20-F: Cordyceps Sunshine Biotech Reports 2024 Loss Amid Strategic Pivot to Taiwanofungus and Internal Control Weaknesses

Cordyceps Sunshine Biotech Holdings Co., Ltd. reported a net loss of $226,258 for fiscal year 2024, driven by increased operating expenses and depreciation, as it pivots its core business entirely to Cattle camphor mushroom products following the spin-off of its Cordyceps operations.

Summary

• Cordyceps Sunshine Biotech Holdings Co., Ltd. (the "Company") reported a net loss from continuing operations of $226,258 for the fiscal year ended December 31, 2024, a significant decrease from a net income of $169,285 in 2023.
• Total revenue for 2024 increased to $1,253,484, up from $882,533 in 2023, primarily driven by a rise in third-party sales of Cattle camphor mushroom products, which accounted for 95.78% of total sales in 2024.
• The Company spun off its Cordyceps business on September 28, 2023, realizing a net gain of $582,324 from discontinued operations in 2023, and is now solely focused on cultivating and selling Cattle camphor mushroom products.
• Gross profit decreased by 30.35% from $766,387 in 2023 to $533,760 in 2024, with the gross profit margin falling from 86.84% to 42.58%.
• Operating expenses, particularly general and administrative expenses, increased by 33.26% to $717,673 in 2024 due to the addition of retail store sales, higher personnel costs, and professional service fees.
• The Company reported negative working capital of $4,385,043 as of December 31, 2024, exacerbated by a significant increase in payables related to cultivation facilities purchases.
• The auditor, KCCW Accountancy Corp., raised substantial doubt about the Company's ability to continue as a going concern due to recurring net losses, accumulated deficit of $699,224, and negative working capital.
• The Company relies on a single major supplier for 100% of its raw materials for Cattle camphor mushroom products for the fiscal years 2022, 2023, and 2024.
• Management identified material weaknesses in internal control over financial reporting as of December 31, 2024, citing a lack of sufficient U.S. GAAP/SEC accounting personnel and comprehensive accounting policies.

Sentiment

Score: 3

Explanation: The company faces severe financial distress, including a net loss, accumulated deficit, and negative working capital, leading to a going concern warning from its auditor. Material weaknesses in internal controls and high reliance on single suppliers/customers further compound these issues. While revenue growth and a strategic pivot to a patented cultivation method for a high-demand product (Cattle camphor mushroom) offer long-term potential, the immediate financial health and operational risks are substantial.

Positives

• Total revenue increased by 42.03% from $882,533 in 2023 to $1,253,484 in 2024, primarily driven by third-party sales.
• Third-party sales of Cattle camphor mushroom products significantly expanded, accounting for 95.78% of total sales in 2024, up from 85.64% in 2023 and 0% in 2022, indicating successful market penetration beyond related parties.
• The Company has patented cultivation technology for Cattle camphor mushroom, which is expected to reduce cultivation costs, increase production capacity, and allow for reuse of carriers, potentially addressing supply chain issues.
• The Company expects to harvest its own Cattle camphor mushroom in 2025, aiming to become the primary source of raw materials, reducing reliance on external suppliers.
• Operating cash flow from continuing operations was positive at $312,006 in 2024 and $321,833 in 2023, despite net losses in 2024.
• The Company has expanded its marketing channels to include online e-commerce platforms, physical chain stores in Taiwan, and collaborations with major retail brands in Hong Kong and China.

Negatives

• The Company incurred a net loss of $226,258 from continuing operations in 2024, a significant decline from a net income of $169,285 in 2023.
• Gross profit margin significantly decreased from 86.84% in 2023 to 42.58% in 2024, indicating higher cost of revenue relative to sales.
• The Company has an accumulated deficit of $699,224 as of December 31, 2024, and has incurred recurring net losses in 2024 and 2022.
• Negative working capital worsened to $4,385,043 as of December 31, 2024, from $2,638,968 in 2023, primarily due to increased payables for cultivation facilities.
• The Company relies on a single major supplier for 100% of its raw materials for Cattle camphor mushroom products, posing a significant supply chain risk.
• The Company had one major third-party customer accounting for 29.81% of revenue in 2024, indicating customer concentration risk.
• Management identified material weaknesses in internal control over financial reporting, specifically a lack of sufficient U.S. GAAP/SEC accounting personnel and comprehensive accounting policies.
• The Company does not carry business interruption, product recall, or third-party liability insurance for its production facilities or products, exposing it to significant uninsured risks.
• The Company has a highly concentrated ownership structure, with Mr. Szu Hao Huang and Mr. Yenhung Liu indirectly owning approximately 59.3% of ordinary shares, which may limit influence for other shareholders.
• There has been no public market for the Company's ordinary shares, and there is no assurance an active trading market will develop, with the shares potentially being designated as "penny stock."

Risks

• The Company is subject to export regulations in Taiwan, and any adverse regulatory action may materially adversely affect its financial condition and business operations.
• Instability in international markets or foreign currency fluctuations (primarily NTD to USD) could adversely affect the Company's results of operations.
• The Company depends on single-source suppliers for some of the products it sells, specifically 100% of raw materials for Cattle camphor mushroom products for the fiscal years ended December 31, 2024, 2023, and 2022.
• New laws and regulations affecting the nutraceutical industry may be enacted, potentially delaying or ceasing marketing/sales activities or imposing additional costs.
• Selling and distributing all products outside of the U.S. subjects the Company to international business risks, including foreign economic downturns, political instability, changes in governmental controls/regulations (e.g., tax laws, tariffs), compliance with U.S. and international laws (e.g., Foreign Corrupt Practices Act), restrictions on fund transfers, and China-Taiwan/China-U.S. geo-political instability.
• The Company's current business is significantly based on a few products (Cattle camphor mushroom), and failure of these products due to supply chain disruption, extreme weather, or regulatory changes could prevent significant revenue generation.
• The Company may not be able to grow and harvest sufficient Cattle camphor mushroom to satisfy production requirements, leading to reliance on third-party suppliers who may not provide sufficient materials in a timely manner.
• Regulations on Cattle camphor mushroom in Taiwan may change in the future, potentially requiring special licenses that could be denied or rescinded.
• Sales and reputation may be affected by product liability claims, product recalls, pests contamination risks, or adverse publicity, as the Company does not have product liability insurance.
• The Company competes in a brand-conscious industry and may struggle to establish and maintain brand name recognition for its "Kasaer" brand.
• Expansion of the business may put pressure on management and operational infrastructure, impeding the ability to meet increased demand and potentially hurting future operating results.
• The Company has a limited operating history, making it difficult to evaluate its business and prospects, and there is no assurance of signing long-term agreements with customers.
• The Company depends heavily on key personnel (Szu Hao Huang, Yenhung Liu), and turnover could harm the business, as no key person insurance is maintained.
• The Company had one major third-party customer accounting for 29.81% of revenue in 2024, and one related party customer accounting for 100% in 2022, posing customer concentration risks.
• The Company may require substantial additional funding in the future to continue as a going concern, and there is no assurance that additional financing will be available.
• The Company's inability to protect its intellectual property (trademarks, patents) may prevent successful marketing and effective competition, and enforcing/defending rights could be costly.
• The Company does not carry any business interruption insurance or third-party liability insurance for its production facilities, exposing it to significant financial losses from operational risks or product defects.
• The highly concentrated ownership and voting power (Mr. Szu Hao Huang and Mr. Yenhung Liu indirectly own 59.3%) may impact shareholders' interests.
• There has been no public market for the Company's ordinary shares, an active trading market may not develop, and shares may not be resold at or above the purchase price, or at all.
• The Company has incurred increased costs as a result of being a public company and expects more costs after ceasing to qualify as an emerging growth company.
• The Company's ordinary shares may be considered a "penny stock," subject to restrictions on marketability and liquidity.
• Failure to maintain an effective system of internal control over financial reporting may lead to inaccurate financial results or fraud.
• The market price for the ordinary shares may be volatile due to various factors, including operating results, analyst estimates, key personnel changes, exchange rate fluctuations, litigation, and large sales by selling shareholders.
• Future sales or issuances of substantial amounts of ordinary shares could adversely affect the share price and make it difficult to issue new equity.
• As the Company is not subject to compliance with rules requiring certain corporate governance measures (e.g., independent audit/compensation committees), shareholders have limited protections against interested director transactions and conflicts of interest.
• The Company's ordinary shares represent equity interests and are subordinate to existing and future indebtedness.
• The Company cannot eliminate all risks from cybersecurity threats and may experience undetected cybersecurity incidents.

Future Outlook

The Company plans to expand its product offerings with diversified Cattle camphor mushroom specialty items and establish an online presence in Hong Kong, China, Japan, and the United States through e-commerce platforms. It also aims to deepen collaboration with raw material agents, health food manufacturers, and biotech pharmaceutical companies. The Company expects to harvest its own cultivated Cattle camphor mushroom in 2025, becoming the primary source of raw materials, and plans to collaborate with Sin-Ding for OEM production. For 2025, the main growth is expected from product sales in Taiwan, with anticipated strengthening demand leading to more positive cash flow.

Management Comments

• "Our plan is to obtain capital from management to meet our minimal operating expenses and seek third party equity and/or debt financing."
• "However, management cannot provide any assurances that we will be successful in accomplishing any of our plans."
• "For 2025, we expect our main growth will be from our products sales in Taiwan. The demand for our products and services appears to be strengthening, from which we expect to generate more positive cash flow."

Industry Context

The Cattle camphor mushroom is a unique and prized medicinal fungus indigenous to Taiwan, boasting a culinary legacy rooted in Taiwanese culture for over a century. The Taiwanese government has supported research in this area since 2002, recognizing its significance comparable to Korean ginseng and Chinese Cordyceps. However, the endangered status of the Cinnamomum kanehirae tree, essential for its growth, has led to regulatory restrictions, hindering expansion and global recognition, resulting in lower visibility compared to its counterparts. Despite this, global demand for Cattle camphor mushroom is experiencing remarkable growth, driven by increasing awareness of traditional Chinese medicine, leading to challenges like overharvesting and supply shortages. The market demand within China is projected to grow from 2812.13 tons in 2023 to 4341.34 tons by 2027, with an annual growth rate of 9-12%, indicating a substantial market opportunity despite the supply-demand gap.

Comparison to Industry Standards

• The document highlights the Cattle camphor mushroom's significance in Taiwan, paralleling it with Korean ginseng and Chinese Cordyceps in terms of medicinal value and market potential, suggesting it operates in a high-value segment of the traditional medicine market.
• The Company's patented cultivation technology, which replaces the traditional method of growing on endangered Cinnamomum camphora tree logs, represents a significant innovation compared to conventional industry practices, potentially offering a more sustainable and cost-effective production method.
• The projected market demand for Cattle camphor mushroom in China, expected to grow from 2812.13 tons in 2023 to 4341.34 tons by 2027 (9-12% annual growth), indicates a robust market opportunity that the Company's new cultivation method aims to address, potentially positioning it to capture a larger share of this growing demand compared to competitors reliant on traditional, constrained supply methods.
• The Company's reliance on a single major supplier for 100% of its raw materials and a single major third-party customer for 29.81% of its revenue in 2024 contrasts with industry best practices for supply chain and customer diversification, which typically aim to mitigate concentration risks.

Corporate Governance

Related Party Transactions

• As of December 31, 2024, the Company owed $119,889 to Mr. Szu Hao Huang (Director, CEO) and $99,975 to Dalan Vincent Holdings Limited (managed by Mr. Szu Hao Huang), totaling $219,864. These amounts are for working capital, payable on demand, and bear no interest.
• Sales to Gasar Biotechnology Co., Ltd. (managed by Mr. Szu Hao Huang) amounted to $52,943 in 2024, $126,856 in 2023, and $53,304 in 2022. Related party sales decreased by 58.27% from 2023 to 2024, and accounted for 4.22% of total revenue in 2024, down from 100% in 2022.
• In June-September 2020, Cordyceps Sunshine Cayman entered into loan agreements to borrow $414,000 from six individuals (likely related parties) to finance operations. These loans were non-interest bearing, non-secured, and matured from June 30, 2025, to September 30, 2025. In 2023, the interest rate was amended to 4.125% per annum. The outstanding balance was $448,155 as of December 31, 2024.
• On September 28, 2023, the Company sold 100% equity interest in Cordyceps Sunshine HK and Chengdu Skyherb to Mr. Xusheng Niu in exchange for cancelling a debt of $1,152,328.5 (RMB8,411,156.95) owed to Mr. Niu, which resulted from several loan agreements since June 29, 2020.
• On February 5, 2024, Cordyceps Sunshine Taiwan Branch entered into an exclusive licensing agreement with Mr. Yen Hung Liu (a director) to use six cultivation technologies globally until the expiration date of each patent, in exchange for a licensing fee.

Stakeholder Impact

• **Shareholders**: Face significant risks due to recurring losses, accumulated deficit, negative working capital, and the auditor's going concern doubt. Highly concentrated ownership limits influence for minority shareholders. Potential dilution from future capital raises. No dividends expected. Penny stock risk if shares become publicly traded.
• **Employees**: The Company has 13 full-time employees. Expansion plans may lead to increased personnel needs, but financial instability could pose job security risks if funding is not secured.
• **Customers**: Potential impact from product liability claims or recalls due to lack of insurance. However, the shift to patented cultivation technology aims to ensure consistent and cost-effective supply of Cattle camphor mushroom products.
• **Suppliers**: The Company's reliance on a single major supplier creates a concentration risk for its raw material supply. Financial instability could affect timely payments to suppliers.
• **Creditors**: Existing creditors (including related parties) face risks due to the Company's negative working capital and going concern issues. The Company relies on related party borrowings for future cash requirements.

Next Steps

• Harvest Cattle camphor mushroom in 2025 to become the primary source of raw materials.
• Collaborate with Sin-Ding for OEM production of products.
• Expand product offerings with diversified Cattle camphor mushroom specialty items.
• Establish online presence in Hong Kong, China, Japan, and the United States through e-commerce platforms.
• Deepen collaboration with raw material agents, health food manufacturers, and biotech pharmaceutical companies.
• Implement measures to improve internal control over financial reporting, including engaging financial consultants, providing U.S. GAAP training, and improving financial oversight.
• Obtain additional capital from management, principal stockholders, and/or third-party equity/debt financing to address going concern issues.
• Apply for quotation on OTCQB for ordinary shares.

Key Dates

Recommendation

Keywords

Cattle camphor mushroom, Taiwanofungus, Dietary supplements, Biotechnology, Nutraceuticals, SEC filing, Form 20-F, Taiwan, Cultivation technology, Herbal products, Financial reporting, Going concern, Supply chain risk, Intellectual property, Corporate governance, Traditional Chinese medicine