ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward
Looking Statements
This
section of the report includes a number of forward-looking statements that reflect our current views with respect to future events
and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate,
intend, project and similar expressions, or words which, by their nature, refer to future events. Actual results could differ
materially from those anticipated in these forward looking statements as a result of any number of factors, including those set
forth in this Quarterly Report, and in the Company’s most recent Annual Report on Form 10-K/A filed on March 29,
2019.
All
written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to
us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties
that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements, which apply only
as of the date of this quarterly report. These forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or our predictions.
Overview
The
following discussion is an overview of the important factors that management focuses on in evaluating our businesses, financial
condition and operating performance and should be read in conjunction with the financial statements included in this Quarterly
Report on Form 10-Q.
The
Company is subject to a number of risks similar to other companies in the medical device industry. These risks include but are
not limited to rapid technological change, uncertainty of market acceptance of our products, uncertainty of regulatory approval,
competition from substitute products and larger companies, the need to obtain additional financing, compliance with government
regulation, protection of proprietary technology, product liability, and the dependence on key individuals.
Our
Business
We
are engaged in the business of designing, developing, manufacturing and marketing of biomaterial internal fixation devices. We
hold one Class III medical device permit for our product - polymer orthopaedic internal fixation screws and one Class II permit
from the China Food and Drug Administration (“CFDA”). We hold two patents issued by the State Intellectual Property
Office of the P.R.C. (“SIPO”). Our polyamide materials, their uses and manufacturing processes are protected by Patent
No. ZL971190739. A new patent, No. ZL201410647464.1 titled “Bone Fracture Plate Made of High Polymer Materials” was
granted to us in January 2018. Our polyamide materials are used in producing screws, binding wires, rods and related products.
These products are used in a variety of applications including orthopedic trauma, sports related medical treatment, or cartilage
injuries, and reconstructive dental procedures. At this time, our company is the sole patent holder and market permit holder of
PA technologies in China, as well as the only company currently engaged in clinical trials, manufacturing and marketing for PA
orthopaedic internal fixation devices in the PRC. Our products are made of a very unique material called PA6-P(MMA-CO-NVP)-HA
(“PA”). Our PA products, such as screws, binding wires, rods, suture anchors and rib-pins consist of enhanced fibers
and high molecular polymers which are designed to facilitate quick healing of complex fractures in many areas of the human skeletal
system.
Our
products offer a number of significant advantages over existing metal implants and the first generation of degradable implants
(i.e. PLLA) for patients, surgeons and other customers including:
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1.
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A
notably reduced need for a secondary surgery to remove implant due to post-operative complications, therefore avoiding unnecessary
risk and expense on all patient care;
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2.
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Enhancing
the performance of the materials by manufacturing them to be easily fitted to each patient, forming an exact fit;
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3.
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Improving
the biological activity of materials. Clinical trial results have shown that PA implants promote a progressive shift of load
to the new bone creating micro-motion and thereby avoiding bone atrophy due to ‘stress shielding’;
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4.
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Reducing
the chance of post-operative infection;
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5.
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Stimulate
bone tissues to facilitate effective biological integration, benefitting the regeneration of bone;
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6.
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Ease
of post-operative care i.e. no distortion during x-ray imaging;
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7.
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Simple
and cost-effective to manufacture.
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Our
products are designed to replace the traditional internal fixation device made of stainless steel and titanium and overcome the
limitations of previous generations of products such as PLA and PLLA. Our laboratory statistics show that our PA products have
a higher mechanical strength, last longer in degradation ratio and are more evenly absorbed form outer layer inwards as compared
with similar materials such as PLA and PLLA. Thus PA allows increased restoration time for bone healing and re-growth. The Company’s
polymer orthopaedic internal fixation screws received approval from the China Food and Drug Administration (“CFDA”)
in April 2018.
CFDA
Application Process and Approval for PA Screws
The
Company first submitted its application for PA Screws to the CFDA in 2008. The application has been withheld by the CFDA pending
additional clinical trial cases. This is due to the amended CFDA regulations, which unlike previous regulations require the applicant
to specify the position on the body where the clinical trial is carried out. Our amended CFDA application has specified the ankle
fracture as the body part of our clinical trial. This is because bones around this part carry most of the body weight.
Due
to the uniqueness of our material, there were no established CFDA Product Standards that we could follow during our application
process for our PA Screws. To establish our own Product Standards, the Company had been carrying out extra tests. The Company
submitted its Product Standards and supplementary reports to the CFDA in 2014. In December 2016, the Company received a notice
from the CFDA requesting supplementary report as part of the review process. The Company completed the supplementary report and
submitted it to the CFDA in June 2017.
In
April 2018, the Company’s application for its PA Screws was approved by the CFDA in China (Medical Device Certification
Number: 20183460133).
Process
of Human Trials
As
of January 31, 2019, for medical study and comparison purpose, the Company has completed a total of 83 successful clinical human
trial cases, including 71 cases on ankle fractures and 57 successful PA Binding Wire trial cases. We have been conducting human
trials at the 6 state level hospitals recognized by CFDA for clinical trials in different cities throughout China; including Nanchang,
Changsha, Luoyang, Nanning and Tianjin. The cities and provinces where our clinical trial hospitals are based will be the initial
target regions on our marketing plan. These regions are both densely populated and have experienced high or above medium economic
growth. The clinical trials for the Company’s PA Screws have been completed with 100 percent success rate. Having gained
CFDA approval for PA Screws, the Company is planning to start clinical trials on series of orthopaedic products the Company has
developed using the same unique biomaterial.
Government
Regulation
Medical
implant devices/products manufactured or marketed by the Company in China are subject to extensive regulations by the CFDA. Pursuant
to the related laws and acts, as amended, and the regulations promulgated there under (the “CFDA Regulations”), the
CFDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. The CFDA also has the
authority to request repair, replacement, or refund of the cost of any device manufactured or distributed by the Company.
Under
the CFDA Regulations, medical devices are classified into three classes (class I, II or III), the basis of the controls deemed
necessary by the CFDA to reasonably assure their safety and efficacy. Under the CFDA’s regulations, class I devices are
subject to general controls (for example, labeling and adherence to Good Manufacturing Practices (“GMP”) requirements)
and class II devices are subject to general and special controls. Generally, class III devices are those which must receive premarket
approval by the CFDA to ensure their safety and efficacy (for example, life-sustaining, life-supporting and certain implantable
devices, or new devices which have not been found substantially equivalent to legally marketed class I or class II devices). The
Company is classified as a manufacturer of class III medical devices. Current CFDA enforcement policy prohibits the marketing
of approved medical devices for unapproved uses.
Before
a new device can be introduced into the market in China, the manufacturer generally must obtain CFDA marketing clearance through
clinical trials. Since the Company is classified as a manufacturer of Class III medical devices, the Company must carry out all
clinical trials in pre-selected CFDA approved hospitals. The Company has one class III product and one class II product that have
been approved by the CFDA.
Manufacturers
of medical devices for marketing in China are required to adhere to GMP requirements. Enforcement of GMP requirements has increased
significantly in the last several years and the CFDA has publicly stated that compliance will be more strictly scrutinized. Manufacturers
of Class II and III medical devices must go through the process of examination and approval by the CFDA or authorised local CFDAs
for obtaining the medical device manufacturing license. The Company’s facilities in Shenzhen meets GMP standard and the
Company’s CFDA manufacturing license is in good order.
Results
of Operations
The
“Results of Operations” discussed in this section merely reflect the information and results of the Company for the
period from September 25, 2002 (Shenzhen Changhua’s date of inception) to January 31, 2019 and 2018.
Revenues
The
Company received market permits for one class III product and one class II product in China in 2018 and is in its early marketing
stage. The Company does not have any revenue and is expecting its first revenue from sales of its product in 2019. The management
team is continuously looking for fundraising possibilities for product improvement, machinery upgrades, facility expansions, continuous
research and development, and sales and marketing.
Our
facility is located in Shenzhen China, which is built to meet the GMP standards. Our facility covers about 865 square meters,
which includes the combined facilities of offices, laboratories, and workshops. There is one production line for the PA Screw
and another production line for the PA Binding Wire. The annual production capabilities of each production line are 100,000 pieces
for PA Screw, and 240,000 packs for the PA Binding Wires. Both production lines, at their maximum production capacity, are capable
of generating approximately $32,000,000 in annual revenue.
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Estimate current production lines in full capacity
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Output Quantity (Max.)
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Price at ex-factory ($)
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Total Turnover ($)
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PA Screw
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100,000
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(piece)
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200
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20,000,000
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PA Binding Wire
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240,000
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(pack)
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50
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12,000,000
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Total:
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32,000,000
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China’s
Marketing Analysis
:
We
have established long term relationships with many hospitals and national distributors in China. Ms. Hui Wang, the Company’s
CEO, has over 25 years’ sales experience in medical distribution. She will be in charge of our sales programs. Professor
Shangli Liu, our chief medical advisor, is one of the highest ranked orthopedic doctors in China as well as being highly renowned
in the rest of the world. He will assist the Company in nationwide product promotion and joint projects with associated academic
institutions and medical schools.
During
product development and clinical trial stages, we developed close relationships with many major national hospitals. We expect
these relationships to boost our revenue generation following CFDA final approval.
China’s
market for PA devices depends on 3 major conditions:
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Patients
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Advanced technology level
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Performance and price of the materials
The
demand for internal fixation medical devices has rapidly increased during the last decade. According to China Health Care Year
Book 2013, the total revenue of Chinese orthopaedic hospitals in 2013 was US$1.28 billion with over 11.5 million patients. From
2009 to 2013, the market size of China’s orthopaedic devices has grown from US$1.1 billion to US$1.92 billion, and it is
estimated to reach US$4 billion in 2020. China has overtaken Japan as the second largest market in the world. The Chinese market
size for trauma treatment implant devices such as our PA Screw and PA Wire was US$1.88 billion in 2013 and US$2.12 billion in
2014 with a growth rate of 12.7%, it is estimated to grow to US$3.02 billion in 2017 and reach US$3.17 billion in 2018 with a
growth rate of 11.6%9. (Source: Shenwan Hongyuan Securities research report).
The
Company has advantages and more opportunities over other competitors due to:
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We
are the only company received approval for our unique PA biomaterial by CFDA in China.
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No
other similar patent registrations in China.
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We
are the only company qualified and permitted to perform PA clinical trials by CFDA to the best of our knowledge.
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We
have a timing advantage over other companies in China which would have to go through the preclinical testing for the CFDA
permit on clinical trials.
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Under
existing regulations by CFDA, it will take at least 3-5 years for clinical trials of new materials.
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Number
of Hospitals at the end of November 2018 Statistic and Census report by the National Health and Family Planning Commission of
the People’s Republic of China.
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Statistic and Census report by National Health and Family Planning Commission of the People’s Republic of China
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(November 2018)
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November 2018
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November 2017
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Increase / (Decrease)
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Total No. of Hospitals
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32,476
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30,294
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2,182
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Public Hospital
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12,072
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12,181
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(109
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Private Hospital
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20,404
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18,113
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2,291
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Hospital Rating
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AAA
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2,498
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2,311
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187
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AA
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8,806
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8,285
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521
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A
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10,477
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9,632
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845
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In
general, technological advancements and the marketing potential within Asia are the biggest factors in driving significant growth
within the global orthopedic devices market. Another major factor that positively influences this market is the growing number
of aging baby boomers with active lifestyles. This sector represents a large portion of the total population.
Research
and Development
The
Company has developed five proprietary polymer fixation implant product lines, including screws, pins, tacks, rods and binding
wires, which provide an alternative to metal implants and overcome the limitations of first generation polymer fixation devices.
The Company’s product range will ultimately cover the full gamut of components featuring PA macromolecule polymer materials
for implantation, including human orthopaedic and dental applications, as well as veterinary applications. We expect research
and development expenses to grow as we continue to invest in basic and advanced research, clinical trials, product development
and in our intellectual property.
Although
there are substantial research and development (R&D) activities within the Company and, the Company regards R&D activity
as the key to maintain its technological advantage and innovation, there can be no assurance that the Company will be able to
obtain any further clearances or approvals, if required, to market its products for their intended uses on a timely basis, if
at all. Moreover, regulatory approvals, if granted, may include significant limitations on the indicated uses for which a product
may be marketed. Delays in the receipt of or the failure to obtain such clearances or approvals, the need for additional clearances
or approvals, the loss of previously received clearances or approvals, unfavorable limitations or conditions of approval, or the
failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company’s
business, financial condition and results of operations.
Marketing
Strategy
The
Company has been conducting Pre-Market Research before its PA Screws application was approved by the CFDA in April 2018. The research
is intended to estimate the potential market success of the company’s products that can be expected. The research also beyond
the Company’s initial market - China, and covers international markets. Based on the results of our Pre-Market Research
and the positive feedbacks we have received from trade shows and industrial conferences, it is the Company’s intention to
apply for additional international regulatory approvals in due course.
The
Company will market its products through a hybrid sales force comprised of a managed network of independent regional distributors/sales
agents (80%) and direct sales representatives (20%) in China.
There
are two ways the Company will generate revenue, 1) through our nationwide and regional distributors and 2) through our direct
sales channels.
The
Company is currently working to have its products registered on multiple provincial Group Purchasing Organization (GPO) platforms.
A few distributors have made deposit payment and the Company will start production in due course.
Finance
Costs
As
of January 31, 2019 and October 31, 2018, a stockholder and four related parties had loaned a total of $5,475,220 and $5,044,379
respectively to the Company as unsecured loans repayable on demand and interest is charged at 7% per annum on the amount due.
Total interest expenses on advances from a stockholder and the related parties accrued for the three months ended January 31,
2019 and 2018 were $75,507 and $67,546 respectively.
As
of January 31, 2019 and October 31, 2018, the Company owed $277,628 and $273,874 respectively to the directors for advances made
on an unsecured basis, repayable on demand. Total imputed interest expenses on advances from directors, calculated at 5% per annum,
recorded as additional paid-in capital amounted to $3,148 and $3,844 for the three months ended January 31, 2019 and 2018 respectively.
Net
Loss
The
net loss attributable to common stockholders for the three months ended January 31, 2019 and 2018 were $252,523 and $222,543 respectively.
We do not have any revenue from inception to January 31, 2019 but have to incur operating expenses for the upkeep of the Company
and the clinical trials.
Liquidity
and Capital Resources
We
had a working capital deficit of $6,207,713 and $5,721,907 as of January 31, 2019 and October 31, 2018 respectively. Our working
capital deficit is due to the fact that we received the CFDA approval for one product in April 2018 and we are in the process
to produce, market and sell our product in China. We had no revenues during the period and that our sole source of financing is
loans from our related parties and stockholders. Meanwhile, we have been upgrading our facilities and continuing R&D works.
Cash
Flows
Net
Cash Used in Operating Activities
Net
cash used in operating activities was $199,767 and $228,331 in the three months ended January 31, 2019 and 2018 respectively.
This amount was attributable primarily to the net loss after adjustment for non-cash items, such as depreciation, loss on disposal
of property and equipment, imputed interest on advances from directors, and others like charges in other receivables and prepaid
expenses and other payables and accrued expenses.
Net
Cash Used in Investing Activities
We
recorded $25,043 net cash used and $4,457 net cash from in investing activities in the three months ended January 31, 2019 and
2018 respectively. This amount reflected purchases of property and equipment, primarily for research and development to our facilities.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities in the three months ended January 31, 2019 and 2018 was $234,622 and $243,455 respectively,
which represented advances from a stockholder, directors and related parties, loan repayment to directors and advances to a related
company.
Operating
Capital and Capital Expenditure Requirements
Our
ability to continue as a going concern and support the commercialization of current products is dependent upon our ability to
market our product while obtaining additional financing in the near term. We anticipate that such funding will be in the form
of equity financing from sales of our common stock. However, there is no assurance that we will be able to raise sufficient funding
from the sale of our common stock to fund our business plan should we decide to proceed. We anticipate continuing to rely on advances
from our related parties and stockholders in order to continue to fund our business operations.
We
believe that our existing cash, cash equivalents at January 31, 2019, will be insufficient to meet our cash needs. Our minimum
cash requirement for the next 12 months is projected to be $750,000. This amount may increase if we decide to start clinical trials
on new products. Once we start production and marketing of our PA Screws, our revenue will cover our basic expenditures. Otherwise,
we will continue to rely on external investments and shareholder’s loans to meet our cash needs. The management is actively
pursuing additional funding and strategic partners, which will enable the Company to implement our business plan, business strategy,
to continue research and development, clinical trials or further development that may arise.
We
intend to spend more to support the commercialization of current products and on research and development activities, including
new products development, regulatory and compliance, clinical studies, and the enhancement and protection of our intellectual
property portfolio.
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 our investors.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including but not limited to those related to income taxes and impairment of long-lived assets. We base our estimates
on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Based on our ongoing review, we plan to adjust to our judgments and estimates where facts and circumstances
dictate. Actual results could differ from our estimates.
We
believe the following critical accounting policies are important to the portrayal of our financial condition and results and require
our management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the
effect of matters that are inherently uncertain.
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Property
and equipment
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Property
and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation
is provided on a straight-line basis, less estimated residual value over the assets estimated useful lives. The estimated useful
lives of the assets are 5 years.
In
accordance with FASB Codification Topic 360 (ASC Topic 360), “Accounting for the impairment or disposal of Long-Lived Assets”,
long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the
long-lived assets. The Company reviews long-lived assets to determine that carrying values are not impaired.
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3.
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Fair
value of financial instruments
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FASB
Codification Topic 825 (ASC Topic 825), “Disclosure About Fair Value of Financial Instruments,” requires certain disclosures
regarding the fair value of financial instruments. The carrying amounts of other receivables and prepaid expenses, other payables
and accrued liabilities and due to a stockholder, directors and related parties approximate their fair values because of the short-term
nature of the instruments. The management of the Company is of the opinion that the Company is not exposed to significant interest
or credit risks arising from these financial statements.
The
Company accounts for income taxes under The Financial Accounting Standards Board (FASB) Codification Topic 740-10-25 (“ASC
740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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. Under ASC 740-10-25, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income in the period included the enactment date.
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5.
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Research
and Development
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Research
and development costs related to both present and future products are expensed as incurred.
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Foreign
currency translation
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The
reporting currency of the company’s financial statements is the US dollar. The financial statements of the Company’s
subsidiary denominated in currencies other than the US dollar are translated into US dollars using the closing rate method. The
balance sheet items are translated into US dollars using the exchange rates at the respective balance sheet dates. The capital
and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses
items are translated at the average exchange rate for the year. All exchange differences are recorded within equity.
RECENT
ACCOUNTING PRONOUNCEMENTS
There
has been no newly effective accounting pronouncement that has significance, or potential significance, to our consolidated financial
statements.
Accounting
Pronouncements Not Yet Effective
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting
for lessees to increase transparency and comparability by recording lease assets and liabilities for operating leases and disclosing
key information about leasing arrangements. The new standard, as amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2019-01,
is effective for annual periods beginning after December 15, 2018 on a modified retrospective basis. The Company will adopt ASU
2016-02 in its first quarter of the year ending October 31 2020. The Company expects its leases designated as operating leases
in Note 6, “Commitments and Contingencies,” will be reported on the consolidated balance sheets upon adoption. However,
the ultimate impact of adopting ASU 2016-02 will depend on the lease terms as of the adoption date.
The
Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe the future
adoptions of any such pronouncements may be expected to cause a material impact on the financial condition or the results of operations.
