||||||||||
| No. of Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Zhong Yuan Bio-Technology Holdings Limited Shareholders’ Deficit | Non-controlling Interest |
Total | |||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||||
| Issuance of shares through private placement | ||||||||||||||||||||||||||||||||
| Grant of stock options | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Foreign current translation adjustment | — | |||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Non-controlling interest contribution | — | |||||||||||||||||||||||||||||||
| Issuance of shares through private placement | ||||||||||||||||||||||||||||||||
| Grant of stock options | — | |||||||||||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign current translation adjustment | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance as of March 31, 2023 (As Restated) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Issuance of shares through private placement | ||||||||||||||||||||||||||||||||
| Net profit (loss) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign current translation adjustment | — | ( | ) | |||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended March 31, | ||||||||||||
| 2024 | 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | As Restated | As Reclassified | ||||||||||
| Net profit (loss): | ||||||||||||
| From continuing operations | $ | $ | ( | ) | $ | ( | ) | |||||
| From discontinued operations | ( | ) | ( | ) | ||||||||
| Adjustments to reconcile net profit (loss) to net cash used in operating activities: | ||||||||||||
| Depreciation of computer and office equipment, fixtures, and furniture | ||||||||||||
| Loss on disposal of computer and office equipment, fixtures, and furniture | ||||||||||||
| Amortization of right-of-use assets | ||||||||||||
| Stock-based compensation expense | ||||||||||||
| Write off of other receivables | ||||||||||||
| Write off of amounts due from related companies | ||||||||||||
| Loss on disposal of a subsidiary | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Loan receivable | ( | ) | ||||||||||
| Inventories | ( | ) | ||||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||||||
| Accrued expenses and other payables | ( | ) | ( | ) | ||||||||
| Net cash used in continuing operations | ( | ) | ( | ) | ( | ) | ||||||
| Net cash used in discontinued operation | ( | ) | ( | ) | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of computer and office equipment, fixtures, and furniture | ( | ) | ( | ) | ||||||||
| Cash consideration received from the disposal of a subsidiary | ||||||||||||
| Net cash provided by continuing operations | ( | ) | ||||||||||
| Net cash provided by discontinued operation | ||||||||||||
| Net cash provided by investing activities | ( | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from private placement | ||||||||||||
| Proceeds from bank loans | ||||||||||||
| Repayment of bank loans | ( | ) | ( | ) | ( | ) | ||||||
| Advance from a director | ||||||||||||
| Repayment from related companies | ||||||||||||
| Advances to related companies | ( | ) | ( | ) | ||||||||
| Net cash provided by continuing operations | ||||||||||||
| Net cash provided by discontinued operation | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||||||
| Cash at beginning of year | ||||||||||||
| Cash at beginning of year held by discontinued operation | ||||||||||||
| Cash at end of year held by discontinued operation | ||||||||||||
| Cash at end of year | $ | $ | $ | |||||||||
| Supplemental information: | ||||||||||||
| Cash paid for income tax | $ | $ | $ | |||||||||
| Cash paid for interests | ||||||||||||
| Major non-cash transactions: | ||||||||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | $ | ||||||||||
| Equity investment consideration received from the disposal of a subsidiary | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of business and organization
Nature of operations
Zhong Yuan Bio-Technology Holdings Limited (“ZY Holdings” or the “Company”) was incorporated in the Cayman Islands on July 5, 2016. The Company is an investment holding company. Through its wholly-owned subsidiaries, the Company is engaged in the businesses of developing early detection kits for brain diseases and new drugs for neurological diseases; sales of plant-derived nervonic acid dietary supplements (referred to as new food raw materials products in China); provision of technical supporting services and sales of Acer truncatum seedlings. ZY Holdings together with its subsidiaries are collectively referred to as the “Company”.
Formation of BF internet
Beijing Baofeng Internet Bio-Technology
Limited (BF Internet) was incorporated under the laws of the PRC on May 23, 2022. It is owned
Disposal of Dandong BF by BF Beijing
On September 30, 2022, BF Beijing
sold its
Note 2 — Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
The Company’s financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of obligations in the normal course of business. However, the Company has accumulated deficit to date. This condition, among negative working capital and substantial amount of short-term bank loans, raises substantial doubt about the ability of the Company to continue as going concern for one year from the date these financial statements are issued.
In view of these matters, continuation as going concern is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and the success of its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should the Company not continue as a going concern.
| F-7 |
Management plans to fund operations of the Company through bank loans, private placement of restricted securities and the issuance of stock in subsequent offering until such a time as a business or other profitable investment may be achieved.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances are eliminated upon consolidation. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of operations and comprehensive losses from the date the Company gains control until the date when the Company ceases to control the subsidiary.
For the Company’s non-wholly owned subsidiary, a non-controlling interest is recognized to reflect the portion of equity that is not attributable, directly or indirectly, to the Company.
The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
| Name | Place of incorporation | Date of incorporation | Business engaged in | Effective ownership as of March 31 2024 | Effective ownership as of March 31, 2023 | |||||||||||
| ZY Holdings | % | % | ||||||||||||||
| China Bio | % | % | ||||||||||||||
| ZY HK | % | % | ||||||||||||||
| ZY Shenzhen | % | % | ||||||||||||||
| BF Beijing | % | % | ||||||||||||||
| BF Internet | % | % | ||||||||||||||
| F-8 |
Change in the Company’s interest in a subsidiary
When the Company loses control of a subsidiary, the assets and liabilities of that subsidiary are deconsolidated. The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained noncontrolling investment. The gain or loss is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the carrying amount of any non-controlling interest in the subsidiary (including AOCI attributable to the non-controlling interest) and (ii) the carrying amount of the assets (including goodwill), and liabilities of the subsidiary attributable to the owner of the Company. The fair value of any retained noncontrolling investment at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under ASC 810-10-40-3A Consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include but not limited to revenue recognition, valuation of accounts receivables, inventories and stock-based compensation, provision for contingent liabilities, and uncertain tax positions. Actual results could differ from these estimates.
Foreign currency translation
The subsidiaries within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (“RMB”) and Hong Kong dollars (“HK$”), being the lawful currency in the PRC and Hong Kong, respectively. The Company’s financial statements are reported using U.S. Dollars. The results of operations and the consolidated statements of cash flows denominated in foreign currencies are translated at the average rates of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the time of capital contributions. Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in consolidated statements of changes in equity. Gains and losses from foreign currency transactions are included in the consolidated statement of operations and comprehensive loss.
The exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars for the purposes of preparing the consolidated financial statements are as follows: -
| 2024 | 2023 | |||||||
| Balance sheet items, except for equity accounts | RMB1=$0.1385 HK$1=$0.1278 | RMB1=$0.1456 HK$1=$0.1274 | ||||||
| Items in statements of income and cash flows | RMB1=$0.1398 HK$1=$0.1278 | RMB1=$0.1460 HK$1=$0.1280 |
No representation is made that the RMB and HK$ amounts could have been, or could be, converted into U.S. dollars at the above rates.
| F-9 |
Fair value measurement
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● |
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● |
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepayments, deposits and other current assets, accounts payable, customer deposits, and salaries and benefits payables approximates their recorded values due to their short-term maturities.
Related parties
The Company adopted ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
Cash
Cash comprise cash at banks and
on hand, which includes deposits with original maturities of three months or less with commercial banks in the PRC. As of March 31, 2024
and 2023, cash balances were $
Prepayments, deposits and other current assets, net
Prepayment, deposits and other current assets, net, primarily consists of advances to suppliers for purchasing goods or services; deposits paid; prepaid expenses and other receivables. Prepayments, deposits and other current assets are classified as current based on the terms of the respective agreements. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
Accounts and loan receivables, net
Accounts and loan receivables, net are stated at the original amount less an allowance for doubtful accounts on such receivables. The allowance for doubtful accounts is estimated based upon the Company’s assessment of various factors including historical experience, the age of the receivable balances, current general economic conditions, future expectations and debtor specific quantitative and qualitative factors that may affect the Company’s debtors’ s ability to pay. An allowance is also made when there is objective evidence for the Company to reasonably estimate the amount of probable loss.
| F-10 |
Inventories
Inventories are stated at the lower of cost or net realizable value on consolidated balance sheets. Cost of inventories is determined using the weighted average cost method. Adjustments are recorded to write down the cost of inventories to the estimated net realizable value due to slow-moving, damaged and lost goods, which is dependent upon factors such as historical and forecasted demand and prevailing market conditions. Write-downs are recorded in cost of revenues on the consolidated statements of operations and comprehensive loss.
Deferred offering costs
The Company capitalizes
certain legal, professional accounting and other third-party fees that are directly associated with the Company’s initial public
offering as deferred offering costs until such offering is consummated. After consummation of the initial public offering these costs
are recorded in stockholders’ equity as a reduction of additional paid-in capital generated as a result of the offering. Should
the in-process initial public offering be abandoned, the deferred offering costs will be expensed immediately as a charge to general and
administrative expenses in the consolidated statements of income. The deferred offering costs of $
Equity investment of less than 20% interest
The Company adopted Accounting Standards Codification (“ASC”) 321 “Investments – Equity Securities” and accounts for an equity investment of less than 20% interest without a readily determinable fair value that does not qualify for the practical expedient to estimate fair value in accordance with ASC 820 “Fair Value” at its cost minus impairment, if any.
Property and equipment, net
Property and equipment, net, mainly comprise fixtures and furniture, computer and equipment are stated at cost less accumulated depreciation and impairment. Property and equipment are depreciated over the estimated useful lives of the assets on a straight-line basis, after considering the estimated residual value.
The estimated useful lives are as follows:
| Useful Life | |
| Office equipment, fixtures and furniture | |
| Computer equipment |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and the related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is charged to the consolidated statements of operations and comprehensive loss.
| F-11 |
Impairment for long-lived assets
Long-lived assets, including office equipment, furniture and fixtures, computer equipment and right of use asset are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable or that the useful life is shorter than the Company had originally estimated. When these events occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the replacement cost to the long-lived assets. For the years ended March 31, 2024 and 2023, the Company recognized nil impairment for the long-lived assets.
Revenue recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”). Under ASU 2014-09, the Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| • | identify the contract with a customer; |
| • | identify the performance obligations in the contract; |
| • | determine the transaction price; |
| • | allocate the transaction price to performance obligations in the contract; and |
| • | recognize revenue as the performance obligation is satisfied. |
The Company evaluates if it is a principal or an agent in a transaction to determine whether revenue should be recorded on a gross or net basis. The Company is acting as the principal if it obtains control over the goods and services before they are transferred to customers. When the Company is primarily obligated in a transaction, is generally subject to inventory risk, has latitude in establishing prices, or has several but not all of these indicators, the Company acts as the principal and revenue is recorded on a gross basis.
The Company currently generates its revenue from the following main sources:
| (a) | Sales of dietary supplements (referred to as new food raw material products in China) |
Sales of dietary supplements (referred to as new food raw material product in China) are recognized at a point in time when title transfers and the risks and rewards of ownership have passed to customers and when the selling price has been fixed and collectability is reasonably assured. The Company does not provide its customers with the right of return (except for quality), after-sale warranty or price protection. There are no customer acceptance provisions associated with the Company’s products.
The Company is subject to value
added tax at
| (b) | Research and Development services |
Research and Development service income is recognized at a point in time when the research and development reports are issued to customers under the respective service contract terms and the contract amount is fixed by the service contract terms and collectability of service income is reasonably assured.
| (c) | Royalty income |
The Royalty income is derived from usage-based royalties, and it is recognized over time based on a fixed agreed amount of the royalty used by receiver.
| F-12 |
| (d) | Event organization income |
Event organization income is recognized at a point in time when the event is completed under the respective service contract terms and the contract amount is fixed by the service contract terms and collectability of service income is reasonably assured.
The Company is subject to value added tax at 6% on research and development services, royalty, and event organization income in the PRC. The Company presents the income, net of valued added tax.
Cost of Revenue
The cost of revenue primarily consists of the cost of the inventory sold and cost of technical supporting services outsourced.
Research and development
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
Government grant
Government grant mainly represents amounts received from central and local governments in connection with the Company’s expenditure in research to technology development. Such amounts are recognized in the consolidated statements of operations and comprehensive loss upon receipt and when all conditions attached to the grant are fulfilled.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately if fully vested and non-forfeitable. The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Operating leases
The Company adopted ASU 2016-02, Leases (Topic 842), on April 1, 2019, using a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.
The Company leases its offices which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received.
| F-13 |
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended March 31, 2024 and 2023. All of the tax returns of the Company’s subsidiaries in China remain subject to examination by the tax authorities for five years from the date of filing.
Value added tax (“VAT”)
Revenue represents the invoiced value of products sold and services provided, net of VAT. The VAT is based on gross sales price and VAT rates range up to 13%, depending on the type of products sold and services provided. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in taxes payable. All of the VAT returns filed by the Company’s subsidiary in China, have been and remain subject to examination by the tax authorities for five years from the date of filing.
Employee defined contribution plan
Full time employees of the Company in the PRC participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labour regulations require that the Company make contributions to the government for these benefits based on a certain percentage from 0.2%-16% of the employee’s salaries with a cap as defined under the Chinese labour regulations. The Company has no legal obligation for the benefits beyond the contributions. The total employee benefits expensed as incurred were $ and $ for the years ended March 31, 2024 and 2023, respectively.
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common share outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential Ordinary Shares (e.g. options) as if they had been exercised at the beginning of the periods presented, or issuance date, if later. Potential Ordinary Shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
| F-14 |
The following table presents a reconciliation of basic and diluted loss per share for the years ended March 31, 2024 and 2023:
| 2024 | 2023 | |||||||
Net profit (loss) from continuing operations | $ | ( | ) | |||||
| - basic | $ | $ | ( | ) | ||||
| - diluted | $ | $ | ( | ) | ||||
| Net profit (loss) from discontinued operation | $ | $ | ( | ) | ||||
| - basic | $ | $ | ( | ) | ||||
| - diluted | $ | $ | ( | ) | ||||
| Net profit (loss) from continuing and discontinued operations | $ | $ | ( | ) | ||||
| - basic | $ | $ | ( | ) | ||||
| - diluted | $ | $ | ( | ) | ||||
| Weighted average number of ordinary shares outstanding | ||||||||
| - basic | ||||||||
| - diluted | ||||||||
For the year ended March 31, 2024, ordinary shares exercisable options were included in the EPS calculation.
For the year ended March 31, 2023, ordinary shares exercisable options were excluded from the EPS calculation as their effect is anti-dilutive.
Significant risk and uncertainties
| (a) | Concentration of credit risk |
Assets that potentially subject
the Company to significant concentration of credit risk primarily consist of cash, restricted cash, accounts receivable, loan receivable
and other current assets. The maximum exposure of such assets to credit risk is their carrying amounts as at the balance sheet dates.
As of March 31, 2024 and 2023, the aggregate amount of cash of $
| (b) | Foreign currency risk |
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
The Company’s functional currency is the RMB, and the Company’s financial statements are presented in U.S. dollars. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.
| F-15 |
To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.
| (c) | Significant customers |
Sales revenue from major customers
of whom each accounted for more than 10% of the Company’s total revenue, was $
| (d) | Significant suppliers |
Purchases from two major vendors
were $
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company’s subsidiaries not using the U.S. dollar as their functional currencies.
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and the specific facts and circumstances of each matter.
| F-16 |
Recently issued accounting pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to replace the incurred loss impairment methodology under U.S. GAAP. This ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model will require the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired, and require a loss be incurred before it is recognized. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The new standard will apply to accounts receivable and other financial instruments. This standard is effective for the Company beginning December 15, 2022. Adoption of ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The adoption of this guidance does not have a material impact on the financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates Step 2 of the two-step Goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s Goodwill with the carrying amount of that Goodwill. ASU 2017-04 requires only a one-step quantitative impairment test, whereby a Goodwill impairment loss is measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total Goodwill allocated to that reporting unit). Adoption of this ASU is on a modified retrospective basis. This standard is effective for the Company’s interim and annual reporting periods beginning after December 15, 2022. The adoption of this guidance does not have a material impact on the financial position, results of operations and cash flows.
In December 2019, (the FASB issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The new guidance is effective for the Company for the year ending March 31, 2023. The adoption of this guidance does not have a material impact on the financial position, results of operations and cash flows.
In May 2021, the FASB issued ASU 2021-04, “Earnings per share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”, which codify the final consensus reached by of the FASB Emerging Issues Task Force on how an issuer should account for modifications made to equity-classified written call options (hereafter referred to as a warrant to purchase the issuer’s common stock). This guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. This guidance is effective for the Company for the year beginning after December 15, 2021. The adoption of this guidance does not have a material impact on the financial position, results of operations and cash flows.
| F-17 |
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance”, which requires the issuer to disclose information about certain types of government assistance they receive in the notes to the financial statements. ASU 2021-10 also adds a new Topic – ASC 832, Government Assistance – to the FASB’s Codification. The disclosure requirements in ASU 2021-10 apply to all entities, except for not-for-profit entities within the scope of ASC 958, Not-for-Profit Entities, and employee benefit plans within the scope of ASC 960, Plan Accounting – Defined Benefit Pension Plans, ASC 962, Plan Accounting – Defined Contribution Pension Plans, and 965, Plan Accounting – Health and Welfare Benefit Plans. The disclosure requirements in ASC 832 only apply to transactions with a government that are accounted for by analogizing to either a grant model (for example, in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance), or a contribution model (for example, in ASC 958-605, Not-for-Profit Entities – Revenue Recognition). This disclosure requirement is effective for the Company for the year beginning after December 15, 2021. The Company has adopted this guidance by directly recognizing government grant as other income in the statement of income when the Company receives the grant.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Note 3 — Segment Information
The Company has four reportable segments: sales of dietary supplements (referred to as new food raw material products in China), research and development services, royalties and event organization for the year ended March 31, 2024. The Company discontinued the operation of Acer truncatum seedlings during the year ended March 31,2023. Segments were identified based on the Company’s internal reporting and how the chief operating decision maker (“CODM”) assesses the performance of the businesses.
Key financial performance measures of the segments for continuing operations are as follows:
For the year ended March 31, 2024
| Segment | Net Sales | Cost of Sales | Segment results as assessed by the CODM | |||||||||
| Sales of dietary supplements (referred to as new food raw material products in China) | $ | $ | ||||||||||
| Research and development services | ||||||||||||
| Royalties | ||||||||||||
| Event organization | ||||||||||||
| Total | $ | $ | $ | |||||||||
For the year ended March 31, 2023
| Segment | Net Sales | Cost of Sales | Segment results as assessed by the CODM | |||||||||
| Sales of dietary supplements (referred to as new food raw material products in China) | $ | $ | $ | |||||||||
| Research and development services | ||||||||||||
| Total | $ | $ | $ | |||||||||
| F-18 |
Note 4 — Accounts receivable, net
Accounts receivable, net, consists of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ||||||||
| Total accounts receivable, net | $ | $ | ||||||
Note 5 — Loan receivable, net
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Loan receivable | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ||||||||
| Total loan receivable, net | $ | $ | ||||||
The one-year term loan with
annual interest of
| F-19 |
Note 6 — Inventories
Inventories consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
There was
Note 7 — Deferred offering costs
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Deferred offering costs | $ | $ | ||||||
The company capitalizes certain legal and professional fees that are directly associated with the Company’s public offering as deferred offering costs.
Note 8 — Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Prepayments | $ | $ | ||||||
| Rental and other deposits | ||||||||
| Other current assets | ||||||||
| Total | $ | $ | ||||||
Note 9 — Equity Investment
As of March 31,
2024 and 2023, the Company held
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Equity investment, at cost Equity investment, at cost | $ | $ | ||||||
| F-20 |
Note 10 — Property, plant and equipment, net
Property, plant and equipment, net, consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Computer equipment | $ | $ | ||||||
| Office equipment, fixtures and furniture | ||||||||
| Subtotal | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation expense for the years
ended March 31, 2024 and 2023 amounted to $
Note 11 — Accrued liabilities and other current payables
Accrued liabilities and other current payables consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Accrued liabilities | ||||||||
| Accrued directors’ remuneration | $ | $ | ||||||
| Accrued payroll and employee defined contribution plan | ||||||||
| Accrued professional fees | ||||||||
| Accrued rent | ||||||||
| Accrued research and development services fees | ||||||||
| Others | ||||||||
| $ | $ | |||||||
| Other current payables | ||||||||
| Advances from customers | $ | $ | ||||||
| Other current payables | ||||||||
| $ | $ | |||||||
| F-21 |
Note 12 — Bank loans
Bank loans consisted of the following:
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Unsecured loan from China Construction Bank wholly repayable within 1 year | $ | $ | ||||||
| Unsecured loan from China Construction Bank wholly repayable within 1 year | ||||||||
| Unsecured loan from Bank of Beijing wholly repayable within 1 year | ||||||||
| Unsecured loan from Bank of Beijing wholly repayable within 1 year | ||||||||
| Unsecured loan from China Citic Bank wholly repayable within 1 year | ||||||||
| Secured loan from China Construction Bank wholly repayable within 1 year | ||||||||
| Unsecured loan from Ping An Bank wholly repayable within 1 year | ||||||||
| Unsecured loan from Bank of Nanjing wholly repayable within 1 year | ||||||||
| Unsecured loan from WeBank wholly repayable within 1 year | ||||||||
| Total unsecured bank loan wholly repayable within 1 year | ||||||||
| Secured loan from China Construction Bank wholly repayable more than 1 year | ||||||||
| Total | $ | $ | ||||||
As of March 31,
2024, the outstanding loan from China Construction Bank of $
As of March 31,
2024, the outstanding loan from China Construction Bank of $
As of March 31, 2024,
the outstanding loan from Ping An Bank of $
As of March 31, 2024,
the outstanding loan from Bank of Nanjing of $
| F-22 |
As of March 31, 2024,
the outstanding loan from WeBank of $
As of March 31, 2024,
the outstanding loan from China Construction Bank of $
As of March 31,
2023, the outstanding loan from China Construction Bank of $
As of March 31, 2023,
the outstanding loan from Bank of Beijing of $
As of March 31, 2023,
the outstanding loan from Bank of Beijing of $
As of March 31, 2023,
the outstanding loan from China Citic Bank of $
As of March 31, 2023, the outstanding loan from China Construction Bank of $338,520 (RMB2,325,000) with an annual interest rate of 4.4% was secured by a pledge of property of the Company’s CEO and executive director, Ms. Ting Ting Chang, and denominated in RMB for a term of 36 months. This RMB2,32,5000 credit facility was obtained on May 19, 2020 and expired on May 19, 2023. It carried a floating interest rate of 0.7% over the PRC 1-year loan prime rate.
The following is a schedule, by years, of maturities of loans as of March 31,2024:
| 2025 | $ | |||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| 2029 and thereafter | ||||||
| $ |
Interest expenses for the years
ended March 31, 2024 and 2023 were $
Note 13 — Amount due to a director
| As of March 31, | ||||||||
| 2024 | 2023 | |||||||
| Amount due to a director | $ | $ | ||||||
The amount due to a director was unsecured, non-interest bearing and repayable on demand.
| F-23 |
Note 14 — Stock-based compensation expense
On May 4, 2020, the Company granted cashless options (the “Options”) to purchase (pre-Reverse Stock Split) or (post-Reverse Stock Split) ordinary shares of the Company at $ (pre-Reverse Stock Split) or $ (post-reverse stock split) per share to Ms. Fung Ming Pang, the Company’s CFO and director. The Options vested 50% at the time when the Company’s ordinary shares began trading on the OTCQB on July 15, 2021 and 50% on July 15, 2022 and are exercisable for five years after the date of vesting.
The fair value of 600,000 (post-Reverse Stock Split) Options was calculated using Black Scholes model with the following assumptions:
| Valuation date (the date of granting) | May 4, 2020 | May 4, 2020 | ||||||
| Number of shares | ||||||||
| Vesting date | ||||||||
| Maturity date | ||||||||
| Fair value per share | $ | $ | ||||||
| Exercise price per share | $ | $ | ||||||
| Risk free rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Exercise multiple | ||||||||
| Expected terms (years) from the date of granting | ||||||||
| Expected volatility | % | % | ||||||
| Value per Option | $ | $ | ||||||
The non-cash stock-based compensation expense of $Nil and $ was included in general and administrative expenses for the year ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, there were Options outstanding, issued and vested, but not yet exercised.
Stock option activity under the Company’s stock-based compensation plan is shown below:
Number of Shares (post-Reverse Stock Split) | Average Exercise Price per Share (post-Reverse Stock Split) | Weighted Average Remaining Contractual Term in Years | ||||||||||||
| Outstanding as of April 1, 2021 | $ | N/A | ||||||||||||
| Exercisable as of April 1, 2021 | — | |||||||||||||
| Granted | N/A | N/A | ||||||||||||
| Exercised | ( | ) | $ | N/A | ||||||||||
| Forfeited | N/A | N/A | ||||||||||||
| Outstanding as of April 1, 2022 | $ | |||||||||||||
| Exercisable as of April 1, 2022 | $ | — | ||||||||||||
| Granted | N/A | N/A | ||||||||||||
| Exercised | N/A | N/A | ||||||||||||
| Forfeited | N/A | N/A | ||||||||||||
| Outstanding as of March 31, 2023 | $ | |||||||||||||
| Exercisable as of March 31, 2023 | $ | |||||||||||||
| Granted | N/A | N/A | ||||||||||||
| Exercised | N/A | N/A | ||||||||||||
| Forfeited | N/A | N/A | ||||||||||||
| Outstanding as of March 31, 2024 | $ | |||||||||||||
| Exercisable as of March 31, 2024 | $ | |||||||||||||
| F-24 |
Note 15 — Disposal of a subsidiary
On September 30,
2022, the Company’s PRC subsidiary, BF Beijing, sold its
| Consideration | RMB | $ | ||||||
| Fair value of the 7% equity interest in Yanbian BF | ||||||||
| Cash | ||||||||
| Total | ||||||||
| Analysis of assets and liabilities disposed: | ||||||||
| Computer and office equipment, fixtures and furniture | ||||||||
| Right of use assets | ||||||||
| Accounts receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Cash at banks | ||||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Lease liabilities – non-current | ( | ) | ||||||
| Translation adjustment | ||||||||
| Release of exchange reserve | ||||||||
| Total | ||||||||
| Total sale consideration | ||||||||
| Loss on disposal of a subsidiary | ||||||||
| F-25 |
Note 16 — Taxes
| (a) | Income tax |
Cayman Islands
The Company was incorporated in the Cayman Islands and is not subject to tax on income or capital gains under the current laws of the Cayman Islands. Additionally, Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
Republic of Seychelles
China Bio-Tech was incorporated in the Republic of Seychelles and is not subject to tax on income or capital gains under the current laws of the Republic of Seychelles. Additionally, Republic of Seychelles does not impose a withholding tax on payments of dividends to shareholders.
Hong Kong
ZY HK was incorporated in Hong
Kong and is subject to
PRC
ZY Shenzhen is governed by the Enterprise Income Tax (“EIT”) laws of the PRC. Under the EIT laws of the PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a uniform 25% enterprise income tax rate. As ZY Shenzhen is an investment holding company, there was no revenue recorded in the books of ZY Shenzhen and as a result, there was no EIT for the years ended March 31, 2024 and 2023.
BF Beijing is governed by the EIT
laws of the PRC and is subject to EIT at a uniform rate of
Because BF Beijing is qualified as a small-scale and low-profit enterprise as well as a high and new technology enterprise, BF Beijing is then subject to the following income tax rates:
| Annual taxable income | Income tax rate | |
| Not more than RMB1 million | ||
| RMB1 million to RMB3 million | ||
| Exceeding RMB3 million | ||
BF Internet is subject to the EIT rate of 25%.
| F-26 |
The income tax provision consisted of the following components:
| Years ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Current tax (credit) expenses | $ | ( | ) | $ | ( | ) | ||
| Deferred tax | ||||||||
| Total income tax (credit) provision | $ | ( | ) | $ | ( | ) | ||
The following table presents a reconciliation of the differences between the Company’s statutory income tax expense and the product of loss before tax multiplied by the PRC Enterprise Income tax Rate for the years ended March 31, 2024 and 2023.
| Years ended March 31 | ||||||||
| 2024 | 2023 | |||||||
| Profit (Loss) before tax | ( | ) | ||||||
| Tax at the PRC enterprise income tax rate of 25% | ( | ) | ||||||
| Tax effect of preferential tax rate for small scale and low profit enterprise | ( | ) | ||||||
| Tax effect of tax loss not recognized | ||||||||
| Tax effect of non-deductible expenses and non-taxable income, net | ||||||||
| Effective income tax expense (credit) | ( | ) | ( | ) | ||||
As of March 31, 2024
and 2023, there were no deferred tax assets and liabilities recognized. As of March 31, 2024, the Company has unused tax losses of $
| (b) | Sales tax |
The Company’s subsidiaries incorporated in the PRC are subject to a value added tax (“VAT”) for services rendered at a rate of 6% and for goods sold at a rate varying from 0% to 13% of the gross sales price depending on their categories in different periods. A credit is available whereby the VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products and services. There is no VAT for Dandong BF which carries out the agricultural business.
| (c) | Tax payable |
The Company does
| F-27 |
Note 17— Discontinued Operation
During the year ended March 31, 2023, the Company’s wholly owned subsidiary, BF Beijing, disposed of its entire interest in Dandong BF. Dandong BF is principally engaged in the research, development and growing of Acer truncatum seedlings in Dandong City, Liaoning Province, in the northeastern region of the PRC.
Accordingly, the results relating to Dandong BF have been presented in the consolidated statements of operations and comprehensive income as “loss from discontinued operations”. Dandong BF was not previously presented as discontinued operations for the year ended March 31, 2022, and thus the comparative statement of operations and comprehensive income has been re-presented to show the discontinued operation separately from continuing operations. Dandong BF was de-consolidated from the Company on September 30, 2022.
The results from the discontinued operation were as follows:
| For the period from April 1, 2022 to September 30, 2022 (date of disposal) | For the year ended March 31, 2022 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross loss | ||||||||
| Operating expenses | ||||||||
| Other (income) expenses, net | ( | ) | ||||||
| Loss before income tax | ||||||||
| Income tax expenses | ||||||||
| Net loss for the period/year | $ | $ | ||||||
Note 18 — Capital transactions
| (a) | Private Placement |
On November 15, 2021, the Company sold Shares, at a purchase price of $ per Share with one warrant for ten ordinary shares sold (“Warrant”), pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. Each Warrant was entitled to subscribe for one share at a price of $4.00 per share for one-year period ending November 15, 2022. All warrants were lapsed.
On April 29, 2022, the Company sold ordinary shares, at a purchase price of $ per share to a shareholder of BF Internet , pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act.
On June 15, 2022, the Company sold ordinary shares to two shareholders of the Company and ordinary shares to independent shareholders, at a purchase price of $ and $ per share, respectively, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act.
On August 7, 2023, the Company sold Ordinary Shares to an unrelated party, at a purchase price of US$ per Ordinary Share, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
On March 25, 2024, the Company sold Ordinary Shares to an unrelated party, at a purchase price of US$ per Ordinary Share, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. In accordance with Regulation S, the Shares were offered and sold solely outside the United States to an investor who is not a U.S. Person, as defined in Regulation S.
| (b) | Cashless Exercise of Options |
On December 2, 2021, Options were exercised on a cashless basis, the closing price of ordinary shares was $5.38 on December 1, 2021 and the exercise price was $0.50. As a result of such exercise, ordinary shares of the Company were issued, being 300,000 shares multiple by closing price ($5.38) minus the exercise price ($0.50) divided by the closing price ($5.38).
| (c) | Statutory Reserves |
In accordance with the relevant PRC laws and regulations, the Group’s subsidiaries in the PRC are required to provide for certain statutory reserves, which are appropriated from net profit as reported in accordance with PRC accounting standards. The Group’s subsidiaries in the PRC are required to allocate at least 10% of their after-tax profits to the general reserve until such reserve has reached 50% of their respective registered capital. Appropriations to other types of reserves in accordance with relevant PRC laws and regulations are to be made at the discretion of the board of directors of each of the Group’s subsidiaries in the PRC. The statutory reserves are restricted from being distributed as dividends under PRC laws and regulations
| F-28 |
Note 19 — Related party transactions
On September 30, 2022,
Bao Feng sold its
During the years ended March 31, 2024 and 2023, the following related companies of which Mr. Yu Chang, father of Ms. Ting Ting Chang, our CEO and Executive Director, is either a director or a shareholder, provided the research and development services to the Company:
| Recognized as R&D expenses | ||||||||||||||
Name | Description of R&D project | Contract sum | For the year ended March 31, 2023 | For the year ended March 31, 2024 | ||||||||||
| $ | $ | $ | ||||||||||||
| Dunhua Acer Truncatum Seedling Planting Co. Ltd. | ||||||||||||||
| Zhong Yuan Nervonic Acid Bio-technology Co. Ltd. | analysis | |||||||||||||
| Zhong Yuan Nervonic Acid Bio-technology Co. Ltd. | analysis | |||||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | testing | |||||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | testing | |||||||||||||
| Zhong Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd. | ||||||||||||||
| Total | ||||||||||||||
Note 20 — Contingencies and commitment
| (a) | Contingencies |
From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe that these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.
| (b) | Lease commitment |
As of March 31, 2024, the Company leases offices space and warehouse for its inventories under certain non-cancelable operating leases, with terms ranging between one and five years. The Company considers that those renewal or termination options are reasonably certain to be exercised in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for lease payment is recognized on a straight-line basis over the lease term.
| F-29 |
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments based on an estimate of its incremental borrowing rate.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The table below presents the operating lease related assets and liabilities recorded on the consolidated balance sheets:
| As of March 31 | ||||||||
| 2024 | 2023 | |||||||
| Rights of use lease assets | $ | $ | ||||||
| Lease liabilities, current | $ | $ | ||||||
| Lease liabilities, non-current | ||||||||
| Total operating lease liabilities | $ | |||||||
As of March 31, 2023, the weighted average remaining lease terms and discount rates for all of operating leases were as follows:
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % |
The following is a schedule, by years, of maturities of lease liabilities as of March 31,2024:
| 2025 | $ | |||||
| 2026 | ||||||
| 2027 | ||||||
| 2028 | ||||||
| 2029 and thereafter | ||||||
| Total undiscounted cash flows | ||||||
| Less: imputed interest | ( | ) | ||||
| Present value of lease liabilities | $ | |||||
Operating lease expenses for the
years ended March 31, 2024 and 2023 were $
Note 21 — Subsequent events
On April 30, 2024,
the Company obtained a
On May 20, 2024,
the Company obtained a
On June 18, 2024,
the Company obtained a
.
| F-30 |
Note 22 — Restatement of Previously Issued Financial Statements
The Company identified errors in the financial statements for the year ended March 31, 2023. The Company has restated herein our audited financial statements as of March 31, 2023, and for the year ended March 31, 2023 (the “2023 Financial Statements”).
The accounting errors impacting the 2023 Financial Statements include:
| 1) | Amounts due from related companies |
The
amounts due from related companies amounted to $
| 2) | Right-of-use assets and lease liabilities |
Because of renewed lease terms of the Company’s warehouse, the right-of-use assets and lease liabilities – current and non-current portions have been recalculated and restated. Amortization of right-of-use assets has been adjusted accordingly.
| 3) | Deferred offering costs |
Deferred
offering costs amounted to $
| 4) | Salary expenses |
Salary
expenses for the year ended March 31, 2023 were understated by $
| 5) | Research and development costs |
Research
and development costs of $
| 6) | Loss on disposal of a subsidiary |
Loss
on disposal of a subsidiary was incorrectly calculated by including post-acquisition accumulated losses. The Company has now correctly
calculated by excluding post-acquisition accumulated losses of $
| F-31 |
I - Consolidated Balance Sheet
As of March 31, 2023
| As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
| Assets | USD | USD | USD | |||||||||
| Current assets | ||||||||||||
| Cash at bank | ||||||||||||
| Account receivable, net | ||||||||||||
| Inventories | ||||||||||||
| Amounts due from related companies | ( | ) | ||||||||||
| Deferred offering costs | ||||||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||||||
| Total current assets | ( | ) | ||||||||||
| Non-current assets | ||||||||||||
| Equity investment | ||||||||||||
| Right-of-use-assets | ||||||||||||
| Property, plant and equipment, net | ||||||||||||
| Total non-current assets | ||||||||||||
| Total assets | ( | ) | ||||||||||
| Liabilities | ||||||||||||
| Bank loan, current | ||||||||||||
| Accrued liabilities and other current payables | ||||||||||||
| Lease liabilities - current | ( | ) | ||||||||||
| Total current liabilities | ||||||||||||
| Non-current Liabilities | ||||||||||||
| Lease liabilities - non-current | ||||||||||||
| Total liabilities | ||||||||||||
| Total deficit | ||||||||||||
| Ordinary shares | ||||||||||||
| Additional paid-in capital | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Zhong Yuan Bio-Technology Holdings Limited stockholders' deficit | ( | ) | ( | ) | ( | ) | ||||||
| Non-controlling interest | ||||||||||||
| Total deficit | ( | ) | ( | ) | ( | ) | ||||||
| Total liabilities and deficit | ( | ) | ||||||||||
| F-32 |
II - Consolidated statement of operations and comprehensive loss
For the year ended March 31, 2023
| As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
| Assets | USD | USD | USD | |||||||||
| Net sales | ||||||||||||
| Cost of sales | ( | ) | ( | ) | ||||||||
| General and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||
| Research and development expenses | ( | ) | ( | ) | ( | ) | ||||||
| Selling and marketing expenses | ( | ) | ( | ) | ( | ) | ||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ||||||
| Other income (expenses) | ||||||||||||
| Loss on disposal of a subsidiary | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||
| Government grant | ||||||||||||
| Interest income | ||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||
| Total other income (expenses), net | ( | ) | ( | ) | ||||||||
| Loss before income tax | ( | ) | ( | ) | ||||||||
| Income tax credit | ||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||||||
| Discontinued operation | ||||||||||||
| Net loss from discontinued operation | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ||||||||
| Other comprehensive loss | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||
| Comprehensive loss | ( | ) | ( | ) | ||||||||
| F-33 |
III - Consolidated statement of cash flow
For the year ended March 31, 2023
| As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
| USD | USD | USD | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net loss: | ||||||||||||
| From continuing operations | ( | ) | ( | ) | ||||||||
| From discontinued operation | ( | ) | ||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation of computer and office equipment, fixtures, and furniture | ( | ) | ||||||||||
| Loss on disposal of computer and office equipment, fixtures, and furniture | ||||||||||||
| Amortization of right-of-use assets | ( | ) | ||||||||||
| Inventory loss included in cost of sales | ( | ) | ||||||||||
| Stock-based compensation expense | ||||||||||||
| Write off of amounts due from related companies | ||||||||||||
| Loss on disposal of a subsidiary | ( | ) | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ( | ) | ||||||||
| Inventories | ( | ) | ( | ) | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ( | ) | ||||||
| Accrued expenses and other payables | ||||||||||||
| Value added and other tax payable | ( | ) | ||||||||||
| Cash paid for value added and other tax payable | ( | ) | ||||||||||
| Net cash used in continuing operations | ( | ) | ( | ) | ||||||||
| Net cash used in discontinued operation | ( | ) | ( | ) | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||||||
| Cash flows from investing activities | ||||||||||||
| Purchase of computer and office equipment, fixtures, and furniture | ( | ) | ( | ) | ||||||||
| Cash consideration received from the disposal of a subsidiary | ||||||||||||
| Net cash provided by continuing operations | ||||||||||||
| Net cash provided by discontinued operation | ||||||||||||
| Net cash provided by investing activities | ||||||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from private placement | ||||||||||||
| Proceeds from bank loans | ||||||||||||
| Repayment of bank loans | ( | ) | ( | ) | ||||||||
| Payment from related companies | ||||||||||||
| Advances to related companies | ( | ) | ( | ) | ||||||||
| Net cash provided by continuing operations | ||||||||||||
| Net cash provided by discontinued operation | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ( | ) | ||||||
| Net increase (decrease) in cash | ||||||||||||
| Cash at beginning of year | ( | ) | ||||||||||
| Cash at beginning of year held by discontinued operation | ||||||||||||
| Cash at end of year held by discontinued operation | ||||||||||||
| Cash at end of year | ||||||||||||
| F-34 |
IV - Statement of changes in equity
For the year ended March 31, 2023
| As Previously Reported | Restatement Adjustments | As Restated | ||||||||||
| USD | USD | USD | ||||||||||
| As of March 31, 2023 | ||||||||||||
| No of ordinary shares | ||||||||||||
| Ordinary shares | ||||||||||||
| Additional paid-in | ||||||||||||
| Accumulated deficit | ( | ) | ( | ) | ( | ) | ||||||
| Accumulated other comprehensive income | ||||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||
| Non-controlling interest | ||||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||
Note 23 — The Comparative Figures
For the comparative figures of the consolidated statement of operations and comprehensive income (loss), the sales, cost of sales, general and administrative expenses, research and development expenses, selling and marketing expenses, other income (expenses),net, and income tax benefit (expense) of discontinued operation, Dandong BF, for the year ended March 31, 2022 must be presented separately from continuing operations and grouped as net loss from discontinued operation. Loss per share from discontinued operation – basic and fully diluted must also be presented separately from loss per share from continuing operations – basic and fully diluted.
For the comparative figures of the consolidated statement of cash flows, cash flows from operating, investing and financing activities for discontinued operations must be grouped as net amount and presented separately from cash flows from continuing operations.
Save as disclosed above, all other comparative figures of statement of changes in equity during the year ended March 31, 2022 remain unchanged.
| F-35 |
Zhong Yuan Bio-Technology Holdings Limited
Index to Consolidated Financial Statements
| F-36 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Zhong Yuan Bio-Technology Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Zhong Yuan Bio-Technology Holdings Limited (the “Company”) as of March 31, 2022 and the related consolidated statements of operations and comprehensive losses, stockholders’ equity and cash flows for the year then, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022, and the results of its operations and its cash flows for the year ended March 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
PCAOB No.
October 6, 2023
| F-37 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
| As of March 31 | |||||||||
| 2022 | 2021 | ||||||||
| Assets | Notes | Reclassified | |||||||
| Current assets | |||||||||
| Cash at banks | $ | $ | |||||||
| Accounts receivable, net | 4 | ||||||||
| Inventories | 5 | ||||||||
| Amounts due from related companies | 6 | ||||||||
| Prepaid expenses and other current assets | 7 | ||||||||
| Total current assets | |||||||||
| Other assets | |||||||||
| Right-of-use assets | 16(b) | ||||||||
| Property, plant and equipment, net | 8 | ||||||||
| Total other assets | |||||||||
| Total assets | $ | $ | |||||||
Liabilities and stockholders' equity |
|||||||||
| Current liabilities | |||||||||
| Bank loans | 10 | $ | $ | ||||||
| Accrued expenses and other current payables | 9 | ||||||||
| Lease liabilities, current | 16(b) | ||||||||
| Total current liabilities | |||||||||
| Non-current liabilities | |||||||||
| Bank loan, non-current | 10 | ||||||||
| Lease liabilities, non-current | 16(b) | ||||||||
| Total non-current liabilities | |||||||||
| Total liabilities | |||||||||
| Contingencies and commitment | 16 | ||||||||
| Stockholders' equity | |||||||||
| Ordinary shares, shares authorized at par value of $ each; and shares issued and outstanding as of March 31, 2022 and 2021, respectively | |||||||||
| Additional paid-in capital | |||||||||
| Accumulated losses | ( | ) | ( | ) | |||||
| Accumulated other comprehensive income | |||||||||
| Total stockholders' equity | |||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-38 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended March 31, | |||||||||
| Notes | 2022 | 2021 | |||||||
| Reclassified | |||||||||
| NET SALES | 3, 14 | $ | $ | ||||||
| Cost of sales | ( | ) | ( | ) | |||||
| Gross profit | |||||||||
| General and administrative expenses | ( | ) | ( | ) | |||||
| Research and development expenses | 14 | ( | ) | ( | ) | ||||
| Selling and marketing expenses | ( | ) | ( | ) | |||||
| Operating loss | ( | ) | ( | ) | |||||
| Other income (expenses) | |||||||||
| Other income (expenses) | |||||||||
| Government grant | |||||||||
| Interest. income | |||||||||
| Interest expense | 10 | ( | ) | ( | ) | ||||
| Total other income(expenses), net | ( | ) | |||||||
| Loss before income tax | ( | ) | ( | ) | |||||
| Income tax expense | 12(a) | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | |||||
| Other comprehensive loss | |||||||||
| Foreign currency translation adjustment | ( | ) | |||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | |||
| Loss per share - Basic and diluted (cents) | 2 | ) | ) | ||||||
| Weighted average number of shares - Basic and diluted | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-39 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Ordinary Shares | Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||
| No. of shares | Amount | Capital | Losses | Income | Total | |||||||||||||||||||
| Balance as of April 1, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Effect of the one-for-ten reverse stock split | ( | ) | — | — | — | — | — | |||||||||||||||||
| Issuance of shares through private placement | — | — | ||||||||||||||||||||||
| Cancellation of shares | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||
| Balance as of March 31, 2021 | ( | ) | ||||||||||||||||||||||
| Issuance of shares through private placement | — | — | ||||||||||||||||||||||
| Grant of stock options | — | — | ||||||||||||||||||||||
| Exercise of stock options | ( | ) | — | |||||||||||||||||||||
| Net loss | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | ||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-40 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation of property, plant and equipment | ||||||||
| Amortization of right-of-use assets | ||||||||
| Inventory provision included in cost of sales | ||||||||
| Inventory loss included in cost of sales | ||||||||
| Stock-based compensation expense | ||||||||
| Write off of other receivables | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payables | ( | ) | ||||||
| Accrued expenses and other payables | ( | ) | ||||||
| Value added and other taxes payable | ||||||||
| Net cash (used in)/provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property, plant and equipment | ( | ) | ||||||
| Net cash on acquisition | ||||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from private placement | ||||||||
| Payment for cancellation of shares | ( | ) | ||||||
| Proceeds from bank loans | ||||||||
| Repayment of bank loan | ( | ) | ( | ) | ||||
| Advances to related companies | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ( | ) | |||||
| Net (decrease)/increase in cash | ( | ) | ||||||
| Cash at beginning of year | ||||||||
| Cash at end of year | $ | 101,719 | $ | |||||
| Supplemental information: | ||||||||
| Cash paid for income tax | $ | $ | ||||||
| Cash paid for interests | ||||||||
| Major non-cash transactions: | ||||||||
| Right of use assets obtained in exchange for operating lease obligations | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-41 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of business and organization
Nature of operations
Zhong Yuan Bio-Technology Holdings Limited (“ZY Holdings” or the “Company”) was incorporated in the Cayman Islands on July 5, 2016. The Company is an investment holding company. Through its wholly-owned subsidiaries, the Company is engaged in the businesses of developing early detection kits for brain diseases and new drugs for neurological diseases; sales of plant-derived nervonic acid health supplements; provision of technical supporting services and sales of Acer truncatum seedlings. ZY Holdings together with its subsidiaries are collectively referred to as the “Company”.
Share Exchange
On August 31, 2019, ZY
Holdings closed on a share exchange (the “Share Exchange”) with Zhong Yuan Investment Limited (“Zhong Yuan
Investment”), a Seychelles company. Prior to the exchange, Zhong Yuan Investment owned
The Share Exchange has been accounted for as a reverse acquisition using the purchase method of accounting, with no goodwill being recognized. ZY Holdings (the legal acquirer) has been considered the accounting acquiree and China Bio (the legal acquiree) the accounting acquirer. The consolidated financial statements prior to the closing of the Share Exchange are actually those of China Bio, and the accounts of ZY Holdings are consolidated from the date of consummation of the Share Exchange.
Reorganization of China Bio
In and around January 2018, China Bio completed a reorganization of its legal structure. The reorganization involved the incorporation of China Bio and its wholly owned subsidiaries, Zhong Yuan Bio-Technology (Hong Kong) Limited (“ZY HK”, previously known as Hua Hong Powerloop Technology (Hong Kong) Limited, a holding company incorporated on June 13, 2016 under the laws of Hong Kong) and Zhong Yuan Bio-Technology (Shenzhen) Company Limited (“ZY Shenzhen”, a holding company established on June 10, 2014 under the laws of the People’s Republic of China (“PRC”) and previously known as Shenzhen Chuang Feng Clear Energy Company Limited); and the transfer of all equity ownership of Bao Feng Bio-Technology (Beijing) Limited (“BF Beijing”, previously known as Beijing Yuan Bao Feng Century Agricultural Technology Limited, an operating company incorporated on August 30, 2012 under the laws of the PRC) to ZY Shenzhen from the former shareholders of BF Beijing.
On January 19, 2018,
ZY Shenzhen entered into an agreement to acquire 100% of the equity ownership of BF Beijing for a total cash consideration of $
Since China Bio and its subsidiaries have effectively been controlled by the same group of shareholders before and after the reorganization, they are considered under common control. The above-mentioned transactions have been accounted for as recapitalization of BF Beijing with no adjustment to the historical basis of the assets and liabilities of BF Beijing and the operations were consolidated as though the transaction occurred as of the beginning of the first accounting period presented in these financial statements. For the purpose of presenting the financial statements on a consistent basis, the consolidated financial statements have been prepared as if the Company, ZY Shenzhen and ZY HK had been in existence since the beginning of the earliest period presented and throughout the whole periods covered by these financial statements.
| F-42 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Dandong BF by BF Beijing
On December 31, 2020, the
Company’s primary operating subsidiary, BF Beijing, completed its acquisition of a 100% equity interest in Dandong Bao Feng
Seedling Technology Co., Limited (“Dandong BF”) from Mr. Yu Chang, the major shareholder of the Company and the father
of Ms. Ting Chang, the Company’s CEO and director, for a total consideration of RMB
Dandong BF was incorporated in the PRC on March 11, 2019 and is principally engaged in the research, development and growing of Acer truncatum seedlings in Dandong city, Liaoning Province, in the northeastern region of the PRC.
The acquisition had been accounted for as a business combination and the results of the operation of Dandong BF have been included in the Company’s consolidated financial statements from the acquisition date. The Company made estimates and judgments in determining the fair value of acquired assets and liabilities, based on an independent preliminary valuation report and management’s experience with similar assets and liabilities.
The following table summarizes the estimated fair value of major classes of assets acquired and liabilities assumed at the date of acquisition, using the exchange rate of 6.5274 on that day.
Fair Value ($) | ||||
| Cash | ||||
| Inventories | ||||
| Amount due from a related party | ||||
| Property, plant and equipment, net | ||||
| Other assets | ||||
| Net assets value | ||||
| Goodwill | ||||
| Total purchase consideration | ||||
In the consolidated statements of operations, revenues and expenses included operations of Dandong BF since January 2, 2021, which is the day after acquisition date.
Reverse Stock Split
On July 24, 2020, the Company completed a one-for-ten reverse stock split of the Company’s ordinary shares (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the authorized share capital of the Company was decreased from 500,000,000 ordinary shares with a par value of US$0.0001 each to 50,000,000 ordinary shares with a par value of US$0.001 each, and the number of issued and outstanding ordinary shares was decreased from 171,450,000 shares to 17,145,000 shares.
Private Placement
On December 13, 2019, the Company closed on the sale of 1,450,000 ordinary shares (pre-Reverse Stock Split) to independent shareholders, at a purchase price of $0.10 per share, pursuant to a private securities offering.
On November 17, 2020, the Company sold 50,000 ordinary shares to an independent shareholder, at a purchase price of $1.00 per share, pursuant to a private securities offering.
On November 15, 2021, the Company sold ordinary shares to independent shareholders at a purchase price of $per share with one warrant for every ten ordinary shares sold (“Warrant”), pursuant to a private securities offering. Each warrant is entitled to subscribe for one ordinary share at a price of $4.00 per share for one-year period ending November 15, 2022.
On April 29, 2022, the Company sold ordinary shares to an independent shareholder, at a purchase price of $per share, and in June 2022, the Company soldordinary shares to two shareholders of the Company, at a purchase price of $ per share and 12,500 ordinary shares to independent shareholders, at a purchase price of $5.00 per share, pursuant to a private securities offering.
| F-43 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cancellation of shares
On November 17, 2020, the Company acquired 25,000 ordinary shares (post-Reverse Stock Split) from one of the shareholders of the Company at total consideration of US$25,000. These shares were thereafter cancelled.
On November 18, 2020, the Company acquired 25,000 ordinary shares (post-Reverse Stock Split) from one of the shareholders of the Company at total consideration of US$25,000. These shares were thereafter cancelled.
Note 2 — Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions and balances are eliminated upon consolidation. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
| Name | Place of incorporation | Date of incorporation | Business engaged in | Effective ownership as of March 31 2022 | Effective ownership as of March 31, 2021 | |||||||||||
| ZY Holdings | ||||||||||||||||
| China Bio | ||||||||||||||||
| ZY HK | ||||||||||||||||
| ZY Shenzhen | ||||||||||||||||
| BF Beijing | ||||||||||||||||
| Dandong BF | ||||||||||||||||
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVID-19 outbreak
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. We are uncertain as to when any new outbreaks of COVID-19 will be contained, and we cannot predict if the impact of any such outbreaks or associated lockdown measures will be short-lived or long-lasting. If the outbreaks of COVID-19 are not effectively controlled within a short period of time, our business, financial condition, results of operations and prospects may be materially and adversely affected. As such, it is uncertain as to the full magnitude that the pandemic will have on our financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak on our results of operations, financial condition, or liquidity for the year ended March 31, 2022.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s consolidated financial statements include but not limited to the useful lives of property and equipment and capitalized development cost, impairment of long-lived assets, revenue recognition, valuation of accounts receivables, inventories and stock-based compensation, provision for contingent liabilities, and realization of deferred tax assets and uncertain tax positions. Actual results could differ from these estimates.
Foreign currency translation
The subsidiaries within the Company maintain their books and records in their respective functional currency, Chinese Renminbi (“RMB”) and Hong Kong dollars (“HK$”), being the lawful currency in the PRC and Hong Kong, respectively. The Company’s financial statements are reported using U.S. Dollars. The results of operations and the consolidated statements of cash flows denominated in foreign currencies are translated at the average rates of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currencies is translated at the historical rates of exchange at the time of capital contributions. Because cash flows are translated based on the average translation rates, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange rates from period to period are included as a separate component of accumulated other comprehensive income included in consolidated statements of changes in equity. Gains and losses from foreign currency transactions are included in the consolidated statement of operations and comprehensive loss.
The exchange rates used to translate amounts in RMB and HK$ into U.S. Dollars for the purposes of preparing the consolidated financial statements are as follows:-
| 2022 | 2021 | |||||||
| Balance sheet items, except for equity accounts | RMB1=$0.1577 HK$1=$0.1277 | RMB1=$0.1526 HK$1=$0.1286 | ||||||
| Items in statements of income and cash flows | RMB1=$0.1558 HK$1=$0.1284 | RMB1=$0.1475 HK$1=$0.1290 |
No representation is made that the RMB and HK$ amounts could have been, or could be, converted into U.S. dollars at the above rates.
| F-45 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value measurement
ASC 825-10 requires certain disclosures regarding the fair value of financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| ● |
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● |
Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted market prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable and inputs derived from or corroborated by observable market data. |
| ● | Level 3 — inputs to the valuation methodology are unobservable. |
Unless otherwise disclosed, the fair value of the Company’s financial instruments including cash, accounts receivable, prepayments, deposits and other current assets, accounts payable, customer deposits, salaries and benefits payables, and taxes payable approximates their recorded values due to their short-term maturities. The fair value of the long term prepayments, deposits and other assets approximate their carrying amounts because the deposits were paid in cash.
Related parties
The Company adopted ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.
Cash
Cash comprise cash at banks
and on hand, which includes deposits with original maturities of three months or less with commercial banks in the PRC. As of March
31, 2022 and 2021, cash balances were $
Prepayments, deposits and other current assets, net
Prepayment, deposits and other current assets, net, primarily consists of advances to suppliers for purchasing goods or services; deposits paid; prepaid expenses and other receivables. Prepayments, deposits and other current assets are classified as either current or non-current based on the terms of the respective agreements. These advances are unsecured and are reviewed periodically to determine whether their carrying value has become impaired.
| F-46 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable, net
Accounts receivable, net are stated at the original amount less an allowance for doubtful accounts on such receivables. The allowance for doubtful accounts is estimated based upon the Company’s assessment of various factors including historical experience, the age of the accounts receivable balances, current general economic conditions, future expectations and customer specific quantitative and qualitative factors that may affect the Company’s customers’ ability to pay. An allowance is also made when there is objective evidence for the Company to reasonably estimate the amount of probable loss.
Accounts receivables are recorded at the invoiced amounts and presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts receivables are written off after exhaustive efforts at collection.
Inventories
Inventories are stated at the lower of cost or net realizable value on consolidated balance sheets. Cost of inventories is determined using the weighted average cost method. Adjustments are recorded to write down the cost of inventories to the estimated net realizable value due to slow-moving, damaged and lost goods, which is dependent upon factors such as historical and forecasted demand and prevailing market conditions. Write-downs are recorded in cost of revenues on the consolidated statements of operations and comprehensive loss.
Property and equipment, net
Property and equipment, net, mainly comprise fixtures and furniture, computer and equipment are stated at cost less accumulated depreciation and impairment. Property and equipment are depreciated over the estimated useful lives of the assets on a straight-line basis, after considering the estimated residual value.
The estimated useful lives are as follows:
| Useful Life | ||
| Office equipment, fixtures and furniture | ||
| Computer equipment |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and the related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is charged to the statement of operations and comprehensive loss.
Impairment for long-lived assets
Long-lived assets, including office equipment, furniture and fixtures, computer equipment and right of use asset are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable or that the useful life is shorter than the Company had originally estimated. When these events occur, the Company measures impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, the Company would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount. For the years ended March 31, 2022 and 2021, the Company recognized nil impairment for the long-lived assets
| F-47 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue recognition
The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”). Under ASU 2014-09, the Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements:
| · | identify the contract with a customer; |
| · | identify the performance obligations in the contract; |
| · | determine the transaction price; |
| · | allocate the transaction price to performance obligations in the contract; and |
| · | recognize revenue as the performance obligation is satisfied. |
The Company evaluates if it is a principal or an agent in a transaction to determine whether revenue should be recorded on a gross or net basis. The Company is acting as the principal if it obtains control over the goods and services before they are transferred to customers. When the Company is primarily obligated in a transaction, is generally subject to inventory risk, has latitude in establishing prices, or has several but not all of these indicators, the Company acts as the principal and revenue is recorded on a gross basis. When the Company is not primarily obligated in a transaction, does not generally bear the inventory risk and does not have the ability to establish the price, the Company acts as the agent and revenue is recorded on a net basis.
The Company currently generates its revenue from the following main sources:
| (a) | Sales of health care supplements |
Sales of health care supplements are recognized at a point in time when title transfers and the risks and rewards of ownership have passed to customers and when the selling price has been fixed and collectability is reasonably assured. The Company does not provide its customers with the right of return (except for quality), after-sale warranty or price protection. There are no customer acceptance provisions associated with the Company’s products.
The Company is subject
to value added tax at a range of
| (b) | Technical supporting services |
Technical supporting service income is recognized at a point in time when the services are rendered under the respective service contract terms and the contract amount is fixed by the service contract terms and collectability of service income is reasonably assured.
The Company is subject to value added tax at 6% on technical supporting service income in the PRC. The Company presents the technical supporting service income net of valued added tax.
| (c) | Sales of Acer truncatum seedlings |
Sales of Acer truncatum seedlings are recognized at a point in time when title transfers and the risks and rewards of ownership have passed to customers and when the selling price has been fixed and sales proceeds are received.
Revenue generated from the sale of Acer truncatum is exempted from value added tax in the PRC.
Cost of Revenues
The cost of revenue primarily consists of the cost of the inventory sold and cost of technical supporting services outsourced.
Research and development
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
Government grant
Government grant mainly represents amounts received from central and local governments in connection with the Company’s expenditure in research to technology development. Such amounts are recognized in the consolidated income statements upon receipt and when all conditions attached to the grant are fulfilled.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718, which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the vesting period or immediately if fully vested and non-forfeitable. The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
| F-48 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating leases
The Company adopted ASU 2016-02, Leases (Topic 842), on April 1, 2019, using a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.
The Company leases its offices which are classified as operating leases in accordance with Topic 842. Under Topic 842, lessees are required to recognize the following for all leases (with the exception of short-term leases) on the commencement date: (i) lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
At the commencement date, the Company recognizes the lease liability at the present value of the lease payments not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate for the same term as the underlying lease. The right-of-use asset is recognized initially at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. No impairment for right-of-use lease assets as of March 31, 2022 and 2021, respectively.
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended March 31, 2022 and 2021. All of the tax returns of the Company’s subsidiaries in China remain subject to examination by the tax authorities for five years from the date of filing.
Value added tax (“VAT”)
Revenue represents the invoiced value of products sold and services provided , net of VAT. The VAT is based on gross sales price and VAT rates range up to 13%, depending on the type of products sold and services provided. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in taxes payable. All of the VAT returns filed by the Company’s subsidiary in China, have been and remain subject to examination by the tax authorities for five years from the date of filing.
Employee defined contribution plan
Full time employees of the Company in the PRC participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labour regulations require that the Company make contributions to the government for these benefits based on a certain percentage of the employee’s salaries with a cap as defined under the Chinese labour regulations. The Company has no legal obligation for the benefits beyond the contributions. The total employee benefits expensed as incurred were $ and $for the years ended March 31, 2022 and 2021, respectively.
| F-49 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average common share outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential Ordinary Shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential Ordinary Shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
The following table presents a reconciliation of basic and diluted loss per share for the years ended March 31, 2022 and 2021:
| 2022 | 2021 | |||||||||
| Net loss | $ | $ | ||||||||
| Weighted average number of ordinary shares outstanding | ||||||||||
| - basic and diluted | ||||||||||
| Net loss per share | ||||||||||
| - basic and diluted | $ | cents | $ | cents | ||||||
For the year ended March 31, 2022, ordinary shares exercisable under warrants were excluded from the EPS calculation, as their effects were anti-dilutive.
For the year ended March 31, 2021, diluted loss per share has been presented as there were no potential ordinary shares outstanding.
Significant risk and uncertainties
| (a) | Concentration of credit risk |
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash, restricted cash, accounts receivable and other current assets. The maximum exposure of such assets to credit risk is their carrying amounts as at the balance sheet dates. As of March 31, 2022 and 2021, the aggregate amount of cash of $101,719 and $194,590, respectively, were held at major financial institutions in the PRC, where there is currently no rule or regulation requiring the financial institutions to maintain insurance to cover bank deposits in the event of bank failure. To limit exposure to credit risk relating to deposits, the Company primarily places cash deposits with large financial institutions in the PRC. The Company conducts credit evaluations of its customers and suppliers, and generally does not require collateral or other security from them. The Company establishes an accounting policy for allowance for doubtful accounts based on the individual customer’s and supplier’s financial condition, credit history, and the current economic conditions.
| (b) | Foreign currency risk |
A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.
The Company’s functional currency is the RMB, and the Company’s financial statements are presented in U.S. dollars. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying changes in our business or results of operations. Currently, our assets, liabilities, revenues and costs are denominated in RMB.
To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.
| (c) | Significant customers |
Sales revenue from three
major customers was $
| (d) | Significant suppliers |
Purchases from two major vendors was $
| F-50 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive income (loss)
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under U.S. GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of a foreign currency translation adjustment resulting from the Company’s subsidiaries not using the U.S. dollar as their functional currencies.
Statement of Cash Flows
In accordance with ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are formulated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statements of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheets.
Commitments and Contingencies
In the normal course of business, the Company is subject to contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and the specific facts and circumstances of each matter.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to replace the incurred loss impairment methodology under U.S. GAAP. This ASU introduces a new accounting model, the Current Expected Credit Losses model (“CECL”), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model will require the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired, and require a loss be incurred before it is recognized. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The new standard will apply to accounts receivable and other financial instruments. This standard is effective for the Company beginning December 15, 2022. Adoption of ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company believes that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”, which simplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. The new guidance is effective for the Company for the year ending March 31, 2023. The Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and issued a subsequent amendment which refines the scope of the ASU and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate reform activities in January 2021 within ASU 2021-01 (collectively, including ASU 2020-04, “ASC 848”). ASC 848 provides optional expedients and exceptions for applying U.S. GAAP on contract modifications and hedge accounting to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The ASU 2020-04 is effective for all entities as of March 12, 2020, through December 31, 2022, at which time transition is expected to be complete. As the Company do not fall within the scope of Topic 848 or have contracts with references to a reference rate expected to be discontinued, the Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
| F-51 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies an issuer’s accounting for certain convertible instruments and the application of derivatives scope exception for contracts in an entity’s own equity. This guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and required enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The new guidance is required to be applied either retrospectively to financial instruments outstanding as of the beginning of the first comparable reporting period for each prior reporting period presented or retrospectively with the cumulative effect of the change to be recognized as an adjustment to the opening balance of retained earnings at the date of adoption. This guidance is effective for the Company for the year ending March 31, 2024. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
In May 2021, the FASB issued ASU 2021-04, “Earnings per share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options”, which codify the final consensus reached by of the FASB Emerging Issues Task Force on how an issuer should account for modifications made to equity-classified written call options (hereafter referred to as a warrant to purchase the issuer’s common stock). This guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. This guidance is effective for the Company for the year beginning after December 15, 2021. The Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance”, which requires the issuer to disclose information about certain types of government assistance they receive in the notes to the financial statements. ASU 2021-10 also adds a new Topic - ASC 832, Government Assistance - to the FASB’s Codification. The disclosure requirements in ASU 2021-10 apply to all entities, except for not-for-profit entities within the scope of ASC 958, Not-for-Profit Entities, and employee benefit plans within the scope of ASC 960, Plan Accounting - Defined Benefit Pension Plans, ASC 962, Plan Accounting - Defined Contribution Pension Plans, and 965, Plan Accounting - Health and Welfare Benefit Plans. The disclosure requirements in ASC 832 only apply to transactions with a government that are accounted for by analogizing to either a grant model (for example, in International Accounting Standard (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance), or a contribution model (for example, in ASC 958-605, Not-for-Profit Entities - Revenue Recognition). This disclosure requirement is effective for the Company for the year beginning after December 15, 2021. The Company does not expect that the adoption of this guidance will have a material impact on the financial position, results of operations and cash flows.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
| F-52 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Segment Information
The Company has three reportable segments: sales of health care supplements; technical supporting services; and sales of Acer truncatum seedlings. Segments were identified based on the Company’s internal reporting and how the chief operating decision maker (“CODM”) assesses the performance of the businesses.
Key financial performance measures of the segments are as follows:
For the year ended March 31, 2022
| Segment | Net Sales | Cost of Sales | Segment results as assessed by the CODM | |||||||||
| Sales of health care supplements | $ | $ | $ | |||||||||
| Technical supporting services | ||||||||||||
| Sales of Acer truncatum seedlings | ( | ) | ||||||||||
| Total | $ | $ | $ | |||||||||
For the year ended March 31, 2021
| Segment | Net Sales | Cost of Sales | Segment results as assessed by the CODM | |||||||||
| Sales of health care supplements | $ | $ | $ | |||||||||
| Technical supporting services | ||||||||||||
| Sales of Acer truncatum seedlings | ||||||||||||
| Total | $ | $ | $ | |||||||||
Note 4 — Accounts receivable, net
Accounts receivable, net, consists of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ||||||||
| Total accounts receivable, net | $ | $ | ||||||
Note 5 — Inventories
Inventories consisted of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventory net | $ | $ | ||||||
Slow moving inventories amounting to $
| F-53 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Amounts due from related companies
Amounts due from related companies were unsecured, non-interest bearing and repayable on demand and consisted of the following:
| As of March 31, | ||||||||
| Amounts due from: | 2022 | 2021 | ||||||
| Dunhua Acer Truncatum Seedling Planting Co. Ltd. | $ | $ | ||||||
| Zhong Yuan Nervonic Acid Bio-technology Co. Ltd. | ||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | ||||||||
| Zhong Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd. | ||||||||
| $ | $ | |||||||
Mr. Yu Chang, the Company’s major shareholder and father of Ms. Ting-ting Chang, CEO and director of the Company, has significant influence on these companies as mentioned above and/or is one of the directors of these companies. Therefore, the Company considers these companies are related companies.
Note 7 — Prepayments, deposits and other current assets
Prepayments, deposits and other current assets consisted of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Advances to suppliers | $ | $ | ||||||
| Deposits | ||||||||
| Prepaid expenses | ||||||||
| Other receivables, net of allowance of $nil (2022) and $nil (2021) | ||||||||
| Prepayments, deposits and other current assets | $ | $ | ||||||
Note 8 — Property, plant and equipment, net
Property, plant and equipment, net, consisted of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Office equipment, fixtures and furniture | ||||||||
| Subtotal | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation expense
for the years ended March 31, 2022 and 2021 amounted to $
Note 9 — Accrued liabilities and other current payables
Accrued liabilities and other payables consisted of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Advances from customers | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Other current payables | ||||||||
| Accrued expenses and other payables | $ | $ | ||||||
| F-54 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Bank loans
Bank loans consisted of the following:
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Unsecured loan from China Construction Bank wholly repayable within 1 year | $ | $ | ||||||
| Unsecured loan from Bank of Beijing wholly repayable within 1 year | ||||||||
| Total unsecured bank loan wholly repayable within 1 year | ||||||||
| Secured loan from China Construction Bank wholly repayable more than 1 year | ||||||||
| Total | $ | $ | ||||||
As of March 31, 2022,
the outstanding loan from China Construction Bank of $
The outstanding
loan from Bank of Beijing of $
As of March 31, 2022,
the outstanding loan from China Construction Bank of $
Interest expenses for
the years ended March 31, 2022 and 2021 were $
Note 11 — Stock-based compensation expense
On May 4, 2020, the Company granted cashless options (the “Options”) to purchase 6,000,000 (pre-Reverse Stock Split) or 600,000 (post-Reverse Stock Split) ordinary shares of the Company at $(pre-Reverse Stock Split) or $0.5 (post-reverse stock split) per share to Ms. Fung Ming Pang, the Company’s CFO and director. The Options vested 50% at the time when the Company’s ordinary shares began trading on the OTCQB on July 15, 2021 and 50% on July 15, 2022 and are exercisable for five years after the date of vesting.
The fair value of 600,000 (post-Reverse Stock Split) Options was calculated using Black Scholes model with the following assumptions:
| Valuation date (the date of granting) | May 4, 2020 | May 4, 2020 | ||||||
| Number of shares | ||||||||
| Vesting date | ||||||||
| Maturity date | ||||||||
| Fair value per share | $ | $ | ||||||
| Exercise price per share | $ | $ | ||||||
| Risk free rate | % | % | ||||||
| Dividend yield | % | % | ||||||
| Exercise multiple | ||||||||
| Expected terms (years) from the date of granting | ||||||||
| Expected volatility | % | % | ||||||
| Value per Option | $ | $ | ||||||
The non-cash stock-based compensation expense of $ was included in general and administrative expenses for the year ended March 31, 2022. There was such expense for the year ended March 31, 2021.
As of March 31, 2022, there were Options outstanding and issued but not yet vested, representing the unrecognized share-based compensation expense of $54,506.
Stock option activity under the Company’s stock-based compensation plan is shown below:
Number of Shares (post-Reverse Stock Split) | Average Exercise Price per Share (post-Reverse Stock Split) | Weighted Average Remaining Contractual Term in Years | |||||||||||||||
| Outstanding as of April 1, 2020 | $ | N/A | N/A | ||||||||||||||
| Exercisable as of April 1, 2020 | N/A | N/A | |||||||||||||||
| Granted | $ | N/A | |||||||||||||||
| Exercised | — | — | — | ||||||||||||||
| Forfeited | — | — | |||||||||||||||
| Outstanding as of April 1, 2021 | N/A | ||||||||||||||||
| Exercisable as of April 1, 2021 | — | — | |||||||||||||||
| - | - | ||||||||||||||||
| Granted | N/A | N/A | |||||||||||||||
| Exercised | ( | ) | $ | N/A | |||||||||||||
| Forfeited | N/A | N/A | |||||||||||||||
| Outstanding as of March 31, 2022 | $ | ||||||||||||||||
| Exercisable as of March 31, 2022 | $ | — | — | ||||||||||||||
| F-55 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Taxes
| (a) | Income tax |
Cayman Islands
The Company was incorporated in the Cayman Islands and is not subject to tax on income or capital gains under the current laws of the Cayman Islands. Additionally, Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
Republic of Seychelles
China Bio-Tech was incorporated in the Republic of Seychelles and is not subject to tax on income or capital gains under the current laws of the Republic of Seychelles. Additionally, Republic of Seychelles does not impose a withholding tax on payments of dividends to shareholders.
Hong Kong
ZY HK was incorporated
in Hong Kong and is subject to
PRC
ZY Shenzhen is governed by the Enterprise Income Tax (“EIT”) laws of the PRC. Under the EIT laws of the PRC, domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a uniform 25% enterprise income tax rate. As ZY Shenzhen is an investment holding company, there was no revenue recorded in the books of ZY Shenzhen and as a result, there was no EIT for the years ended March 31, 2022 and 2021.
BF Beijing is governed by the EIT laws of the PRC and is subject to EIT at a uniform rate of 25%. Because BF Beijing is qualified as a small-scale and low-profit enterprise of which its annual taxable income must not be more than RMB3 million; its number of employees must not exceed 300 and its total assets must not exceed RMB50 million, BF Beijing enjoys a reduced tax rate of 5% on annual taxable income not exceeding RMB1 million and the remaining annual taxable income from RMB1 million to RMB3 million can enjoy a reduced tax rate of 10%. Commencing from the fiscal year started from January 1, 2021, the first RMB1 million of annual taxable income is taxed at half of the current reduced tax rate of 5% (i.e. 2.5%) while the remaining annual taxable income from RMB1 million to RMB3 million continues to be taxed at the current reduced tax rate of 10%. BF Beijing is also qualified as high and new technology enterprise and is also subject to a preferential income tax rate of 15%.
Because BF Beijing is qualified as a small-scale and low-profit enterprise as well as a high and new technology enterprise, BF Beijing is then subject to the following income tax rates:
| Annual taxable income | Income tax rate | |
Dandong BF is exempted from the EIT in the PRC because of its agricultural business.
The income tax provision consisted of the following components:
| Years ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Current tax | $ | |||||||
| Deferred tax | ||||||||
| Total provision for income taxes | $ | $ | ||||||
| F-56 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a reconciliation of the differences between the Company’s statutory income tax expense and the product of loss before tax multiplied by the PRC Enterprise Income tax Rate for the years ended March 31, 2022 and 2021.
| Years ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| % | % | |||||||
| Loss before tax | ||||||||
Tax at the PRC enterprise income tax rate of 25% | ( | ) | ( | ) | ||||
| Tax effect of preferential tax rate for small scale and low profit enterprise | ( | ) | ( | ) | ||||
| Tax effect of tax loss not recognized | ||||||||
| Tax effect of non-deductible expenses and non-taxable income, net | ( | ) | ||||||
| Effective income tax rate | ||||||||
As of March 31, 2022
and 2021, there were no deferred tax assets and liabilities recognized. As at March 31, 2022, the Group has unused tax losses of $
| (b) | Sales tax |
The Company’s subsidiaries incorporated in the PRC are subject to a value added tax (“VAT”)for services rendered at a rate of 6% and for goods sold at a rate varying from 0% to 13% of the gross sales price depending on their categories in different periods. A credit is available whereby the VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on sales of the finished products and services. There is no VAT for Dandong BF which carries out the agricultural business.
| (c) | Tax payable |
The Company does not have material income tax payable as of March 31, 2022 and 2021.
Note 13 — Capital transactions
| (a) | Stock Split |
On July 24, 2020, the
Company completed a
All shares of ordinary shares and amount per share referenced in this report have been adjusted retroactively to reflect the Stock Split.
| (b) | Private Placement |
On November 17 , 2020, the Company sold ordinary shares (post-Reverse Stock Split) at a purchase price of $ per Share, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act.
On November 15, 2021, the Company sold Shares, at a purchase price of $ per Share with one warrant for ten ordinary shares sold (“Warrant”), pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act. Each Warrant is entitled to subscribe for one share at a price of $4.00 per share for one-year period ending November 15, 2022.
| F-57 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| (c) | Share cancellation |
On November 17, 2020 the Company cancelled ordinary shares (post-Reverse Stock Split) at a purchase price of $1.00 per Share.
| (d) | Cashless exercise of Options |
On December 2, 2021, Options were exercised on a cashless basis, the closing price of ordinary shares was $5.38 on December 1, 2022 and the exercise price was $0.50. As a result of such exercise, ordinary shares of the Company were issued, being 300,000 shares multiple by closing price ($5.38) minus the exercise price ($0.50) divided by the closing price ($5.38).
Note 14 — Related party transactions
On December 31, 2020, the Company completed the acquisition of 100% equity interest in Dandong BF from Mr. Yu Chang, the Company’s major shareholder and father of Ms. Ting-ting Chang, CEO and director of the Company, for a total consideration of $1,482,600 (or RMB10,500,000). Details are set out in note 1 under the heading “Acquisition of Dandong BF by BF Beijing”.
During the year
ended March 31, 2022, the Company provided technical supporting services to Beijing Guo Bao Feng Bio-technology Co. Ltd. and Zhong
Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd., both of which Mr. Yu Chang, the Company’s major shareholder and father
of Ms. Ting-ting Chang, CEO and director of the Company, has interests and/or is a director, and generated service income of $
During the year ended March 31, 2022, the following related companies provided the research and development services to the Company:
Name | Description of R&D project | Contract sum | % of Completion | Recognized as R&D expenses | Outstanding contract sum | |||||||||||||
| $ | $ | $ | ||||||||||||||||
| Dunhua Acer Truncatum Seedling Planting Co. Ltd. | % | |||||||||||||||||
| Zhong Yuan Nervonic Acid Bio-technology Co. Ltd. | analysis | % | ||||||||||||||||
| Zhong Yuan Nervonic Acid Bio-technology Co. Ltd. | analysis | % | ||||||||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | testing | % | ||||||||||||||||
| Ai Rui Tai Ke Fertilizer Co. Ltd. | testing | % | ||||||||||||||||
| Zhong Yuan Bo Rui Bio-technology (Zhuhai Hengqin) Co. Ltd. | % | |||||||||||||||||
| Total | ||||||||||||||||||
Note 15 — Statutory reserves
In accordance with the relevant PRC laws and regulations, the Group’s subsidiaries in the PRC are required to provide for certain statutory reserves, which are appropriated from net profit as reported in accordance with PRC accounting standards. The Group’s subsidiaries in the PRC are required to allocate at least 10% of their after-tax profits to the general reserve until such reserve has reached 50% of their respective registered capital. Appropriations to other types of reserves in accordance with relevant PRC laws and regulations are to be made at the discretion of the board of directors of each of the Group’s subsidiaries in the PRC. The statutory reserves are restricted from being distributed as dividends under PRC laws and regulations.
Note 16 — Contingencies and commitment
| (a) | Contingencies |
From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe that these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.
| (b) | Lease commitment |
As of March 31, 2022, the Company leases offices space and warehouse for its inventories under certain non-cancelable operating leases, with terms ranging between one and five years. The Company considers that those renewal or termination options are reasonably certain to be exercised in the determination of the lease term and initial measurement of right of use assets and lease liabilities. Lease expense for lease payment is recognized on a straight-line basis over the lease term.
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company discount lease payments based on an estimate of its incremental borrowing rate.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
| F-58 |
ZHONG YUAN BIO-TECHNOLOGY HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the operating lease related assets and liabilities recorded on the consolidated balance sheets:
| As of March 31 | ||||||||
| 2022 | 2021 | |||||||
| Rights of use lease assets | $ | $ | ||||||
| Lease liabilities, current | $ | $ | ||||||
| Lease liabilities, non-current | ||||||||
| Total operating lease liabilities | $ | |||||||
As of March 31, 2022, the weighted average remaining lease terms and discount rates for all of operating leases were as follows:
| Weighted average remaining lease term (years) | ||
| Weighted average discount rate |
The following is a schedule, by years, of maturities of lease liabilities as of March 31, 2022:
| 2023 | $ | |||||
| 2024 | ||||||
| 2025 | ||||||
| 2026 | ||||||
| 2027 and thereafter | ||||||
| Total undiscounted cash flows | ||||||
| Less: imputed interest | ( | ) | ||||
| Present value of lease liabilities | $ | |||||
Operating lease
expenses for the years ended March 31, 2022 and 2021 were $
Note 17 — Subsequent events
On April 29, 2022, the Company sold 100,000 ordinary shares, at a purchase price of $4.00 per share to an independent shareholder, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act.
On May 13, 2022, the Company obtained a new facility of credit limit of RMB 1,500,000 from China Construction Bank for a term of 12 months, with floating interest rate charged at 0.5% over the 1-year PRC prime lending rate.
On June 1, 2022, the Company obtained a new facility of credit limit of RMB 2,498,439 from Bank of Beijing for a term of 12 months, with floating interest rate charged at 0.6% over the 1-year PRC prime lending rate.
On June 1, 2022, the Company obtained a new facility of credit limit of RMB 1,005,000 from Bank of Beijing for a term of 12 months, with floating interest rate charged at 0.6% over the 1-year PRC prime lending rate.
On June 15, 2022, the Company sold 20,000 ordinary shares to two shareholders of the Company and 12,500 ordinary shares to independent shareholders, at a purchase price of $4.00 and $5.00 per share, respectively, pursuant to a private securities offering conducted under Regulation S promulgated under the Securities Act.
Saved as disclosed above, in accordance with ASC Topic 855, “Subsequent Events” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred up to the date the audited financial statements were available to issue. Based upon this review, the Company has not identified any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
Note 18 — Comparative figures
The comparative figures of the consolidated balance sheet and consolidated statement of operations and comprehensive loss were reclassified to conform to the presentation in current year.
For the comparative figures of the consolidated balance sheet, the accrued expenses and other payables and the value added and other tax payable were combined and disclosed as accrued expense and other current payables in current year. For the comparative figures of the consolidated statement of operations and comprehensive loss, the business tax, which was offset with the net sales in last year, was allocated to the cost of sales in current year; the income tax expense in last year was reclassified to the other income, net in current year. Saved as disclose above, all other comparative figures of the consolidated balance sheet and consolidated statement of operations and comprehensive loss remains unchanged.
| F-59 |