Full Press Release Details
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our
results of operations and financial condition should be read together with our unaudited condensed consolidated financial statements and
the notes thereto and other financial information, which are included elsewhere in this Form 6-K. Our unaudited financial statements have
been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). In addition, our unaudited financial
statements and the financial information included in this Form 6-K reflect our organizational transactions and have been prepared as if
our current corporate structure had been in place throughout the relevant periods.
This section contains forward-looking statements.
These forward-looking statements are subject to various factors, risks and uncertainties that could cause actual results to differ materially
from those reflected in these forward-looking statements. Further, as a result of these factors, risks and uncertainties, the forward-looking
events may not occur. Relevant factors, risks and uncertainties include, but are not limited to, those discussed in the section entitled
"Business," "Risk Factors" and elsewhere in this Form 6-K. Readers are cautioned not to place undue reliance on
forward-looking statements, which reflect management's beliefs and opinions as of the date of this Form 6-K. We are not obligated
to publicly update or revise any forward-looking statements, whether as a result of new Information, future events or otherwise. See "Special
Note Regarding Forward-Looking Statements."
Unless otherwise indicated or the context requires
otherwise, "we", "us" or the "Company" in this prospectus are to China SXT Pharmaceuticals, Inc.,
its subsidiaries and its affiliated entities in the context of describing our business, operations and consolidated financial information.
We are an offshore holding company incorporated
in British Virgin Islands, conducting all of our business through our subsidiaries and variable interest entity, Jiangsu Taizhou Suxantang
Pharmaceutical Co., Ltd. ("Taizhou Suxuantang" or the "VIE") in China. Neither we nor our subsidiaries own any
share in Taizhou Suxuantang. Instead, we control and receive the economic benefits of Taizhou Suxuantang's business operation through
a series of contractual arrangements, also known as VIE Agreements. The VIE Agreements by and among our wholly-owned subsidiary, Taizhou
Suxantang Biotechnology Co. Ltd. (the "WFOE"), Taizhou Suxuantang, and Taizhou Suxuantang's shareholders include (i)
certain power of attorney agreements and equity interest pledge agreement, which provide WFOE effective control over Taizhou Suxuantang;
(ii) an exclusive technical consulting and service agreement which allows WFOE to receive substantially all of the economic benefits from
Taizhou Suxuantang; and (iii) certain exclusive equity interest purchase agreements which provide WFOE with an exclusive option to purchase
all or part of the equity interests in and/or assets of Taizhou Suxuantang when and to the extent permitted by PRC laws. Through the VIE
Agreements among WFOE, Taizhou Suxuantang and Taizhou Suxuantang's shareholders, we are regarded as the primary beneficiary of Taizhou
Suxuantang for accounting purpose, and, therefore, we are able to consolidate the financial results of Taizhou Suxuantang in our consolidated
financial statements in accordance with U.S. GAAP. However, the VIE structure cannot completely replicate a foreign investment in China-based
companies, as the investors will not and may never directly hold equity interests in the Chinese operating entities. Instead, the VIE
structure provides contractual exposure to foreign investment in us. Because we do not directly hold equity interests in the VIE, we are
subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited
to limitation on foreign ownership of internet technology companies, regulatory review of oversea listing of PRC companies through a special
purpose vehicle, and the validity and enforcement of the VIE Agreements. We are also subject to the risks of uncertainty about any future
actions of the PRC government in this regard that could disallow the VIE structure, which would likely result in a material change in
our operations and the value of Ordinary Shares may depreciate significantly or become worthless.
Our VIE Agreements may not be effective in providing
control over Taizhou Suxuantang. We may also subject to sanctions imposed by PRC regulatory agencies including Chinese Securities Regulatory
Commission, or CSRC, if we fail to comply with their rules and regulations.
We rely principally on dividends and other distributions
on equity from Taizhou Suxuantang and its subsidiaries for our cash requirements, including for services of any debt we may incur. Taizhou
Suxuantang and its subsidiaries' ability to distribute dividends is based upon their distributable earnings. Current PRC regulations
permit Taizhou Suxuantang and its 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 Taizhou Suxuantang and its subsidiaries
are 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 each of their registered capitals. 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 Taizhou Suxuantang and its subsidiaries to distribute dividends or other payments to their respective
shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
businesses, pay dividends or otherwise fund and conduct our business.
To address the persistent capital outflow 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, have implemented a series of capital control measures in the subsequent months, including stricter vetting
procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments.
For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or
the SAFE Circular 3, issued on January 26, 2017, provides that the banks shall, when dealing with dividend remittance transactions from
domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions, original tax filing form
and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may continue
to strengthen its capital controls and Taizhou Suxuantang and its subsidiaries' dividends and other distributions may be subject
to tightened scrutiny in the future. Any limitation on the ability of Taizhou Suxuantang and its subsidiaries to pay dividends or make
other distributions to us 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.
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 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 to the payment of dividends by a PRC enterprise to a
Hong Kong enterprise may be reduced to 5% from a standard rate of 10% if the Hong Kong enterprise (i) directly holds at least 25% of the
PRC enterprise, (ii) is a tax resident in Hong Kong and (iii) could be recognized as a beneficial owner of the dividend from PRC tax perspective.
Under administrative guidance, a Hong Kong resident enterprise must meet the following conditions, among others, in order to apply the
reduced withholding tax rate: (i) it must be a company; (ii) it must directly own the required percentage of equity interests and voting
rights in the PRC resident enterprise; and (iii) it must have directly owned such required percentage in the PRC resident enterprise throughout
the 12 months prior to receiving the dividends. Nonresident enterprises are not required to obtain pre-approval from the relevant tax
authority in order to enjoy the reduced withholding tax. Instead, nonresident enterprises and their withholding agents may, by self-assessment
and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax
rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations
by the relevant tax authorities. Accordingly, our wholly owned subsidiary China SXT Group Limited ("SXT HK") incorporated
in Hong Kong may be able to benefit from the 5% withholding tax rate for the dividends it receives from our PRC subsidiaries, if it satisfies
the conditions prescribed under Guoshuihan [2009] 81 and other relevant tax rules and regulations. However, if the relevant tax authorities
consider the transactions or arrangements we have 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% will apply
to dividends received by SXT HK from Taizhou Suxuantang and its subsidiaries. This withholding tax will reduce the amount of dividends
we may receive from Taizhou Suxuantang and its subsidiaries.
Through our subsidiaries and Taizhou Suxuantang,
we are an innovative pharmaceutical company based in China that focuses on the research, development, manufacture, marketing and sales
of TCMP. TCMP is a type of TCM products that has been widely accepted by Chinese people for thousands of years. Throughout the decades
of years, TCMP products' origin, identification, prepared process, quality standard, indication, dosage and administration, precautions,
and storage have been well documented, listed and specified in "China Pharmacopoeia" a state-governmental issued guidance
on manufacturing TCMP. In recent years, TCMP industry enjoyed more rapid growth than any other segments of the pharmaceutical industry
primarily due to the favorable government policies for the TCMP industry. Because of the favorable government policies, TCMP products
do not have to go through rigorous clinical trials before commercialization. We currently sell three types of TCMP products: Advanced
TCMP, Fine TCMP and Regular TCMP. Although all of our TCMP products are generic TCMP drugs and we did not change the medical effects of
these products in any significant way, these products are innovative in terms of their unconventional administration. The complexity of
the manufacturing process is what differentiates these types of products. Advanced TCMP typically has the highest quality because it requires
specialized equipment and prepared processes to manufacture, and has to go through more manufacturing steps to produce than Fine TCMP
and Regular TCMP. Fine TCMP is also manufactured with more refined ingredients than Regular TCMP.
We conduct all of our business in China via Taizhou