Confidential Draft No. 2 as confidentially submitted to the Securities and Exchange Commission on June 12, 2020. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.

Registration No. 333-[●]

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

Universe Pharmaceuticals INC

(Exact name of registrant as specified in its charter)

 

Cayman Islands   2834   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

265 Jingjiu Avenue

Jingji Jishu Kaifa District, Jinggangshan, Ji’an

Jiangxi, China
+86-0796-8404999

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
(212) 530-2206

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

With a Copy to:

 

Ying Li, Esq.

Guillaume de Sampigny, Esq.

Hunter Taubman Fischer & Li LLC
1450 Broadway, 26th Floor
New York, NY 10018
212-530-2206

Elizabeth Fei Chen, Esq.

Pryor Cashman LLP

7 Times Square

New York, NY 10036

212-326-0199

 

Approximate date of commencement of proposed sale to the public: Promptly after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  
     
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  
     
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering  
     
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering  
     
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933    
     
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 7(a)(2)(B) of the Securities Act  

 

 

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  Amount to
Be
Registered
   Proposed
Maximum
Offering
Price per
Share
   Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee(2)
 
Ordinary shares, par value US$1.00 per share(3)                             $             $               
Underwriter’s warrants(4)                    
Ordinary shares, par value US$1.00 per share, underlying the underwriter’s warrants            $    $  
Total   [●]        $    $  

 

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act. Includes the offering price attributable to additional shares that the underwriter has the option to purchase to cover over-allotments, if any.
   
(2) Calculated pursuant to Rule 457(a) under the Securities Act, based on an estimate of the proposed maximum aggregate offering price
   
(3) In accordance with Rule 416(a), we are also registering an indeterminate number of additional ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.
   
(4)

The Registrant will issue to the underwriter warrants to purchase a number of ordinary shares equal to an aggregate of 6% of the ordinary shares sold in the offering, excluding the ordinary shares sold as a result of the underwriter’s election to exercise its over-allotment option. The exercise price of the underwriter’s warrants is equal to 110% of the offering price of the ordinary shares offered hereby. The underwriter’s warrants are exercisable at any time, and from time to time, in whole or in part, within 5 years commencing from the effective date of the offering.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

  

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS DATED [●], 2020

 

[] Ordinary Shares

 

 

 

 

Universe Pharmaceuticals INC

 

This is an initial public offering of our ordinary shares. We are offering on a firm commitment basis our ordinary shares, par value $1.00 per share (“Ordinary Shares”). Prior to this offering, there has been no public market for our Ordinary Shares. We expect the initial public offering price to be in the range of $[●] to $[●] per Ordinary Share. We have reserved the symbol “[●]” for purposes of listing our Ordinary Shares on [New York Stock Exchange/NASDAQ Capital Market] and plan to apply to list our Ordinary Shares on [New York Stock Exchange/NASDAQ Capital Market].

 

Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 9 to read about factors you should consider before buying our Ordinary Shares.

 

We are an “emerging growth company” as defined under the federal securities laws and will be subject to reduced public company reporting requirements. Please read the disclosures beginning on page 28 of this prospectus for more information.

 

Following the completion of this offering, our largest shareholder will beneficially own approximately [●]% of the aggregate voting power of our outstanding Ordinary Shares. As such, we may be deemed a “controlled company” within the meaning of [the NYSE listing rules/the NASDAQ listing standards]. However, even if we are deemed as a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under [the NYSE listing rules/the NASDAQ listing standards]. See “Risk Factors” and “Management—Controlled Company.”

 

   Per Share   Total 
Initial public offering price  $             $  
Underwriter’s discounts(1)  $    $  
Proceeds to our company before expenses(2)  $    $          

 

(1)

We have also agreed to issue, on the closing date of this offering, underwriter’s warrants to the underwriter in an amount equal to 6% of the aggregate number of Ordinary Shares sold by us in this offering, excluding the Ordinary Shares sold as a result of the underwriter’s election to exercise its over-allotment option. See “Underwriting” in this prospectus for more information regarding our arrangements with the underwriter.

   
(2)

We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses) not to exceed $230,000, exclusive of the above discounts. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation, such as 1% of the total offering amount as the underwriter’s non-accountable expenses. These payments will further reduce proceeds available to us before expenses. For a detailed description of the compensation to be received by the underwriter, see “Underwriting.

 

This offering is being conducted on a firm commitment basis. The underwriter is obligated to take and pay for all of the Ordinary Shares if any such Ordinary Shares are taken. We have granted the underwriter an option for a period of 45 days after the effective date of this registration statement to purchase up to 15% of the total number of the Ordinary Shares to be offered by us pursuant to this offering (excluding Ordinary Shares subject to this option), solely for the purpose of covering over-allotments, at the public offering price less the underwriting discounts. If the underwriter exercises the option in full, the total underwing discounts payable will be $[●] based on an assumed offering price of $[●] per Ordinary Share, and the total gross proceeds to us, before underwriting discounts and expenses, will be $[●].

 

The underwriter expects to deliver the Ordinary Shares against payment as set forth under “Underwriting,” on or about [●], 2020.

 

Neither the Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

Prospectus dated [●], 2020.

 

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
THE OFFERING 6
   
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA 7
   
RISK FACTORS 9
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 28
   
ENFORCEABILITY OF CIVIL LIABILITIES 29
   
USE OF PROCEEDS 30
   
DIVIDEND POLICY 31
   
CAPITALIZATION 32
   
DILUTION 33
   
CORPORATE HISTORY AND STRUCTURE 34
   
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 36
   
INDUSTRY 58
   
BUSINESS 63
   
REGULATIONS 75
   
MANAGEMENT 85
   
EXECUTIVE COMPENSATION 89
   
PRINCIPAL SHAREHOLDERS 90
   
RELATED PARTY TRANSACTIONS 92
   
DESCRIPTION OF SHARE CAPITAL 93
   
SHARES ELIGIBLE FOR FUTURE SALE 111
   
TAXATION 113
   
UNDERWRITING 121
   
EXPENSES RELATING TO THIS OFFERING 125
   
LEGAL MATTERS 126
   
EXPERTS 126
   
WHERE YOU CAN FIND MORE INFORMATION 126
   
INDEX TO FINANCIAL STATEMENTS F-1

 

You should rely on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy the Ordinary Shares, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Ordinary Shares.

 

Neither we nor the underwriter have taken any action to permit a public offering of the Ordinary Shares outside the United States or to permit the possession or distribution of this prospectus or any filed free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about and observe any restrictions relating to the offering of the Ordinary Shares and the distribution of this prospectus or any filed free-writing prospectus outside the United States.

 

Until , 2020 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

PROSPECTUS SUMMARY

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements included elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our Ordinary Shares, discussed under “Risk Factors,” before deciding whether to buy our Ordinary Shares.

 

Overview

 

Traditional Chinese Medicine (“TCM”) is a comprehensive form of healthcare that has been widely adopted in China for more than 23 centuries. TCM rests upon the assumption that the human body is an ecosystem, embodying the fusion of Shen (psyche), Essence (soma), Qi, Moisture (body fluids), and Blood (tissue). Health in the context of TCM is more than just the absence of diseases, but to identify imbalance in human body and restore harmony. TCM is not only intended to cure diseases but to enhance the capacity for fulfillment, happiness and general well-being of people.

 

We are a pharmaceutical company based in Jiangxi, China, specializing in the manufacturing, marketing, sales and distribution of traditional Chinese medicine derivatives (“TCMD”) products targeting the elderly with the goal of addressing their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products, which are sold in approximately 280 cities of 31 provinces in China as of the date of this prospectus. In addition, through our wholly owned subsidiary Jiangxi Universe Pharmaceuticals Commercial Trade Co., Ltd. (“Universe Trade”), we sell biomedical drugs, medical instruments, Traditional Chinese Medicine Pieces (“TCMP”) products, and dietary supplements manufactured by third-party pharmaceutical companies.

 

Products manufactured by us. The 13 TCMD products currently manufactured by us fall into two categories: (1) treatment and relief for common chronic health conditions in the elderly designed to achieve physical wellness and longevity (“Chronic Condition Treatments”), and (2) cold and flu medications.

 

  Chronic Condition Treatments: Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor.
     
  Cold and flu medicines: Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup.

 

As people age, they have an increasing risk of developing chronic health conditions. According to a report published by the Chinese Center for Disease Control and Prevention in March 2019, 75.8% of seniors have at least one chronic health condition, and 35.1% of them have two or more. Some of the most common chronic diseases in the elderly include arthritis, chronic kidney disease, fatigue, and low back pain. Our products under the category of Chronic Condition Treatments are designed to address some of the aforementioned diseases. Our cold and flu medicines, on the other hand, include products designed to treat and relieve symptoms of respiratory illnesses caused by bacteria and viruses.

 

Our third-party products. Through Universe Trade, we also distribute and sell products manufactured by third-party producers, including biomedical drugs, medical instruments, TCMP products and dietary supplements. As of March 31, 2020, we had distributed over 4,000 third-party products.

 

Our Customers. Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains, primarily located in Jiangxi Province, Jiangsu Province, Guangdong Province, and 27 other provinces in China.

 

We believe we have implemented a successful business model, and our business has grown substantially since our inception. Our customer base continue to grow meaningfully, from a total of 1,304 customers in 2017 to 2,603 customers at the end of fiscal year 2019. Our revenues from selling our own products increased from $17,620,823 for the fiscal year ended September 30, 2018 to $20,895,542 for the fiscal year ended September 30, 2019. Our revenues from distributing and selling products manufactured by third-party companies increased from $10,893,357 for the fiscal year ended September 30, 2018 to $12,333,774 for the fiscal year ended September 30, 2019. Our net income was $7,602,933 for the fiscal year ended September 30, 2018 and $7,551,465 for the fiscal year ended September 30, 2019.

1

 

Our Competitive Strengths

 

We believe that the following competitive strengths have contributed to our success and differentiated us from our competitors:

 

  a recognized manufacturer of TCMD products in China’s rapidly growing health and wellness market;
     
  rigorous quality control standards and manufacturing protocols;
     
  visionary management team with substantial industry experience; and
     
  strong record of growth and profitability.

 

Our Growth Strategies

 

We plan to implement the following strategies to achieve growth in the future:

 

  build a strong brand image to achieve national recognition;
     
  enhance our distribution network to increase market penetration;
     
  integrate our internal manufacturing capacity to ensure production, supply and selection of products; and
     
  further grow our research and development capacities.

 

Our Challenges

 

Our ability to execute our strategies and realize our vision is subject to risks and uncertainties, including:

 

  our ability to compete effectively in the Chinese patent medicine industry;
     
  our ability to attract new customers and retain existing customers and expand our customer relationships;
     
  our ability to improve our products to keep up with the rapidly changing demands, preferences, or trends in the Chinese patent medicine industry;
     
  our ability to generate and maintain sufficient cash inflows from operating activities;
     
  our ability to comply with applicable laws and regulations in China; and
     
  our ability to protect our intellectual property rights and proprietary rights.

 

Our History and Corporate Structure

 

We initially conducted our business through Jiangxi Universe Pharmaceuticals Co., Ltd. (“Jiangxi Universe”), a PRC company incorporated in 1998 and Jiangxi Universe Pharmaceuticals Trade Co., Ltd. (“Universe Trade”), a PRC company incorporated in 2010, a wholly owned subsidiary of Jiangxi Universe.

 

With the growth of our business and in order to facilitate international capital investment in our Company, we underwent an offshore reorganization in 2019 and 2020. On December 11, 2019, our holding company, Universe Pharmaceuticals INC (“Universe INC”), was incorporated under the laws of the Cayman Islands as an exempted company with limited liability. Our wholly owned subsidiary Universe Pharmaceuticals Group (International) Limited (“Universe HK”) was incorporated in Hong Kong on May 21, 2018 as an intermediate holding company. Universe HK in turn holds all the capital stock of Jiangxi Universe Pharmaceuticals Technology Co., Ltd. (“Universe Technology”), a wholly foreign owned enterprise incorporated in China on Aril 8, 2019. Universe Technology holds all the capital stock and controls Jiangxi Universe. Jiangxi Universe holds 100% equity interest in Universe Trade.

 

Universe INC is a holding company with no business operation other than holding the shares in Universe HK; Universe HK is a pass-through entity with no business operation. Universe Technology is exclusively engaged in the business of managing the operation of Jiangxi Universe. Jiangxi Universe specializes in manufacturing our own TCMD products. Universe Trade specializes in the distribution and sales of our own TCMD products and third-party pharmaceutical products.

 

Foshan Shangyu Investment Holding Co., Ltd. (“Foshan Shangyu”) is our affiliated entity, 90% owned by and controlled by Mr. Gang Lai, our controlling shareholder. Foshan Shangyu was formed in 2004 in China as a holding company for Mr. Gang Lai. Foshan Shangyu has no business operations.

 

The following diagram illustrates our corporate structure as of the date of this prospectus and upon completion of this offering based on proposed number of [●] Ordinary Shares being offered. For more detail on our corporate history, please refer to “Corporate History and Structure”.

2

 

 

Our Corporate Information

 

Our principal executive offices are located at 265 Jingjiu Avenue, Jingji Jishu District, Jinggangshan, Ji’an, Jiangxi Province, People’s Republic of China. Our phone number is +86-0796-8404999. Our registered office in the Cayman Islands is located at Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KYI – 1205 Cayman Islands, and the phone number of our registered office is +1-(345)769-9372.

 

Investors should submit any inquiries to the address and telephone number of our principal executive offices. We maintain a corporate website at http://www.dzrzy.com. The information contained in, or accessible from, our website or any other website does not constitute a part of this prospectus.

 

Implications of Our Being an “Emerging Growth Company”

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to larger public companies. In particular, as an emerging growth company, we:

 

  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A;”

3

 

  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
     
  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
     
  are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting until our second annual report on Form 20-F following the effectiveness of our initial public offering.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions until we no longer meet the definition of an emerging growth company. The JOBS Act provides that we would cease to be an “emerging growth company” at the end of the fiscal year in which the fifth anniversary of our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, herein referred to as the Securities Act, occurred, if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our Ordinary Share held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Foreign Private Issuer Status

 

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
     
  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
     
  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
     
  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
     
  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; and
     
  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

4

 

Conventions That Apply to This Prospectus

 

Unless otherwise indicated or the context requires otherwise, references in this prospectus to:

 

   “Affiliated Entities” are to our subsidiaries;
     
  “BVI” are to the British Virgin Islands;
     
  “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
     
  “Jiangxi Universe” are to Jiangxi Universe Pharmaceuticals Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by Universe Technology;
     
  “shares,” “Shares,” or “Ordinary Shares” are to the ordinary shares of the Company, par value US$1.00 per share;
     
  “Universe HK” are to Universe INC’s wholly owned subsidiary, Universe Pharmaceuticals Group (International) Limited, a Hong Kong corporation;
     
  “Universe INC” are to Universe Pharmaceuticals INC, an exempted company with limited liability incorporated under the laws of Cayman Islands;
     
  “Universe Trade” are to Jiangxi Universe Pharmaceuticals Commercial Trade Co., Ltd., a limited liability company organized under the laws of the PRC, which is a wholly owned by Jiangxi Universe;
     
  “we,” “us,” or the “Company” are to one or more of Universe INC, and its subsidiaries, as the case may be; and
     
  “WFOE” or “Universe Technology” are to Jiangxi Universe Pharmaceuticals Technology Co., Ltd., a limited liability company organized under the laws of the PRC, which is wholly owned by Universe HK.

 

Unless the context indicates otherwise, all information in this prospectus assumes:

 

  the filing and effectiveness of our amended and restated memorandum and articles of associations, which will occur immediately prior to the completion of this offering; and
     
  no exercise by the underwriter of its over-allotment option.

 

Our business is conducted by Jiangxi Universe and Universe Trade, our wholly owned subsidiaries in the PRC using Chinese Yuan (“RMB”), the currency of China. Our consolidated financial statements are presented in U.S. dollars. In this prospectus, we refer to assets, obligations, commitments, and liabilities in our consolidated financial statements in United States dollars. These dollar references are based on the exchange rate of RMB to U.S. dollars, determined as of a specific date or for a specific period. Changes in the exchange rate will affect the amount of our obligations and the value of our assets in terms of U.S. dollars which may result in an increase or decrease in the amount of our obligations (expressed in dollars) and the value of our assets, including accounts receivable (expressed in dollars).

5

 

THE OFFERING

 

Ordinary Shares offered by us   [●] million Ordinary Shares
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be in the range of $[●] to $[●] per Ordinary Share.
     
Ordinary Shares outstanding prior to completion of this offering   50,000 Ordinary Shares
     
Ordinary Shares outstanding immediately after this offering  

[●] Ordinary Shares assuming no exercise of the underwriter’s over-allotment option and excluding [●] Ordinary Shares underlying the underwriter warrants.

 

[●] Ordinary Shares assuming full exercise of the underwriter’s over-allotment option and excluding [●] Ordinary Shares underlying the underwriter warrants.

     
Listing   We will apply to have our Ordinary Shares listed on [New York Stock Exchange/NASDAQ Capital Market].
     
Trading symbol   “[●]”
     
Transfer Agent   [●]
     
Use of proceeds   We intend to use the proceeds from this offering for working capital and general corporate purposes, including the expansion of our business. See “Use of Proceeds” on page 30 for more information.
     
Risk factors   The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 9 for a discussion of factors to consider before deciding to invest in our Ordinary Shares.
     
Lock-up   We, our directors and executive officers, our existing shareholders have agreed with the underwriter not to sell, transfer or dispose of any Ordinary Shares or similar securities for a period of [180] days after the date of this prospectus, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

6

 

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following tables set forth selected historical statements of operations for the fiscal years ended September 30, 2019 and 2018, and balance sheet data as of September 30, 2019 and 2018, which have been derived from our audited consolidated financial statements for those periods. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in the prospectus.

 

Selected Statements of Operations Information:

 

  

For the years ended

September 30,

 
   2019   2018 
         
REVENUE  $33,229,316   $28,514,180 
COST OF REVENUE   19,821,831    15,105,265 
GROSS PROFIT   13,407,485    13,408,915 
           
OPERATING EXPENSES          
Selling expenses   1,578,826    1,680,258 
General and administrative expenses   1,457,393    1,282,946 
Research and development expenses   618,437    789,382 
Total operating expenses   3,654,656    3,752,586 
           
INCOME FROM OPERATIONS   9,752,829    9,656,329 
           
OTHER INCOME(EXPENSES)          
Interest expense, net   (129,268)   (164,922)
Other income, net   2,760    5,014 
Equity investment income   26,741    21,630 
Total other expense   (99,767)   (138,278)
           
INCOME BEFORE INCOME TAX PROVISION   9,653,062    9,518,051 
           
INCOME TAX PROVISION   2,101,597    1,915,118 
           
NET INCOME   7,551,465    7,602,933 
           
OTHER COMPREHENSIVE INCOME (LOSS)          
Foreign currency translation adjustment   (645,978)   (587,693)
COMPREHENSIVE INCOME  $6,905,487   $7,015,240 
           
EARNINGS PER SHARE          
Basic and diluted  $151.0   $152.1 
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          
Basic and diluted   50,000    50,000 

7

 

Selected Balance Sheet Information

 

    As of September 30,  
    2019     2018  
ASSETS            
CURRENT ASSETS            
Cash   $ 3,177,321     $ 6,190,176  
Accounts receivable, net     6,420,986       7,637,177
Inventories, net     2,615,155       8,120,436  
Prepaid expenses and other current assets     16,300       8,484  
TOTAL CURRENT ASSETS     12,229,762       21,956,273  
                 
Property, plant and equipment, net     4,566,932       5,075,695  
Intangible assets, net     171,610       183,583  
Investment in equity securities     700,500       728,000  
Deferred tax assets     168,075       135,021  
TOTAL NONCURRENT ASSETS     5,607,117       6,122,299  
                 
TOTAL ASSETS   $ 17,836,879     $ 28,078,572  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Short-term bank loans   $ 2,521,800     $ 2,620,800  
Accounts payable     1,937,095       2,938,221  
Taxes payable     551,049       893,512  
Due to related party     54,705       55,709  
Dividend payable     -       11,648,000  
Accrued expenses and other current liabilities     388,171       240,758  
TOTAL CURRENT LIABILITIES     5,452,820       18,397,000  
                 
COMMITMENTS AND CONTINGENCIES                
                 
SHAREHOLDERS’ EQUITY                
Ordinary shares, $1.00 par value, 50,000 shares authorized, issued and outstanding     50,000       50,000  
Additional paid in capital     3,679,000       3,679,000  
Statutory reserve     2,439,535       2,439,535  
Retained earnings     6,180,757       2,832,292  
Accumulated other comprehensive income     34,767       680,745  
TOTAL SHAREHOLDERS’ EQUITY     12,384,059       9,681,572  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 17,836,879     $ 28,078,572  

8

 

 

RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

 

Risks Related to Our Business and Industry

 

Price increases in raw materials and sourced products could harm the Company’s financial results.

 

Our principal raw materials include angelica, codonopsis, poria mushroom isatis root, and other herbs and plant extracts. These raw materials are subject to price volatility and inflationary pressures. Our success is dependent, in part, on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and market share. These manufactures are also subject to price volatility and labor cost and other inflationary pressures, which may in turn result in an increase in the amount we pay for sourced products. Raw materials and sourced product price increases may offset our productivity gains and price increases and may adversely impact our financial results.

 

High quality materials for our products may be difficult to obtain or substantially increase our production costs.

 

Raw materials account for a portion of our manufacturing costs and we rely on third-party suppliers to provide almost all raw materials. Suppliers may be unable or unwilling to provide the raw materials we need in the quantities requested, at a price we are willing to pay, or that meet our quality standards. We are also subject to potential delays in the delivery of raw materials caused by events beyond our control, including transportation interruptions, delivery delays, labor disputes and changes in government regulations. Our business could be adversely affected if we are unable to obtain a reliable source of the raw materials used in the manufacturing of our products that meets our quality standards. Any significant delay in or disruption of the supply of raw materials could, among other things, substantially increase the cost of such materials, require reformulation or repackaging of products, require the qualification of new suppliers, or result in our inability to meet customer demands.

 

We operate in a highly competitive industry. Our failure to compete effectively could adversely affect our market share, revenues and growth prospects.

 

The Chinese patent medicine industry in China are subject to significant competition and pricing pressures. We will experience significant competitive pricing pressures as well as competitive products. Several significant competitors may offer products at the same or lower prices than our products. The market is highly sensitive to the introduction of new products, which may rapidly capture a significant share of the market. It is possible that one or more of our competitors could develop a significant research advantage over us that allows them to provide superior products that are more attractive to consumers, which could put us in a competitive disadvantage. Continued pricing pressure or improvements in research and shifts in customer preference could adversely impact our customer base or pricing structure and have a material and adverse effect on our business, financial conditions, results of operations and cash flows.

 

Failure to maintain or enhance our brands or image could have a material adverse effect on our business and results of operations.

 

We believe several of our brands, such as “Bai Nian Dan (百年丹)”, “Hu Zhuo Ren (胡卓人)” and “Long Zhong (龙种)”, are well-recognized among our clients and other Chinese patent medicine industry players. Our brand is integral to our sales and marketing efforts. Our continued success in maintaining and enhancing our brand and image depends to a large extent on our ability to satisfy customer needs by further developing effective and better-quality products, as well as our ability to respond to competitive pressures. If we are unable to satisfy customer needs or if our public image or reputation were otherwise diminished, our business transactions with our customers may decline, which could in turn adversely affect our results of operations.

 

9

 

 

Our failure to appropriately respond to changing consumer preferences and demand for new products could significantly harm our customer relationships and product sales.

 

Our business is particularly subject to changing consumer trends and preferences. Our continued success depends in part on our ability to anticipate and respond to these changes, and we may not be able to respond in a timely or commercially appropriate manner to these changes. If we are unable to do so, our customer relationships and product sales could be harmed significantly.

 

Furthermore, the Chinese patent medicine industry is characterized by rapid and frequent changes in demand and new product introductions. Our failure to accurately depict these trends could negatively impact consumer opinion of our stores as a source for latest products. This could harm our customer relationships and cause losses to our market share. The success of our new product offerings depends upon a number of factors, including our ability to: accurately anticipate customer needs; innovate and develop new products; successfully commercialize new products in a timely manner; price our products competitively; manufacture and deliver our products in sufficient volumes and in a timely manner; and differentiate our product offerings from those our competitors.

 

If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could become obsolete, which could have a material adverse effect on our revenues and operating results.

 

If our products do not have the effects intended or cause undesirable side effects, our business may suffer.

 

Although many of the ingredients in our current products for which there is a long history of human consumption and we believe that all of these products and the combinations of ingredients in them are safe when taken as directed, the products could have certain undesirable side effects if not taken as directed or if taken by a consumer who has certain medical conditions. In addition, these products may not have the effect intended if they are not taken in accordance with instructions, which may include dietary restrictions. Furthermore, there can be no assurance that any of these products, even when used as directed, will have the effects intended or will not have harmful side effects in an unforeseen way or on an unforeseen cohort. If any of our products or products we develop or commercialize in the future are shown to be harmful or generate negative publicity from perceived harmful effects, our business, financial condition, results of operations, and prospects could be harmed significantly.

 

We are subject to evolving regulatory requirements, non-compliance with which, or changes in which, may adversely affect our business and prospects.

 

As a manufacturer of products designed for human consumption, we are subject to legal and regulatory requirements applicable to the Chinese patent medicine industry in the PRC. We have been subject to penalties by PRC regulatory authorities in the past due to our failure to comply with their requirements, including noncompliance with the Good Manufacturing Practice for Drugs and the National Drug Standard.

 

The regulations to which we are subject in this area is evolving. As a result, the interpretation of these laws and their enforcement is often uncertain. Predicting the application of these laws can be difficult, and unexpected outcomes in the interpretation and enforcement of the applicable regulations may have an adverse impact on our business and operations. Additionally, any future changes in regulation may render our business non-compliant or require changes to our business practices or licensing arrangements to ensure compliance. These changes may involve significant costs, which in turn may adversely affect our business and prospectus.

 

Various regulatory authorities of the PRC government regulate the manufacturing and trading of Chinese patent medicine. Violations of regulations may lead to the imposition of significant penalties which may affect our business, operations, reputation and financial prospects. See “Regulations” for details.

 

As we introduce new products to our customers, we may be required to comply with additional laws and regulations that are yet to be determined. To comply with such additional laws and regulations, we may be required to obtain necessary certificates, licenses or permits, as well as expend additional resources to monitor regulatory and policy developments. Our failure to adequately comply with such additional laws and regulations may delay, or possibly prevent, some of our products from being offered to customers, which may have a material adverse effect on our business, financial condition and results of operations.

 

10

 

 

Our business is subject to inherent risks relating to product liability and personal injury claims.

 

As a manufacturer of products designed for human consumption, we are subject to product liability claims if the use of our products is alleged to have resulted in injury. For instance, adverse reactions resulting from human consumption of the ingredients contained in our products could occur. We may also be obligated to recall affected products. 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, and our reputation as well as our brand name may also suffer. We, like many other similar companies in China, do not carry product liability insurance. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any available business interruption insurance in China, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.

 

We may not be successful in expanding a distribution network.

 

Although we intend to expand our distribution network including additional cities and rural areas in the PRC in an effort to increase our geographic appearance. Our distribution, logistics and products may encounter various competition from similar or substitutive businesses. Therefore, the success of expansion will depend upon many factors, including our ability to form relationships with, and manage an increasing number of, customers base and optimize our distribution network. If we fail to expand our distribution network as planned, our business, financial condition and results of operations may be materially and adversely affected.

 

We are dependent on certain key personnel and loss of these key personnel could have a material effect on our business, financial condition and results of operations.

 

Our success is, to a certain extent, attributable to the management, sales and marketing, and research and development expertise of key personnel. We are dependent upon the services of Mr. Gang Lai, our chairman of the Board and our chief executive officer, for the continued growth and operation of the Company, due to his industry experiences and management experiences. Although we have no reason to believe that Mr. Gang Lai will discontinue his services with us, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operation. There can be no assurance that we will be able to retain them after the terms of their employment expire. The loss of these officers could have a material adverse effect upon our business, financial condition, and results of operations.

 

We may not effectively manage our growth, which could materially harm our business.

 

We expect that our business will continue to grow, which may place a significant strain on our management, personnel, systems and resources. We must continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our technology and workforce. We must also maintain close coordination among our compliance, accounting finance, marketing and sales organizations. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed.

 

Our continued growth will require an increased investment by us in technology, facilities, personnel and financial and management systems and controls. It also will require expansion of our procedures for monitoring and assuring our compliance with applicable regulations, and we will need to integrate, train and manage a growing employee base. The expansion of our existing businesses, any expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes that are more extensive and broader in scope than those we have historically acquired. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with this growth, our operating margins and profitability will be adversely affected.

 

We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain and hire these personnel in the future, our ability to improve our products and implement our business objects could be adversely affected.

 

We must attract, recruit and retain a sizeable workforce of technically competent employees. Competition for senior management and personnel in the PRC is intense and the pool of qualified candidates in the PRC is very limited. We may not be able to retain the services of our senior executives or personnel, or attract and retain high-quality senior executives or personnel in the future. This failure could materially and adversely affect our future growth and financial condition.

 

11

 

 

Our success depends on our ability to protect our intellectual property.

 

We currently own 11 patents and 22 trademarks in China. We believe that our success depends on our ability to obtain and maintain patent protection for products developed utilizing our technologies, in the PRC and in other countries, and to enforce these patents. There is no assurance that any of our existing and future patents will be held valid and enforceable against third-party infringement or that our products will not infringe any third-party patent or intellectual property. Although we have filed additional patent applications with Patent Administration Department of PRC, there is no assurance that they will be granted.

 

Any patents relating to our technologies may not be sufficiently broad to protect our products. In addition, our patents may be challenged, potentially invalidated or potentially circumvented. Our patents may not afford us protection against competitors with similar technology or permit the commercialization of our products without infringing third-party patents or other intellectual property rights.

 

We also rely on or intend to rely on our trademarks, trade names and brand names to distinguish our products from the products of our competitors, and have registered or will apply to register a number of these trademarks. However, third parties may oppose our trademark applications or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing these new brands. Further, our competitors may infringe our trademarks, or we may not have adequate resources to enforce our trademarks.

 

In addition, we also have trade secrets, non-patented proprietary expertise and continuing technological innovation that we shall seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to products arising from research, we may not be able to maintain the confidentiality of information relating to these products.

 

Because we rely on our manufacturing operations to produce a significant amount of the products we sell, disruptions in our manufacturing system or losses of manufacturing certifications could adversely affect our sales and customer relationships.

 

Our manufacturing operations produced approximately 62.9% of the total value of the products we sold for the year ended September 30, 2019. Our products are produced in our manufacturing facility located in Jinggangshan, Jiangxi Province, China. For the year ended September 30, 2019, one vendor supplied more than 10% of our raw materials. In the event any of our third-party suppliers or vendors becomes unable or unwilling to continue to provide raw materials in the required volumes or quality levels or in a timely manner, we would be required to identify and obtain acceptable replacement supply sources. If we are unable to identity and obtain alternative supply sources, our business could be adversely affected. Any significant disruption in our operations at our manufacturing facility for any reason, including government-imposed regulatory requirements, the loss of certifications, power interruptions, fires, war, or other force of nature, could disrupt our supply of products, adversely affecting our sales and customer relationships.

 

We face risks related to our sales of products obtained from third-party suppliers.

 

We sell a significant number of products that are manufactured by third-party suppliers over which we have no direct control. While we have implemented processes and procedures to try to ensure that the suppliers we use are complying with all applicable regulations, there can be no assurances that such suppliers in all instances will comply with such processes and procedures or otherwise with applicable regulations. Noncompliance could result in our marketing and distribution of contaminated or dangerous products which would subject us to liabilities and could result in the imposition by government authorities of penalties that could restrict or eliminate our ability to purchase products. Any or all of these effects could adversely affect our business, financial condition and results of operation.

 

The growth of our business depends on our ability to finance new product innovations and these increased costs may reduce our cash flows and, if the products in which we have invested fail, it would reduce our profitability.

 

We operate in the Chinese patent medicine industry, which is characterized by significant competition and rapid change. New products appear with increasing frequency to supplant existing products. If we fail to adapt to those conditions in a timely and efficient manner, our revenues and profits would likely decline. To remain competitive, we must continue to incur significant costs in product research and development, marketing, equipment and facilities and to make capital investment. These costs may increase, resulting in greater fixed costs and operating expenses. Our future operating results will depend to a significant extent on our ability to continue to provide new products that compare favorably based on time to market, cost and performance with the design and manufacturing capabilities and competing third-party suppliers and technologies. Our failure to increase our net sales sufficient to offset these increased costs would reduce our profitability.

 

12

 

 

Future acquisitions may have an adverse effect on our ability to manage our business.

 

We may acquire businesses, technologies, services or products which are complementary to our core business of manufacturing and selling TCMD products. Future acquisitions may expose us to potential risks, including risks associated with: the integration of new products, services and personnel; unforeseen or hidden liabilities; the diversion of resources from our existing business; our potential inability to generate sufficient revenue to offset new costs; the expenses of acquisitions; or the potential loss of or harm to relationships with both employees and advertising clients resulting from our integration of new businesses.

 

Any of the potential risks listed above could have a material and adverse effect on our ability to manage our business, our revenues and net income. We may need to raise additional debt funding or sell additional equity securities to make such acquisitions. The raising of additional debt funding by us, if required, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that would restrict our operations. The sale of additional equity securities could result in additional dilution to our shareholders.

 

Increase in labor costs in the PRC may adversely affect our business and our profitability.

 

China’s economy has experienced increases in labor costs in recent years. China’s overall economy and the average wage in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to pass on these increased labor costs to our customers by increasing prices for our products or services, our profitability and results of operations may be materially adversely affected.

 

In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law (《中华人民共和国劳动法》) (the “Labor Contract Law”) that became effective in January 2008 and its implementing rules that became effective in September 2008 and its amendments that became effective in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

 

As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

 

The tariffs by the U.S. government and the trade war between the U.S. and China, and on a larger scale, internationally, may dampen global growth. If the U.S. government, in the future, subjects the services that we provide to tariffs, our business operations and revenues may be negatively impacted.

 

The U.S. government has recently, among other actions, imposed new or higher tariffs on specified products imported from China to penalize China for what it characterizes as unfair trade practices and China has responded by imposing new or higher tariffs on specified products imported from the United States. Based on our analysis of the list of products affected by the tariffs, we expect that the tariffs will not have a material direct impact on our business operations, as currently, we are based in the PRC, and sell products to customers exclusively located within the PRC market. The imposed tariffs, however, may cause the depreciation of the RMB currency and a contraction of certain PRC industries that will likely be affected by the tariffs. As such, there may be potential decrease in the spending powers of advertising customers, which in turn, may lead to a contraction of the PRC advertising market. As such, we may have access to fewer business opportunities and our operation may be negatively impacted. In addition, future actions or escalations by either the United States or China that affect trade relations may cause global economic turmoil and potential have a negative impact on our business and we cannot provide any assurance as to whether such actions will occur or the form that they may take.

 

13

 

 

Natural disasters (whether or not caused by climate change), unusually adverse weather conditions, pandemic outbreaks, terrorist acts and global political events could cause permanent or temporary distribution center or store closures, impair our ability to purchase, receive or replenish inventory, or cause customer traffic to decline, all of which could result in lost sales and otherwise adversely affect our financial performance.

 

The occurrence of one or more natural disasters, such as hurricanes, fires, floods and earthquakes (whether or not caused by climate change), unusually adverse weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our suppliers are located, or similar disruptions could adversely affect our operations and financial performance. To the extent these events result in the closure of one or more of our distribution centers, a significant number of stores, a manufacturing facility or our corporate headquarters, or impact one or more of our key suppliers, our operations and financial performance could be materially adversely affected through an inability to make deliveries to our stores and through lost sales. In addition, these events could result in increases in fuel (or other energy) prices or a fuel shortage, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our distribution centers or stores, the temporary reduction in the availability of products in our stores and disruption to our information systems. These events also could have indirect consequences, such as increases in the cost of insurance, if they were to result in significant loss of property or other insurable damage.

 

The outbreak of the coronavirus in China may have a material adverse effect on our business.

 

Our business could be materially and adversely affected by health epidemics such as the outbreak of the coronavirus disease 2019 (“COVID-19”) in China. The World Health Organization has declared the COVID-19 outbreak a public health emergency of international concern. As this virus is transmitted between humans, the Chinese government has imposed travel restrictions in certain parts of the country. The development of the COVID-19 outbreak could materially disrupt our business and operations, slow down the overall economy, curtail consumer spending, interrupt our sources of supply, and make it difficult to adequately staff our operations. As a result, our operating results, financial conditions and cash flows could be materially adversely impacted.

 

As a result of the COVID-19 outbreak, our factory was closed during the first two weeks of February 2020 at the mandate of the Chinese government and reopened in on February 13, 2020. This impacted the manufacturing productivity of our factory, and therefore our inventory and sales to customers. Our factory has been fully running as normal since March 2, 2020. We expect the negative impacts of the COVID-19 outbreak on our manufacturing and sales to be temporary and our revenues to grow in the future.

 

Risks Related to Doing Business in China

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using proceeds from this offering and/or future financing activities to make loans or additional capital contributions to our PRC operating subsidiaries.

 

As an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of loans or capital contributions. Any capital contributions or loans that we, as an offshore entity, make to our Company’s PRC subsidiaries, including from the proceeds of this offering, are subject to PRC regulations. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with China’s State Administration of Foreign Exchange (“SAFE”), or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other government authorities in China. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to obtain such approvals or make such registration, our ability to make equity contributions or provide loans to our Company’s PRC subsidiaries or to fund their operations may be negatively affected, which may adversely affect their liquidity and ability to fund their working capital and expansion projects and meet their obligations and commitments. As a result, our liquidity and our ability to fund and expand our business may be negatively affected.

 

14

 

We must remit the offering proceeds to China before they may be used to benefit our business in China, and this process may take several months to complete.

 

The proceeds of this offering must be sent back to China, and the process for sending such proceeds back to China may take as long as six months after the closing of this offering. In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with SAFE.

 

To remit the proceeds of the offering, we must take the following steps:

 

  First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to SAFE certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments of the domestic residents, and foreign exchange registration certificate of the invested company.
     
  Second, we will remit the offering proceeds into this special foreign exchange account.
     
  Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a tax certificate.

 

The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary significantly. Ordinarily the process takes several months but is required by law to be accomplished within 180 days of application.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be subject to the requirement of making necessary filings in the FICMIS, and registration with other government authorities in China. We cannot assure you that we will be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our Chinese operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our Chinese operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

We may rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct business.

 

As a holding company, we conduct substantially all of our business through our consolidated subsidiaries incorporated in China. We may rely on dividends paid by these PRC subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. In accordance with the Article 166, 168 of the Company Law of the PRC (Amended in 2018) (the “PRC Company Law”), each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. A company may discontinue the contribution when the aggregate sum of the statutory surplus reserve is more than 50% of its registered capital. The statutory common reserve fund of a company shall be used to cover the losses of the company, expand the business and production of the company or be converted into additional capital. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to us in the form of dividends. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

 

Adverse changes in political, economic and social conditions, as well as government policies in China could have a material adverse effect on our business results of operations, financial conditions and prospects.

 

Substantially all of our business operations are conducted in China. Accordingly, our financial condition, results of operations and prospects are, to a material extent, subject to economic, political and legal developments in China. The economy in China differs from the economies of developed countries in many respects, including, among other things, the degree of government involvement, control of investment, level of economic development, growth rate, foreign exchange controls and resource allocation. Although the economy in China has been transitioning from a planned economy to a more market-oriented economy for about four decades, a substantial portion of productive assets in China is still owned by the PRC government. The PRC government also exercises significant control over the economic growth of China through allocating resources, controlling payments of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. In recent years, the PRC government has implemented measures emphasizing the utilization of market forces in economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance practices in business enterprises. Some of these measures benefit the overall economy in China, but may adversely affect us. For example, our financial condition and results of operations may be adversely affected by government policies on the Chinese patent medicine industry in China or changes in tax regulations applicable to us. If the business environment in China deteriorates, our business in China may also be materially and adversely affected.

15

 

  

Uncertainties with respect to the PRC legal system could adversely affect us.

 

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and 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 because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis 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 sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Labor Contract Law and other labor-related laws in the PRC may adversely affect our business and our results of operations.

 

On December 28, 2012, the PRC government released the revision of the Labor Contract Law, which became effective on July 1, 2013. Pursuant to the Labor Contract Law, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. According to the PRC Social Insurance Law (《中华人民共和国社会保险法》), employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees. As the interpretation and implementation of labor-related laws and regulations are still evolving, we cannot assure you that our employment practices do not and will not violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we have complied or will be able to comply with all labor-related law and regulations regarding including those relating to obligations to make social insurance payments and contribute to the housing provident fund. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations will be adversely affected.

 

There are significant uncertainties under the Enterprise Income Tax Law, or the EIT Law, relating to the withholding tax liabilities of our PRC subsidiaries, and dividends payable by our PRC subsidiaries to our offshore subsidiaries may not qualify to enjoy certain treaty benefits.

 

China passed the EIT Law, and it is implementing rules, both of which became effective on January 1, 2008. Under the PRC EIT Law and its implementation rules, the profits of an FIE generated through operations, which are distributed to its immediate holding company outside the PRC, will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be reduced to 5% if a Hong Kong resident enterprise owns more than 25% of the equity interest in the PRC company. Our PRC subsidiaries, Universe Technology, Jiangxi Universe and Universe Trade, are wholly-owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the tax payer needs to satisfy certain conditions to enjoy the benefits under a tax treaty. The beneficial owner of the relevant dividends and the corporate shareholder to receive dividends from the PRC subsidiary must have continuously met the direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration of Taxation promulgated the Notice on How to Comprehend and Determine the “Beneficial Owner” in Tax Treaties (《国家税务总局关于税收协定中”受益所有人”有关问题的公告》) on February 3, 2018, which limits the “beneficial owner” to individuals, projects or other organizations normally engaged in substantive operations, and sets forth certain detailed factors in determining the “beneficial owner” status. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the relevant Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority. As of the date of this prospectus, we have not commenced the application process for a Hong Kong tax resident certificate from the relevant Hong Kong tax authority, and there is no assurance that we will be granted such a Hong Kong tax resident certificate.

 

Even after we obtain the Hong Kong tax resident certificate, we are required by applicable tax laws and regulations to file required forms and materials with relevant PRC tax authorities to prove that we can enjoy 5% lower PRC withholding tax rate. Universe HK intends to obtain the required materials and file with the relevant tax authorities when it plans to declare and pay dividends, but there is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends received from Universe HK.

 

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Failure to qualify for or obtain any preferential tax treatments that are available in China could adversely affect our results of operations and financial condition. 

The EIT Law and its implementation rules generally impose a uniform income tax rate of 25% on all enterprises, but grant preferential treatment to “high and new technology enterprises strongly supported by the state,” or HNTEs, with a preferential enterprise tax rate of 15%. Our subsidiary Jiangxi Universe is currently accredited as an HNTE. According to the relevant administrative measures, to qualify as an “HNTE,” Jiangxi Universe must meet certain financial and non-financial criteria and complete verification procedures with the administrative authorities. Continued qualification as an HNTE is subject to review by the relevant government authorities in China every three years, and in practice, certain local tax authorities may require annual evaluation of the qualification. In the event that Jiangxi Universe fails to renew its status as HNTE with the local tax authority, it will be subject to the standard PRC enterprise income tax rate of 25%. 

Under the EIT Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.  

The EIT Law and its implementing rules became effective on December 9, 2019. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. 

If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, as we conduct our sales in China. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would be deemed as “qualified investment income between resident enterprises” and therefore qualify as “tax-exempt income” pursuant to the clause 26 of the EIT Law. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which the dividends we pay with respect to our Ordinary Shares, or the gain our non-PRC shareholders may realize from the transfer of our Ordinary Shares, may be treated as PRC-sourced income and may therefore be subject to a 10% PRC withholding tax. The EIT Law and its implementing regulations are, however, relatively new and ambiguities exist with respect to the interpretation and identification of PRC-sourced income, and the application and assessment of withholding taxes. If we are required under the EIT Law and its implementing regulations to withhold PRC income tax on dividends payable to our non-PRC shareholders, or if non-PRC shareholders are required to pay PRC income tax on gains on the transfer of their Ordinary Shares, our business could be negatively impacted and the value of your investment may be materially reduced. Further, if we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both China and such countries in which we have taxable income, and our PRC tax may not be creditable against such other taxes. 

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption law.  

In connection with this offering, we will become subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees of our Company, because these parties are not always subject to our control. 

Although we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption law, our existing safeguards and any future improvements may prove to be less than effective, and the employees of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption law may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire. 

The enforcement of stricter advertisement laws and regulations in the PRC may adversely affect our business and our profitability. 

In October 2018, the Standing Committee of the National People’s Congress (the “SCNPC”) promulgated the PRC Advertising Law, effective on October 26, 2018. According to the Advertising Law, advertisements shall not have any false or misleading content, or defraud or mislead consumers. Furthermore, an advertisement will be deemed as a “false advertisement” if any of the following situations exist: (i) the advertised product or service does not exist; (ii) there is any inconsistency that has a material impact on the decision to purchase in what is included in the advertisement with the actual circumstances with respect to the product’s performance, functions, place of production, uses, quality, specification, ingredient, price, producer, term of validity, sales condition, and honors received, among others, or the service’s contents, provider, form, quality, price, sales condition, and honors received, among others, or any commitments, among others, made on the product or service; (iii) fabricated, forged or unverifiable scientific research results, statistical data, investigation results, excerpts, quotations, or other information have been used as supporting material; (iv) effect or results of using the good or receiving the service are fabricated; or (v) other circumstances where consumers are defrauded or misled by any false or misleading content. 

Our current marketing relies on advertisements on media platforms. The laws and regulations of advertising are relatively new and evolving and there is substantial uncertainty as to the interpretation of “false advertisement” by the State Administration for Industry and Commerce (the “SAIC”). If any of the advertisements published by our customers is deemed to be a “false advertisement” by the SAIC or its local branch, we could be subject to various penalties, such as discontinuation of publishing the target advertisement, imposition of fines and obligations to eliminate any adverse effects incurred by such false advertisement. Any such penalties may disrupt our business and our competition with competitors, which could affect our results of operations and financial conditions. 

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We were not in compliance with the PRC’s regulations relating to employee’s social insurance and housing funds prior to April 2020, and as a result, we may be subject to penalties for such non-compliance.

 

Pursuant to the Social Insurance Law of the PRC (the “Social Insurance Law”), which was promulgated by the SCNPC on October 28, 2010 and amended on December 29, 2018, and the Administrative Regulations on the Housing Provident Funds, which was promulgated by the State Council on April 3, 1999 and last amended on March 24, 2019, employers are required to make contributions, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, occupational injury insurance, maternity insurance and to housing provident funds. Prior to April 2020, we only contributed to the social insurance and housing provident funds for some, but not all, of our employees. Since April 2020, we have started contributing to the social insurance and housing funds for our eligible full-time employees in accordance with the aforementioned PRC laws and regulations. Even though we are currently making contributions in accordance with applicable PRC laws, there is a risk that the labor security administration authority may take enforcement action to collect from us all the outstanding contributions of the social insurance and housing provident funds required to be made for the employees in the past, and we may be subject to a late charge at the rate of 0.05% per day on the total outstanding contribution.

 

U.S. regulatory bodies may be limited in their ability to conduct investigations or inspections of our operations in China.

 

The Securities and Exchange Commission (the “SEC”), the U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or executive officers in the PRC. The SEC has stated that there are significant legal and other obstacles to obtaining information needed for investigations or litigation in China. China has recently adopted a revised securities law that became effective on March 1, 2020, Article 177 of which provides, among other things, that no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Accordingly, without governmental approval in China, no entity or individual in China may provide documents and information relating to securities business activities to overseas regulators when it is under direct investigation or evidence discovery conducted by overseas regulators, which could present significant legal and other obstacles to obtaining information needed for investigations and litigation conducted outside of China.

 

You may experience difficulty in effecting service of process, enforcing foreign judgments or bringing actions against our directors and officers.

 

We are a Cayman Islands exempted company with limited liability and most of our assets are located outside of the United States. In addition, all of our directors and executive officers are residents of the PRC, and substantially all of their assets and our assets are located in the PRC. As a result, it may be difficult or impossible for you to effect service of process within the United States upon our directors and executive officers. It may also be difficult for you to enforce in the United States courts judgments obtained in the United States courts based on the civil liability provisions of the United States federal securities laws against us and our officers and directors who reside and whose assets are located outside the United States. 

 

In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of the United States courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. 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. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. 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 United States.

  

Further, pursuant to the PRC Civil Procedures Law, any matter, including matters arising under U.S. federal securities laws, in relation to assets or personal relationships may be brought as an original action in China, only if the institution of such action satisfies the conditions specified in the PRC Civil Procedures Law. As a result of the conditions set forth in the PRC Civil Procedures Law and the discretion of the PRC courts to determine whether the conditions are satisfied and whether to accept the action for adjudication, there remains uncertainty as to whether an investor will be able to bring an original action in a PRC court based on U.S. federal securities laws.

 

Because our business is conducted in the RMB and the price of our Ordinary Shares is quoted in United States dollars, changes in currency conversion rates may affect the value of your investments.

 

Our business is conducted in the PRC, our books and records are maintained in the RMB, the legal currency of the PRC, and the financial statements that we file with the SEC and provide to our shareholders are presented in United States dollars. Changes in the exchange rate between the RMB and dollar affect the value of our assets and the results of our operations in United States dollars. The value of the RMB against the United States dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenue and financial condition. Further, our Ordinary Shares offered by this prospectus are offered in United States dollars, we will need to convert the net proceeds we receive into RMB in order to use the funds for our business. Changes in the conversion rate between the United States dollar and the RMB will affect that amount of proceeds we will have available for our business.

 

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Government control in currency conversion may adversely affect our financial condition and ability to remit dividends

 

Currently, the RMB cannot be freely converted into any foreign currency, and conversion and remittance of foreign currencies are subject to PRC foreign exchange regulations. It cannot be guaranteed that under a certain exchange rate, we will have sufficient foreign exchange to meet our foreign exchange requirements. Under the current PRC foreign exchange control system, foreign exchange transactions under the current account conducted by us, including the payment of dividends, do not require advance approval from SAFE, but we are required to present documentary evidence of such transactions and conduct such transactions at designated foreign exchange banks within China that have the licenses to carry out foreign exchange business. Foreign exchange transactions under the capital account conducted by us, however, must be approved in advance by SAFE.

 

Under existing foreign exchange regulations, following the completion of this offering, we will be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, we cannot assure you that these foreign exchange policies regarding payment of dividends in foreign currencies will continue in the future. In addition, any insufficiency of foreign exchange may restrict our ability to obtain sufficient foreign exchange for dividend payments to shareholders or to satisfy any other foreign exchange requirements. If we fail to obtain approval from SAFE to convert the RMB into any foreign exchange for any of the above purposes, our capital expenditure plans, and even our business, operating results and financial condition, may be materially and adversely affected.

 

Our business may be materially and adversely affected if any of our PRC subsidiaries declare bankruptcy or become subject a dissolution or liquidation proceeding.

 

The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.

 

Our PRC subsidiaries hold certain assets that are important to our business operations. If any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

According to SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if any of our PRC subsidiaries undergoes a voluntary or involuntary liquidation proceeding, prior approval from SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.

 

Our current corporate structure and business operations may be affected by the newly enacted PRC Foreign Investment Law.

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became effective on January 1, 2020. The PRC Foreign Investment Law defines the “foreign investment” as the investment activities in China conducted directly or indirectly by foreign investors in the following manners: (i) the foreign investor, by itself or together with other investors establishes a foreign invested enterprises in China; (ii) the foreign investor acquires shares, equities, asset tranches, or similar rights and interests of enterprises in China; (iii) the foreign investor, by itself or together with other investors, invests and establishes new projects in China; (iv) the foreign investor invests through other approaches as stipulated by laws, administrative regulations or otherwise regulated by the State Council. If our PRC subsidiaries are recognized as “foreign investment enterprises,” PRC governmental authorities will regulate foreign investment by applying the principle of re-entry national treatment together with a “negative list,” which will be promulgated by or promulgated with approval by the State Council. Foreign investors are prohibited from making any investments in the industries which are listed as “prohibited” in such negative list; and, after satisfying certain additional requirements and conditions as set forth in the “negative list,” are allowed to make investments in industries which are listed as “restricted” in such negative list. For any foreign investor that fails to comply with the negative list, the competent authorities are entitled to ban its investment activities, require such investor to take measures to correct its non-compliance and impose other penalties.

 

Pharmaceutical production and distribution activities that we conduct through our PRC subsidiaries are not subject to foreign investment restrictions or prohibitions set forth in the Special Administrative Measures for the Access of Foreign Investment (Negative List) (Edition 2019) (the “2019 Negative List”). We do not intend to conduct any types of business activities restricted or prohibited under the 2019 Negative List in the future. However, it is unclear whether any updated “negative list” to be published by the State Council in the future will be different from the 2019 Negative List. If future laws, administrative regulations or provisions of the State Council set forth restrictions or prohibitions on foreign investment in our current business activities, and that our PRC subsidiaries are recognized as “foreign investment enterprises,” we may be required to take appropriate and timely measures to comply with such regulatory requirements. If we fail to do so, our business operations could be materially and adversely affected.

   

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, may limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, may limit the ability of our PRC subsidiaries to distribute profits to us or may otherwise materially and adversely affect us

 

Pursuant to the Circular on relevant issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicle (《关于境内居民通过特殊目的公司境外投融资及返程投资外汇管理有关问题的通知》) (the “Circular 37”), which was promulgated by SAFE, and became effective on July 4, 2014, (1) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle, or an Overseas SPV, that is directly established or indirectly controlled by the PRC resident for the purpose of conducting investment or financing; and (2) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change in the Overseas SPV’s PRC resident shareholder, name of the Overseas SPV, term of operation, or any increase or reduction of the contributions by the PRC resident, share transfer or swap, and merger or division. Additionally, pursuant to the Circular of SAFE on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies (《关于进一步简化和改进直接投资外汇管理政策的通知》) (the “Circular 13”), which was promulgated on February 13, 2015 and became effective on June 1, 2015, the aforesaid registration shall be directly reviewed and handled by qualified banks in accordance with the Circular 13, and SAFE and its branches shall perform indirect regulation over the foreign exchange registration via qualified banks.

 

As confirmed by our PRC counsel, Mr. Gang Lai completed the initial foreign exchange registration on June 3, 2019. As it remains unclear how Circular 37 and Circular 13 will be interpreted and implemented, and how or whether SAFE will apply them to us. Therefore, we cannot predict how they will affect our business operations or future strategies. For example, the ability of our present and prospective PRC subsidiaries to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 and Circular 13 by our PRC resident beneficial holders. In addition, as we have little control over either our present or prospective, direct or indirect Shareholders or the outcome of such registration procedures, we cannot assure you that these Shareholders who are PRC residents will amend or update their registration as required under Circular 37 and Circular 13 in a timely manner or at all. Failure of our present or future shareholders who are PRC residents to comply with Circular 37 and Circular 13 could subject these shareholders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit the ability of our PRC subsidiaries to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations and certain other PRC regulations.

 

On August 8, 2006, six PRC regulatory authorities, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration of Taxation (the “SAT”), the SAIC, the China Securities Regulatory Commission (the “CSRC”) and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (《关于外国投资者并购境内企业的规定》) (the “M&A Rules”), which became effective on September 8, 2006 and was amended in June 2009. The M&A Rules, governing the approval process by which a PRC company may participate in an acquisition of assets or equity interests by foreign investors, requires the PRC parties to make a series of applications and supplemental applications to the government agencies, depending on the structure of the transaction. In some instances, the application process may require presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Accordingly, due to the M&A Rules, our ability to engage in business combination transactions has become significantly more complicated, time-consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our Shareholders or sufficiently protect their interests in a transaction.

 

The M&A Rules allow PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the MOFCOM and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The M&A Rules also prohibit a transaction at an acquisition price obviously lower than the appraised value of the business or assets in China and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. In addition, the M&A Rules also limit our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on legal and/or financial terms that satisfy our investors and protect our shareholders’ economic interests.

 

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We face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

The SAT released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which became effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698 has the effect of taxing foreign companies on gains derived from the indirect sale of a PRC company. Where a foreign investor indirectly transfers equity interests in a PRC resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction that has an effective tax rate less than 12.5% or does not tax foreign income of its residents, the foreign investor must report this indirect transfer to the tax authority in charge of that PRC resident enterprise. 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 avoiding PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC withholding tax at a rate of up to 10.0%.

 

SAT subsequently released public notices to clarify issues relating to Circular 698, including the Announcement on Several Issues concerning the EIT on the Indirect Transfers of Properties by Nonresident Enterprises (《关于非居民企业间接转让财产企业所得税若干问题的公告》) (the “SAT Notice 7”), which became effective on February 3, 2015. SAT Notice 7 abolished the compulsive reporting obligations originally set out in Circular 698. Under SAT Notice 7, if a non-resident enterprise transfers its shares in an overseas holding company, which directly or indirectly owns PRC taxable properties, including shares in a PRC company, via an arrangement without reasonable commercial purpose, such transfer shall be deemed as indirect transfer of the underlying PRC taxable properties. Accordingly, the transferee shall be deemed as a withholding agent with the obligation to withhold and remit the EIT to the competent PRC tax authorities. Factors that may be taken into consideration when determining whether there is a “reasonable commercial purpose” include, among other factors, the economic essence of the transferred shares, the economic essence of the assets held by the overseas holding company, the taxability of the transaction in offshore jurisdictions, and economic essence and duration of the offshore structure. SAT Notice 7 also sets out safe harbors for the “reasonable commercial purpose” test.

 

On October 17, 2017, the SAT released the Notice on Several Issues concerning the Withholding and Collection of Income Tax of Non-resident Enterprises from the Source (《关于非居民企业所得税源泉扣缴有关问题的公告》) (the “SAT Notice 37”). SAT Notice 37 clarifies: (1) matters concerning the withholding and collection of corporate income tax, and property transfer of non-resident enterprises based on the EIT Law; (2) the currencies required to be used by the withholding agents (when the payments is made in a currency rather than RMB), as well as the time, venue and business for the performance of the withholding and collection obligations; and (3) the abolishment of Circular 698.

 

There is little guidance and practical experience regarding the application of SAT Notice 7 and SAT Notice 37 and the related SAT notices. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax rates in foreign tax jurisdictions. As a result, due to our complex offshore restructuring, we may become at risk of being taxed under SAT Notice 7 and SAT Notice 37 and we may be required to expend valuable resources to comply with SAT Notice 7 and SAT Notice 37 or to establish that we should not be taxed under SAT Notice 7 and SAT Notice 37, which could have a material adverse effect on our financial condition and results of operations.

 

Risks Related to the Offering and our Ordinary Shares

 

The initial public offering price of our Ordinary Shares may not be indicative of the market price of our Ordinary Shares after this offering. In addition, an active, liquid and orderly trading market for our Ordinary Shares may not develop or be maintained, and our share price may be volatile.

 

Prior to this offering, our Ordinary Shares were not traded on any market. Any active, liquid and orderly trading market for our Ordinary Shares may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of our Ordinary Shares could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our Ordinary Shares, you could lose a substantial part or all of your investment in our Ordinary Shares. The initial public offering price will be determined by us, based on numerous factors and may not be indicative of the market price of our Ordinary Shares after this offering. Consequently, you may not be able to sell our Ordinary Shares at a price equal to or greater than the price paid by you in this offering.

 

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The following factors could affect our share price:

 

  our operating and financial performance;
     
  quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and revenues;
     
  the public reaction to our press releases, our other public announcements and our filings with the SEC;
     
  strategic actions by our competitors;
     
  changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;
     
  speculation in the press or investment community;
     
  the failure of research analysts to cover our Ordinary Shares;
     
  sales of our Ordinary Shares by us or other shareholders, or the perception that such sales may occur;
     
  changes in accounting principles, policies, guidance, interpretations or standards;
     
  additions or departures of key management personnel;
     
  actions by our shareholders;
     
  domestic and international economic, legal and regulatory factors unrelated to our performance; and
     
  the realization of any risks described under this “Risk Factors” section.

 

The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Ordinary Shares. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, diver our management’s attention and resources and harm our business, operating results and financial condition.

 

There may not be an active, liquid trading market for our Ordinary Shares.

 

Prior to this offering, there has been no public market for our Ordinary Shares. An active trading market for our Ordinary Shares may not develop or be sustained following this offering. You may not be able to sell your shares at the market price, if at all, if trading in our shares is not active. The initial public offering price was determined by negotiations between us and our advisors based upon a number of factors. The initial public offering price may not be indicative of prices that will prevail in the trading market.

 

You will experience immediate and substantial dilution.

 

The initial public offering price of our shares is substantially higher than the pro forma net tangible book value per share of our Ordinary Shares. Assuming the completion of the offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $[] per share or approximately []% from the offering price of $[] per share, and after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

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Shares eligible for future sale may adversely affect the market price of our Ordinary Shares if the shares are successfully listed on [New York Stock Exchange/Nasdaq Capital Market] or other stock markets, as the future sale of a substantial amount of outstanding Ordinary Shares in the public marketplace could reduce the price of our Ordinary Shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Ordinary Shares. An aggregate of [] shares will be outstanding before the consummation of this offering all of which, except those held by management, are or will be freely tradable immediately upon effectiveness of this registration statement. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”

 

We are a “controlled company” within the meaning of the [NYSE listing rules/Nasdaq Stock Market Rules] and, as a result, may rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

 

We are a “controlled company” as defined under [Rule 5615(c)(1) of the Nasdaq Marketplace Rules/ NYSE Listed Company Manual 303A.00] because Mr. Gang Lai holds more than 50% of our voting power, and we expect we will continue to be a controlled company upon completion of this offering. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from the obligation to comply with certain corporate governance requirements, including:

 

  the requirement that our director nominees must be selected or recommended solely by independent directors; and
     
  the requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

 

As a result, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the [NYSE listing rules/NASDAQ Stock Market Rules], if we utilize such exemptions. We currently do not intend to utilize the controlled company exemptions.

 

A sale or perceived sale of a substantial number of our Ordinary Shares may cause the price of our Ordinary Shares to decline.

 

If our shareholders sell substantial amounts of our Ordinary Shares in the public market, the market price of our Ordinary Shares could fall. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short our ordinary shares. These sales also make it more difficult for us to sell equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any further earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Ordinary Shares if we are successfully listed and the market price of our Ordinary Shares increases.

 

We will incur substantial increased costs as a result of being a public company.

 

Upon consummation of this offering, we will incur significant legal, accounting and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and[the New York Stock Exchange/Nasdaq], impose various requirements on the corporate governance practices of public companies.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers.

 

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We are an “emerging growth company,” as defined in the JOBS Act and will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Ordinary Shares that is held by non-affiliates exceeds $700 million as of the prior March 31, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

After we are no longer an “emerging growth company,” or until five years following the completion of our initial public offering, whichever is earlier, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures.

 

We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

There can be no assurance that we will not be a passive foreign investment company (“PFIC”) for United States federal income tax purposes for any taxable year, which could subject United States holders of our Ordinary Shares could be subject to adverse United States federal income tax consequences.

 

A non-United States corporation will be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (i) at least 75% of its gross income for such taxable year is passive income or (ii) at least 50% of the value of its assets (based on average of the quarterly values of the assets) during such year is attributable to assets that that produce or are held for the production of passive income. Based on the current and anticipated value of our assets and the composition of our income assets, we do not expect to be a PFIC for United States federal income tax purposes for our current taxable year ended September 30, 2020 or in the foreseeable future. However, the determination of whether or not we are a PFIC according to the PFIC rules is made on an annual basis and depend on the composition of our income and assets and the value of our assets from time to time. Therefore, changes in the composition of our income or assets or value of our assets may cause us to become a PFIC. The determination of the value of our assets (including goodwill not reflected on our balance sheet) may be based, in part, on the quarterly market value of Ordinary Shares, which is subject to change and may be volatile.

 

The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations as well as certain IRS guidance relating to the classification of assets as producing active or passive income. Such regulations guidance are potentially subject to different interpretations. If due to different interpretations of such regulations and guidance the percentage of our passive income or the percentage of our assets treated as producing passive income increases, we may be a PFIC in one of more taxable years.

 

If we are a PFIC for any taxable year during which a United States person holds Ordinary Shares, certain adverse United States federal income tax consequences could apply to such United States person. See “Taxation – Certain United States Federal Income Tax Considerations – Passive Foreign Investment Company.”

 

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

 

We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (i) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act, (ii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) provide certain disclosure regarding executive compensation required of larger public companies, or (iv) hold nonbinding advisory votes on executive compensation. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700 million in market value of our Ordinary Shares held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

 

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To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our Ordinary Shares to be less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile.

 

If we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

 

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal controls over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the years ended September 30, 2019 and 2018, we identified several material weaknesses in our internal control over financial reporting and other control deficiencies as of September 30, 2019. 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 the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses identified to date relate to (i) a lack of accounting staff and resources with appropriate knowledge of generally accepted accounting principles in the United States (“U.S. GAAP”) and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; (iii) a lack of independent directors and an audit committee; (iv) lack of risk assessment in accordance with the requirement of COSO 2013 framework and (v) a lack of an effective review process by the accounting manager which led to material audit adjustments to the financial statements.

 

Following the identification of the material weaknesses and control deficiencies, we plan to continue to take remedial measures including (i) hiring more qualified accounting personnel with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) setting up an internal audit function as well as engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors, establishing an audit committee, and strengthening corporate governance.

 

We plan to take measures to remedy these material weaknesses. The implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct theses material weaknesses or our failure to discover and address any other material weaknesses could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our Ordinary Shares, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinders our ability to prevent fraud. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report from management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending September 30, 2021. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

 

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During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. Generally speaking, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our Ordinary Shares, if and when they trade. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

 

As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual general meetings will be governed by Cayman Islands requirements. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our Ordinary Shares.

 

As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the [New York Stock Exchange listing rules/Nasdaq listing standards]. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.

 

As a foreign private issuer, we are permitted to take advantage of certain provisions in the [New York Stock Exchange listing rules/Nasdaq listing standards] that allow us to follow Cayman Islands law for certain governance matters. Certain corporate governance practices in the Cayman Islands may differ significantly from corporate governance listing standards as, except for general fiduciary duties and duties of care, Cayman Islands law has no corporate governance regime which prescribes specific corporate governance standards. Currently, we do not intend to rely on home country practice with respect to our corporate governance after we complete with this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

 

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our Ordinary Shares are directly or indirectly held by residents of the U.S. and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the [New York Stock Exchange listing rules/Nasdaq listing standards]. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange.

 

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We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

 

To the extent (i) we raise more money than required for the purposes explained in the section titled “Use of Proceeds” or (ii) we determine that the proposed uses set forth in that section are no longer in the best interests of our Company, we cannot specify with any certainty the particular uses of such net proceeds that we will receive from our initial public offering. Our management will have broad discretion in the application of such net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our shareholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value.

 

The price of the Ordinary Shares and other terms of this offering have been determined by us along with our underwriter.

 

If you purchase our Ordinary Shares in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that was determined by us along with our underwriter. The offering price for our Ordinary Shares may bear no relationship to our assets, book value, historical results of operations or any other established criterion of value. The trading price, if any, of the Ordinary Shares that may prevail in any market that may develop in the future, for which there can be no assurance, may be higher or lower than the price you paid for our Ordinary Shares.

 

The laws of the Cayman Islands may not provide our shareholders with benefits comparable to those provided to shareholders of corporations incorporated in the United States.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (2020 Revision) of the Cayman Islands and by the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law in the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands and from English common law. Decisions of the Privy Council (which is the final Court of Appeal for British overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts, and particularly the Supreme Court and the Court of Appeal are generally of persuasive authority but are not binding in the courts of the Cayman Islands. Decisions of courts in other Commonwealth jurisdictions are similarly of persuasive but not binding authority. 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 relative to the United States. Therefore, our public shareholders may have more difficulty protecting their interests in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

You may be unable to present proposals before annual general meetings or extraordinary general meetings not called by shareholders.

 

Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. These rights, however, may be provided in a company’s amended and restated articles of association. Our amended and restated articles of association allow our shareholders holding shares representing in aggregate not less than 10% of our voting share capital in issue, to requisition a general meeting of our shareholders, in which case our directors are obliged to call such meeting. Advance notice of at least 21 clear days is required for the convening of our annual general shareholders’ meeting and at least 14 days’ notice any other general meeting of our shareholders. A quorum required for a meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of the total issued shares carrying the right to vote at a general meeting of the Company.

 

The obligation to disclose information publicly may put us at a disadvantage to competitors that are private companies.

 

Upon completion of this offering, we will be a public company in the United States. As a public company, we will be required to file periodic reports with the Securities and Exchange Commission upon the occurrence of matters that are material to our Company and shareholders. Although we may be able to attain confidential treatment of some of our developments, in some cases, we will need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with our Company. Similarly, as a U.S. public company, we will be governed by U.S. laws that our competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases our expenses or decreases our competitiveness against such companies, our public company status could affect our results of operations.

 

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that reflect our current expectations and views of future events, all of which are subject to risks and uncertainties. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by the use of words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “will,” “would,” “should,” “could,” “may” or other similar expressions in this prospectus. These statements are likely to address our growth strategy, financial results and product and development programs. You must carefully consider any such statements and should understand that many factors could cause actual results to differ from our forward-looking statements. These factors may include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  assumptions about our future financial and operating results, including revenues, income, expenditures, cash balances and other financial items;
     
  our ability to execute our growth, and expansion, including our ability to meet our goals;
     
  current and future economic and political conditions;
     
  our ability to compete in the highly-competitive Chinese patent medicine industry;
     
  our capital requirements and our ability to raise any additional financing which we may require;
     
  our ability to attract clients and further enhance our brand recognition;
     
  our ability to hire and retain qualified management personnel and key employees in order to enable us to develop our business;
     
  trends and competition in the Chinese patent medicine industry; and
     
  other assumptions described in this prospectus underlying or relating to any forward-looking statements.

 

We describe certain material risks, uncertainties and assumptions that could affect our business, including our financial condition and results of operations, under “Risk Factors.” We base our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may, and are likely to, differ materially from what is expressed, implied or forecast by our forward-looking statements. Accordingly, you should be careful about relying on any forward-looking statements. Except as required under the federal securities laws, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this prospectus, whether as a result of new information, future events, changes in assumptions, or otherwise.

 

Industry Data and Forecasts

 

This prospectus contains data related to the Chinese patent medicine industry in China. This industry data includes projections that are based on a number of assumptions which have been derived from industry and government sources which we believe to be reasonable. The Chinese patent medicine industry may not grow at the rate projected by industry data, or at all. The failure of these industries to grow as anticipated is likely to have a material adverse effect on our business and the market price of our Ordinary Shares. In addition, the rapidly changing nature of the Chinese patent medicine industry subjects any projections or estimates relating to the growth prospects or future condition of our industries to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the industry data turns out to be incorrect, actual results may, and are likely to, differ from the projections based on these assumptions.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

 

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We incorporated under the laws of 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. The Cayman Islands, however, has a less developed body of securities laws as compared to the United States and provides significantly less protection for investors than the United States. Additionally, Cayman Islands companies may not have standing to sue in the Federal courts of the United States.

 

Substantially all of our assets are located in the PRC. In addition, all of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed Hunter Taubman Fischer & Li LLC as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

 

Ogier, our counsel with respect to the laws of the Cayman Islands, and AllBright Law Offices, our counsel with respect to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC 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 in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Ogier has further advised us that there is currently no statutory enforcement or treaty between the United States and the Cayman Islands providing for enforcement of judgments. A judgment obtained in the United States, however, may be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination on the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment: (i) is given by a foreign court of competent jurisdiction; (ii) is final; (iii) is not in respect of taxes, a fine or a penalty; and (iv) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy of the Cayman Islands. Furthermore, it is uncertain that Cayman Islands courts would enforce: (1) judgments of U.S. courts obtained in actions against us or other persons that are predicated upon the civil liability provisions of the U.S. federal securities laws; or (2) original actions brought against us or other persons predicated upon the Securities Act. Ogier has informed us that there is uncertainty with regard to Cayman Islands law relating to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature.

 

AllBright Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. There are no treaties or other forms of reciprocity between China and the United States for the mutual recognition and enforcement of court judgments. AllBright Law Offices has further advised us that under PRC law, PRC courts will not enforce a foreign judgment against us or our officers and directors if the court decides that such judgment violates the basic principles of PRC law or national sovereignty, security or public interest, thus making the recognition and enforcement of a U.S. court judgment in China difficult.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $[●] per Ordinary Share and assuming the underwriter exercises its over-allotment option in full, we estimate that we will receive net proceeds from this offering, after deducting the estimated underwriting discounts, non-accountable expense allowance, and the estimated offering expenses payable by us, of approximately $[●].

 

We plan to use the net proceeds we receive from this offering for the following purposes:

 

  approximately []% for [      ];
     
  approximately []% for [      ];
     
  approximately []% for [      ]; and
     
  The balance to fund working capital and for other general corporate purposes.

 

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering.

 

If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors — Risks Relating to the Offering and Our Ordinary Shares — We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.”

 

To the extent that the net proceeds we receive from this offering are not immediately used for the above purposes, we intend to invest our net proceeds in short-term, interest-bearing bank deposits or debt instruments.

 

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DIVIDEND POLICY

 

Our board of directors has discretion on whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that the company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

 

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

 

We are an exempted company with limited liability incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us.

 

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of our Ordinary Shares to the depositary, as the registered holder of such Ordinary Shares, and the depositary then will pay such amounts to the holders of our Ordinary Share, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of Share Capital.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2019:

 

  on an actual basis; and
     
  on an as adjusted basis to reflect the issuance and sale of the Ordinary Shares by us in this offering at the assumed initial public offering price of $[●] per Ordinary Share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of the underwriter’s over-allotment option.

 

You should read this capitalization table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

   September 30,
2019
 
   Actual   Pro Forma As Adjusted 
   US$   US$ 
Long-term loans  $    $            
           
Equity          
Share capital $1.00 par value, 50,000 Ordinary Shares authorized, 50,000 Ordinary Shares issued and outstanding as of September 30, 2019; [●] Ordinary Shares issued and outstanding, as adjusted   50,000      
Additional paid-in capital(1)   3,679,000      
Statutory reserve   2,439,535      
Retained earnings   6,180,757      
Accumulated other comprehensive income   34,767      
Total shareholders’ equity   12,384,059      
           
Adjusted total capitalization   12,384,059      

 

(1) Reflects the sale of Ordinary Shares in this offering at an assumed initial public offering price of $[●] per share, and after deducting the estimated underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. Additional paid-in capital reflects the net proceeds we expect to receive, after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. We estimate that such net proceeds will be approximately $[●].

 

A $1.00 increase (decrease) in the assumed initial public offering price of $[●] per Ordinary Share would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $[●] million, assuming the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts, non-accountable expense allowance and estimated expenses payable by us.

 

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DILUTION

 

If you invest in our Ordinary Shares, your interest will be diluted for each Ordinary Share you purchase to the extent of the difference between the initial public offering price per Ordinary Share and our net tangible book value per Ordinary Share after this offering. Dilution results from the fact that the initial public offering price per Ordinary Share is substantially in excess of the net tangible book value per Ordinary Share attributable to the existing shareholders for our presently outstanding Ordinary Shares.

  

Our net tangible book value as of September 30, 2019, was $12,384,059, or $247.7 per Ordinary Share. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting the net tangible book value per Ordinary Share (as adjusted for the offering) from the initial public offering price per Ordinary Share and after deducting the underwriting discounts, non-accountable expense allowance, and the estimated offering expenses payable by us.

 

After giving effect to our sale of [●] Ordinary Shares offered in this offering based on the initial public offering price of $[●] per Ordinary Share after deduction of the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us, our as adjusted net tangible book value as of September 30, 2019, would have been $[●], or $[●] per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $[●] per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $[●] per Ordinary Share to investors purchasing Ordinary Shares in this offering. The as adjusted information discussed above is illustrative only.

 

The following table illustrates such dilution:

 

   Post-Offering(1)   Full Exercise of Over-Allotment Option 
Assumed Initial public offering price per Ordinary Share  $                    $           
Net tangible book value per Ordinary Share as of September 30, 2019  $    $  
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $    $  
Pro forma net tangible book value per Ordinary Share immediately after this offering  $    $  
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $    $  

 

(1) Assumes that the underwriter’s over-allotment option has not been exercised.

 

If the underwriter exercises its over-allotment option in full, the pro forma as adjusted net tangible book value per Ordinary Share after the offering would be $[●], the increase in net tangible book value per Ordinary Share to existing shareholders would be $[●], and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $[●].

 

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2019, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share before deducting the underwriting discounts, non-accountable expense allowance, and the estimated offering expenses payable by us.

 

   Ordinary Shares
purchased
   Total consideration   Average
price per
Ordinary
 
   Number   Percent   Amount   Percent   Share 
   ($ in thousands) 
Existing shareholders                     %  $               %  $            
New investors               %  $             %  $  
Total         %  $      %  $  

 

The pro forma as adjusted information as discussed above is illustrative only. Our net income book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our Ordinary Shares and other terms of this offering determined at the pricing.

 

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CORPORATE HISTORY AND STRUCTURE

 

Our Corporate History

 

We initially conducted our business through Jiangxi Universe Pharmaceuticals Co., Ltd. (“Jiangxi Universe”), a PRC company incorporated in 1998 and Jiangxi Universe Pharmaceuticals Trade Co., Ltd. (“Universe Trade”), a PRC company incorporated in 2010, a wholly owned subsidiary of Jiangxi Universe.

 

With the growth of our business and in order to facilitate international capital investment in our Company, we underwent an offshore reorganization in 2019 and 2020. On December 11, 2019, our holding company, Universe Pharmaceuticals INC (“Universe INC”), was incorporated under the laws of the Cayman Islands as an exempted company with limited liability. Our wholly owned subsidiary Universe Pharmaceuticals Group (International) Limited (“Universe HK”) was incorporated in Hong Kong on May 21, 2018 as an intermediate holding company. Universe HK in turn holds all the capital stocks of Jiangxi Universe Pharmaceuticals Technology Co., Ltd. (“Universe Technology”), a wholly foreign owned enterprise incorporated in China on Aril 8, 2019. Universe Technology holds all the capital stocks and controls Jiangxi Universe. Jiangxi Universe holds 100% of the equity interests in Universe Trade.

 

Universe INC is a holding company with no business operation other than holding the shares in Universe HK; Universe HK is a pass-through entity with no business operation. Universe Technology is exclusively engaged in the business of managing the operation of Jiangxi Universe. Jiangxi Universe specializes in manufacturing our own TCMD products. Universe Trade specializes in the distribution and sales of our own TCMD products and third-party pharmaceutical products.

 

Foshan Shangyu Investment Holding Co., Ltd. (“Foshan Shangyu”) is our affiliated entity, 90% owned by and controlled by Mr. Gang Lai, our controlling shareholder. Foshan Shangyu was formed in 2004 in China as a holding company of Mr. Gang Lai. Foshan Shangyu has no business operations.

 

Our principal executive offices are located at 265 Jingjiu Avenue, Jingji Jishu District, Jinggangshan, Ji’an, Jiangxi Province, People’s Republic of China. Our phone number is +86-0796-8404999. Our registered office in the Cayman Islands is located at Vistra (Cayman) Limited, P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KYI – 1205 Cayman Islands, and the phone number of our registered office is +1-(345)769-9372.

 

Our Corporate Structure

 

The following diagram illustrates our corporate structure, including our subsidiaries, as of the date of this prospectus and upon completion of this offering based on a proposed number of [●] Ordinary Shares being offered.

 

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For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principal Shareholders.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. 

   

Overview

 

We are a pharmaceutical company specializing in the development, manufacturing, marketing and sale of traditional Chinese medicine derivatives (“TCMD”) products targeted to the elderly to address their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products and sell them in 280 cities in 31 provinces in China as of the date of this prospectus. In addition, we also sell biomedical drugs, medical instruments, traditional Chinese medicine pieces (“TCMP”) products and dietary supplements manufactured by third-party pharmaceutical companies (collectively referred to as “third-party products”).

 

Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains, primarily located in Jiangxi Province, Jiangsu Province, Guangdong Province, Hubei Province, Fujian Province, Guangxi Province and Shandong Province, and 24 other provinces in China.

 

We have been profitable since 2015 and we believe we are well-positioned to benefit from the rapid growth of the TCMD market in China and to leverage the leading market position of our flagship products in order to further grow our business.

 

Our Organization

 

Universe INC was incorporated under the laws of the Cayman Islands on December 11, 2019 as an exempted company with limited liability.

 

Universe INC owns 100% equity interest of Universe HK, an entity incorporated on May 21, 2018 in accordance with the laws and regulations in Hong Kong.

 

Universe Technology was formed on April 8, 2019, as a WOFE in the PRC.

 

Universe INC, Universe HK and Universe Technology are currently not engaging in any active business operations and merely acting as holding companies.

 

Jiangxi Universe was incorporated on March 2, 1998 in accordance with PRC laws and is engaged in the research and development and manufacturing of modernized traditional Chinese medicines. Jiangxi Universe’s subsidiary, Universe Trade, which was incorporated on March 10, 2010, handles the sales and distribution of the pharmaceutical products manufactured by Jiangxi Universe and third-party pharmaceutical manufacturers.

 

Reorganization

 

A reorganization of our legal structure (“Reorganization”) was completed on December 11, 2019. The reorganization involved the incorporation of Universe INC and Universe Technology, and the transfer of the 100% equity interest of Jiangxi Universe to Universe Technology. Consequently, Universe INC, through its subsidiary Universe HK, directly controls Universe Technology and Jiangxi Universe, and became the ultimate holding company of all other entities mentioned above.

 

The Reorganization has been accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the Reorganization. The consolidation of Universe INC and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. Results of operations for the periods presented comprise those of the previously separate entities combined from the beginning of the period to the end of the period, eliminating the effects of intra-entity transactions.

 

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Our revenues increased by $4,715,136, or 16.5%, from $28,514,180 for the fiscal year ended September 30, 2018, to $33,229,316 for the fiscal year ended September 30, 2019. Revenues from sales of TCMD products manufactured by us accounted for 62.9% and 61.8% of our total revenues for the fiscal years ended September 30, 2019 and 2018, respectively, revenues from sales of TC products manufactured by third-party pharmaceutical companies accounted for 37.1% and 38.2% of our total revenues for the fiscal years ended September 30, 2019 and 2018, respectively.

  

The following table illustrates the amount and percentage of our revenue derived from our different products sold:

 

   For the Years Ended September 30, 
   2019   2018 
   Amount   % of revenue   Amount   % of revenue 
Revenue from sales of self-manufactured TCMD products  $20,895,542    62.9%  $17,620,823    61.8%
Revenue from sales of third-party products   12,333,774    37.1%   10,893,357    38.2%
Total revenue  $33,229,316    100.0%  $28,514,180    100.0%

 

Key Factors that Affect Our Results of Operations

 

We believe the following key factors may affect our financial condition and results of operations:

 

Our Ability to Attract Additional Customers and Increase the Spending Per Customer

 

Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains. We currently sell our products to these customers in 243 cities in 30 provinces in China, with significant customers located in Jiangxi Province, Jiangsu Province, Guangdong Province, Hubei Province, Fujian Province, Guangxi Province and Shandong Province in China. For the years ended September 30, 2019 and 2018, we had total 2,603 and 1,518 customers, and no single customer accounted for more than 10% of our total revenue, respectively. However, our top 10 customers in the aggregate accounted for 34.5% and 31.6% of our total revenues, respectively. Our dependence on a small number of larger customers could expose us to the risk of substantial losses if a single large customer stops purchasing our products, purchases fewer of our products or goes out of business and we cannot find substitute customers on equivalent terms. If any of our significant customers reduces the quantity of the products they purchase from us or stops purchasing from us, our net revenues would be materially and adversely affected. Therefore, the success of our business in the future depends on our effective marketing efforts to expand our distribution network including additional cities and rural areas in the PRC in an effort to increase our geographic appearance. The success of expansion will depend upon many factors, including our ability to form relationships with, and manage an increasing number of, customers base and optimize our distribution network. If our marketing efforts fail to convince customers to accept our products, we may find it difficult to maintain the existing level of sales or to increase such sales. Should this happen, our net revenues would decline and our growth prospectus would be severely impaired.

 

Our Ability to Increase Awareness of Our Brand and Develop Customer Loyalty

 

Our brand, such as “Bai Nian Dan (百年丹)” and “Hu Zhuo Ren (胡卓人)”, are well-recognized among our clients and other Chinese medicine industry players. Our brand is integral to our sales and marketing efforts. We believe that maintaining and enhancing our brand name recognition in a cost-effective manner is critical to achieving widespread acceptance of our current and future products and is an important element in our effort to increase our customer base. Successful promotion of our brand name will depend largely on our marketing efforts and ability to provide reliable and quality products at competitive prices. Brand promotion activities may not necessarily yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in marketing activities. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers, in which case our business, operating results and financial condition, would be materially adversely affected.

 

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Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency

 

Our business growth is dependent on our ability to attract and retain qualified and productive employees, identify business opportunities, secure new contracts with customers and our ability to control costs and expenses to improve our operating efficiency. Our inventory costs (including raw materials, labor, packaging cost, depreciation and amortization, freight costs, overhead and third-party products purchase costs) have a direct impact on our profitability. The raw materials used in manufacturing of our TCMD products are subject to price volatility and inflationary pressures. Our success is dependent, in part, on our ability to reduce our exposure to increase in those costs through a variety of ways, while maintaining and improving margins and market share. We also rely on third-party manufacturers as a source for a portion of components for a portion of components for our products. These manufactures are also subject to price volatility and labor cost and other inflationary pressures, which may, in turn, result in an increase in the amount we pay for sourced products. Raw materials and sourced product price increases may offset our productivity gains and price increases and may adversely impact our financial results. In addition, our staffing costs (including payroll and employee benefit expense) and administrative expenses also have a direct impact on our profitability. Our ability to drive the productivity of our staff and enhance our operating efficiency affects our profitability. To the extent that the costs we are required to pay to our suppliers and our staffs exceeds our estimates, our profit may be impaired. If we fail to implement initiatives to control costs and improve our operating efficiency over time, our profitability will be negatively impacted. 

 

Our Ability to Compete Successfully

 

The Chinese patent medicine industry we are in is highly competitive and evolving in China. The development and commercialization of new pharmaceutical products is highly competitive, and the industry currently is characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. We will face competition with respect to our current and future pharmaceutical product candidates from major pharmaceutical companies in China. Potential competitors also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization of pharmaceutical products. Some of our current or potential competitors may have significantly greater financial resources and expertise in research and development, manufacturing, product testing, obtaining regulatory approvals and marketing approved products than we do., which could result in our competitors establishing a strong market position before our new products are able to enter the market. Additionally, technologies developed by our competitors may render our product candidates uneconomical or obsolete. If we do not compete effectively, our operating results could be harmed.

 

A Severe or Prolonged Slowdown in The Global or Chinese Economy Could Materially and Adversely Affect Our Business and Our Financial Condition

 

The rapid growth of the Chinese economy has slowed down since 2012 and this slowdown may continue in the future. There is considerable uncertainty over trade conflicts between the United States and China and the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. The withdrawal of these expansionary monetary and fiscal policies could lead to a contraction. There continue to be concerns over unrest and terrorist threats in the Middle East, Europe, and Africa, which have resulted in volatility in oil and other markets. There are also concerns about the relationships between China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes. The eruption of armed conflict could adversely affect global or Chinese discretionary spending, either of which could have a material and adverse effect on our business, results of operation in financial condition. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy would likely materially and adversely affect our business, results of operations and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.

 

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COVID-19 Impact

 

In December 2019, a novel strain of coronavirus was reported in Wuhan, China. On March 11, 2020, the World Health Organization categorized it as a pandemic. To contain the spread of the COVID-19, the government took stringent measures, including restricting access to provinces and cities, reducing gathering events, and postponing non-essential business activities. As of the date of this prospectus, the COVID-19 coronavirus outbreak in China appears to have slowed down and certain provinces and cities have resumed some business activities under the guidance and support of the government. Our business has been negatively impacted by the COVID-19 coronavirus outbreak to a certain extent. In the beginning of February, we had to temporary suspend our manufacturing and sales activities due to government restrictions on business activities. During the temporary business closure period, our employees had very limited access to our manufacturing facilities, and as a result, we experienced difficulty delivering our products to our customers on a timely basis. In addition, due to the COVID-19 outbreak, some of our customers or suppliers may experience financial distress, delay or default on their payments, reduce the scale of their business, or suffer disruptions in their business due to the outbreak. Any increased difficulty in collecting accounts receivable, delayed raw materials supply, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic conditions could negatively impact our results of operations. We resumed our work on March 2, 2020. In light of the current circumstances and available information, we estimate that for the period from February to April 2020, our revenues could be approximately 11% lower as compared to the same period of last year, to an estimated amount of $6.8 million. At the same time, our employee salaries and benefits as well as some fixed overhead costs did not decrease during the period when we were temporarily closed. As a result, we expect that our net income could be approximately 32% lower as compared to the same period of last year, to an estimated amount of $1.4 million for the period of February to April 2020. However, since our factory has been fully running as normal since March 2, 2020, we expect the negative impact of the COVID-19 coronavirus outbreak on our business to be temporary and our revenues to grow.

 

Due to the effects of the outbreak of COVID-19 discussed above, to the extent that we experience a more adverse operating environment, incur unanticipated capital expenditures, or if we decide to accelerate our growth, then additional financing may be required. We cannot guarantee, however, that additional financing, if required, would be available at all or on favorable terms. Such financing may include carrying additional debts or selling additional equity securities. Any financing which involves the sale of equity securities or instruments that are convertible into equity securities could result in immediate and possibly significant dilution to our existing shareholders. 

 

Key Financial Performance Indicators

 

In assessing our financial performance, we consider a variety of financial performance measures, including principal growth in net revenue and gross profit, our ability to control costs and operating expenses to improve our operating efficiency and net income. Our review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to respond promptly to competitive market conditions and different demands and preferences from our customers. The key measures that we use to evaluate the performance of our business are set forth below and are discussed in greater details under “Results of Operations”:

 

Net Revenue

 

Our net revenue is equal to gross revenue minus sales returns; sales incentives that we offer to our customers, such as discounts that are offset to gross sales. Our net revenue is driven by changes in the number of customers, sales volume, selling price, and mix of products sold.

 

  

For the Years Ended

September 30,

   Variance 
   2019   2018   % 
Revenue from sales of self-manufactured TCMD products  $62.9%  $61.8%   18.6%
Revenue from sales of third-party products   37.1%   38.2%   13.2%
Total revenue   100.0%   100.0%     
                
Number of customers   2,603    1,518    71.5%
Sales volume by unit -TCMD products   17,766,549    16,045,824    10.7%
Sales volume by unit –third-party products   7,734,333    7,669,369    0.8%
Total sales volume   25,500,882    23,715,193    7.5%
                
Average selling price per unit - TCMD products  $1.18   $1.10    7.1%
Average selling price per unit – Third-party products  $1.59   $1.42    12.3%

 

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Revenues from sales of TCMD products manufactured by us accounted for 62.9% and 61.8% of our total revenues for the fiscal years ended September 30, 2019 and 2018, respectively. The 13 TCMD products manufactured by us fall into two categories: Chronic Condition Treatments and cold and flu medications. Our Chronic Condition Treatments primarily include Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor, and our cold and flu medications primarily include Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup. Sales volume of our TCMD products increased by 10.7%, from 16,045,824 units sold in fiscal year 2018 to 17,766,549 units sold in fiscal year 2019, while average selling price of our TCMD products increased by 7.1% from $1.10 per unit in fiscal year 2018 to $1.18 per unit in fiscal year 2019. In addition, the number of our customers increased by 71.5% from 1,518 in fiscal year 2018 to 2,603 in fiscal year 2019. These factors led to an 18.6% increase in our revenue from sales of our TCMD products from fiscal year 2018 to fiscal year 2019.

 

In order to diversify our product offerings and product mix, in addition to sales of TCMD products manufactured by us, we also sell products manufactured by third-party pharmaceutical companies, including (i) biomedical drugs, such as liquid glucose, prednisolone, and citicoline, (ii) medical instruments, such as drug-eluting stents, surgical tubes and syringes, (iii) TCMP products, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules, and (iv) dietary supplements, such as vitamins, probiotic powder, and calcium tablets. Revenues from sales of third-party products accounted for 37.1% and 38.2% of our total revenues for the fiscal years ended September 30, 2019 and 2018, respectively. Sales volume of third-party products increased by 0.8% from 7,669,369 units sold in fiscal year 2018 to 7,734,333 units sold in fiscal year 2019, while the average selling price of third-party products increased by 12.3% from $1.42 per unit in fiscal year 2018 to $1.59 per unit in fiscal year 2019 due to the increase in purchase costs of third-party products. In addition, the number of our customers increased by 71.5% from 1,518 in fiscal year 2018 to 2,603 in fiscal year 2019. These factors led to a 13.2% increase in our revenue from sales of our third-party products from fiscal year 2018 to in fiscal year 2019.

 

Gross Profit

 

Gross profit is equal to net revenue minus cost of goods sold. Cost of goods sold primarily includes inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead). Cost of goods sold generally changes as our production costs change, as these are affected by factors including the market price of raw materials, labor productivity, or the purchase price of third-party products, and as the customer and product mix changes. Our cost of revenues accounted for 59.7% and 53.0% of our total revenue for the fiscal year 2019 and 2018, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future. Our gross margin was 40.3% for fiscal year 2019, a decrease by 6.7% from gross margin of 47.0% in fiscal year 2018, primarily attributable to the increase in cost of revenue from sales of TCMD products when the purchase price of several Chinese herb materials used in the manufacturing of our TCMD products increased in fiscal year 2019, which led to the increase in our related production cost. In addition, our gross profit and gross margin is also affected by sales of different product mix during each reporting period. Our gross margin increases when more products with lower costs and higher margin are sold, while our gross margin decreases when more products with higher costs and lower margin are sold. In fiscal year 2019, more products with higher costs and lower margin were sold. Furthermore, in August and September 2019 we conducted maintenance for our manufacturing facility to improve its environment, including cleaning and upgrading the machineries and equipment, in order to both meet the strict requirements for renewing our Good Manufacturing Practice Certificate (“GMP Certificate”) and ensure the quality and safety of our products. In doing so, we temporarily suspended our manufacturing activities. We resumed our manufacturing activities in late September 2019 after we successfully renewed our GMP Certificate. Costs associated with the factory maintenance (such as depreciation, maintenance and repair, base salary for workers) of approximately $0.26 million were included in the total cost of revenue for this period. These factors led to the increase in our costs of revenue and decrease in our gross profit and gross margin. See detailed discussion under “–Results of Operation”.

 

Operating Expenses

 

Our operating expenses consist of selling expenses, general and administrative expenses and research and development expenses.

 

Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, advertising expenses to increase the awareness of our brand, shipping ad delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses. Our selling expenses accounted for 4.8% and 5.9% of our total revenue for the years ended September 30, 2019 and 2018, respectively. We expect that our overall selling expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, will continue to increase in the foreseeable future if our business further grows.

 

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Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses. General and administrative expenses were 4.4% and 4.5% of our revenue for the years ended September 30, 2019 and 2018, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we plan to hire additional personnel and incur additional expenses in connection with the expansion of our business operations. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

The Chinese patent medicine industry is characterized by rapid and frequent changes in customer demand and launches of new products. If we do not launch new products or improve our existing products to meet the changing demands of our customers in a timely manner, some of our products could become uncompetitive in the market, thereby adversely affecting on our revenues and operating results. Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing of new TCMD products, depreciation, and other miscellaneous expenses. Research and development expenses were 1.9% and 2.8% of our revenue for the years ended September 30, 2019 and 2018, respectively. As we continue to develop new products and diversify our product offerings to satisfy customer demand, we expect our research and development expenses to continue to increase in the foreseeable future.

 

Results of Operations

 

Comparison of Results of Operations for the Years Ended September 30, 2019 and 2018

 

The following table summarizes the results of our operations during the fiscal years ended September 30, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

   For the Years Ended September 30, 
   2019   2018   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
REVENUE  $33,229,316    100.0%  $28,514,180    100.0%  $4,715,136    16.5%
COST OF REVENUE   19,821,831    59.7%   15,105,265    53.0%   4,716,566    31.2%
GROSS PROFIT   13,407,485    40.3%   13,408,915    47.0%   (1,430)   (0.0)%
                               
OPERATING EXPENSES                              
Selling expenses   1,578,826    4.8%   1,680,258    5.9%   (101,432)   (6.0)%
General and administrative expenses   1,457,393    4.4%   1,282,946    4.5%   174,447    13.6%
Research and development expenses   618,437    1.9%   789,382    2.8%   (170,945)   (21.7)%
Total operating expenses   3,654,656    11.0%   3,752,586    13.2%   (97,930)   (2.6)%
                               
INCOME FROM OPERATIONS   9,752,829    29.4%   9,656,329    33.9%   96,500    1.0%
                               
OTHER INCOME (EXPENSE)                              
Interest expense, net   (129,268)   (0.4)%   (164,922)   (0.6)%   35,654    (21.6)%
Other income, net   29,501    0.1%   26,644    0.1%   2,857    10.7%
Total other expense, net   (99,767)   (0.3)%   (138,278)   (0.5)%   38,511    (27.9)%
                               
INCOME BEFORE INCOME TAX PROVISION   9,653,062    29.0%   9,518,051    33.4%   135,011    1.4%
                               
PROVISION FOR INCOME TAXES   2,101,597    6.3%   1,915,118    6.7%   186,478    9.7%
                               
NET INCOME  $7,551,465    22.7%  $7,602,933    26.7%  $(51,467)   (0.7)%

 

41

 

 

Revenues. We currently produce and sell 13 varieties of TCMD products and also sell products manufactured by third-party pharmaceutical companies, to our customers.

 

   For the years ended September 30, 
   2019   2018   Change 
   Amount   Amount   Amount   % 
                 
 Revenue - TCMD products sales  $20,895,542   $17,620,823   $3,274,719    18.6%
 Revenue – third-party products sales   12,333,774    10,893,357    1,440,418    13.2%
 Total revenue   33,229,316    28,514,180    4,715,136    16.5%

 

Our total revenues increased by $4,715,136, or 16.5%, to $33,229,316 for the year ended September 30, 2019 from $28,514,080 for the year ended September 30, 2018. The increase in our revenues was attributable to the increase in sales volume by 7.5% from 23,715,193 units of TCMD and third-party products sold in fiscal year 2018 to 25,500,882 units of TCMD and third-party products sold in fiscal year 2019. In addition, the weighted average per unit selling price of our TCMD products increased by 7.0%, from $1.1 per unit in fiscal year 2018 to $1.2 per unit in fiscal year 2019, and the weighted average per unit selling price of third-party products increased by 15.9%, from $1.4 per unit in fiscal year 2018 to $1.6 per unit in fiscal year 2019. Also, through our effective marketing efforts, we have expanded our distribution network and attracted more customers including pharmaceutical companies, hospitals, clinics and drugstore chains, with the total number of customers increasing by 71.5% from 1,518 in fiscal year 2018 to 2,603 in fiscal year 2019. These factors all contributed to the increase in our revenues by 16.5% from fiscal year 2018 to fiscal year 2019.

 

   For the years ended September 30, 
   2019   2018   Change                   Average   Average       % of 
   Amount   % of revenue   Amount   % of revenue   Amount   %   QTY sold 2019   QTY sold 2018   QTY change   % of change   price 2019   price 2018   Price change   change in price 
                                                         
Sales of TCMD products:                                                        
Shiquan Dabu Medicinal Liquor  $636,362    1.9%  $961,856    3.4%  $(325,494)   (33.8)%   331,063    508,138    (177,075)   (34.8)%  $1.92   $1.89   $0.03    1.5%
Shenrong Medicinal Liquor   538,235    1.6%   564,426    2.0%   (26,191)   (4.6)%   202,335    254,249    (51,914)   (20.4)%   2.66    2.22    0.44    19.8%
 Fengtong Medicinal Liquor   978,217    2.9%   1,124,208    3.9%   (145,991)   (13.0)%   794,959    969,942    (174,983)   (18.0)%   1.23    1.16    0.07    6.2%
 Fengshitong Medicinal Liquor   65,305    0.2%   67,048    0.2%   (1,743)   (2.6)%   58,546    54,445    4,101    7.5%   1.12    1.23    (0.11)   (8.6)%
Qishe Medicinal Liquor,   137,896    0.4%   139,746    0.5%   (1,849)   (1.3)%   55,618    52,296    3,322    6.4%   2.48    2.67    (0.19)   (7.2)%
Guben Yanling Pill   10,767,341    32.4%   7,374,646    25.9%   3,392,695    46.0%   3,229,035    2,469,573    759,462    30.8%   3.33    2.99    0.34    11.3%
Quanlu Pill   141,396    0.4%   303,337    1.1%   (161,941)   (53.4)%   134,496    309,157    (174,661)   (56.5)%   1.05    0.98    0.07    7.1%
Shenrong Weisheng Pill   1,753,747    5.3%   1,470,953    5.2%   282,795    19.2%   2,834,898    2,031,029    803,869    39.6%   0.62    0.72    (0.10)   (13.2)%
Yangxue Danggui Syrup   1,167,048    3.5%   1,283,824    4.5%   (116,777)   (9.1)%   1,243,625    1,284,537    (40,912)   (3.2)%   0.94    1.00    (0.06)   (6.1)%
Wuzi Yanzong Oral Liquid   226,696    0.7%   96,882    0.3%   129,814    134.0%   122,105    46,785    75,320    161.0%   1.86    2.07    (0.21)   (10.3)%
Qiangli Pipa Syrup   2,308,512    6.9%   2,341,830    8.2%   (33,318)   (1.4)%   4,090,867    4,249,568    (158,701)   (3.7)%   0.56    0.55    0.01    2.4%
 Isatis Root Granule   1,653,536    5.0%   1,507,037    5.3%   146,499    9.7%   2,333,506    1,987,233    346,273    17.4%   0.71    0.76    (0.05)   (6.6)%
 Paracetamol Granule for Children   521,251    1.6%   385,031    1.4%   136,220    35.4%   2,335,496    1,828,872    506,624    27.7%   0.22    0.21    0.01    6.0%
Subtotal: sales of TCMD products   20,895,542    62.9%   17,620,823    61.8%   3,274,718    18.6%   17,766,549    16,045,824    1,720,725    10.7%   1.18    1.10    0.08    7.1%
                                                                       
Sales of third party products:                                                                      
Biochemical drugs   9,508,816    28.6%   7,226,228    25.3%   2,282,588    31.6%   7,153,518    6,704,511    449,008    6.7%   1.33    1.08    0.25    23.3%
Traditional Chinese Medicine Pieces   142,409    0.4%   175,503    0.6%   (33,095)   (18.9)%   56,915    56,807    108    0.2%   2.50    3.09    (0.59)   (19.0)%
Medical instruments   2,668,422    8.0%   3,483,052    12.2%   (814,630)   (23.4)%   521,753    903,280    (381,527)   (42.2)%   5.11    3.86    1.25    32.4%
Dietary supplements   14,127    0.0%   8,574    0.0%   5,554    64.8%   2,147    4,771    (2,624)   (55.0)%   6.58    1.80    4.78    266.2%
Subtotal:  sales of third party products   12,333,774    37.1%   10,893,357    38.2%   1,440,418    13.2%   7,734,333    7,669,369    64,964    0.8%   1.59    1.42    0.17    12.3%
                                                                       
Total revenue  $33,229,316    100.0%  $28,514,180    100.0%  $4,715,136    16.5%   25,500,882    23,715,193    1,785,689    7.5%  $1.30   $1.20   $0.10    8.4%

 

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Revenue from sales of our TCMD products

 

Our TCMD products primarily include Chronic Condition Treatments such as Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor, as well as our cold and flu medications such as Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup. Revenue from sales of our TCMD products accounted for 62.9% and 61.8% of our total revenue for the years ended September 30, 2019 and 2018, respectively.

 

Our TCMD products sales increased by $3,274,718 or 18.6%, from $17,620,823 in fiscal year 2018 to $20,895,542 in fiscal year 2019, because the sales volume of our TCMD products increased by 10.7% from 16,045,824 units sold in fiscal year 2018 to 17,766,549 units sold in fiscal year 2019, and that the average selling price of our TCMD products increased by 7.1% from $1.10 per unit in fiscal year 2018 to $1.18 per unit in fiscal year 2019. Among the 13 varieties of TCMD products we manufacture, the sales of Guben Yanling Pill, one of our representative products, accounted for 32.4% and 25.9% of our total revenue for the years ended September 30, 2019 and 2018, respectively. The sales of Guben Yanling Pill increased by $3,392,695 or 759,462 units or 30.8% from fiscal year 2018 to fiscal year 2019. In addition, the sales of our Shenrong Weisheng Pill, Wuzi Yanzong Oral Liquid, Isatis Root Granule and Paracetamol Granule for Children also increased by $282,795, $129,814, $146,499 and $136,220, representing a 19.2%, 134.0%, 9.7% and 35.4% increase, respectively, and their sales volume increased by 39.6%, 161.0%, 17.4% and 27.7% from fiscal year 2018 to fiscal year 2019, respectively. The increase in revenue and sales volume of the above-mentioned products was attributable to the increase in the number of our customers by 71.5% as a result of our strengthened marketing and sales efforts which led to increased brand awareness. In addition, since the market prices of certain key raw materials used in our production fluctuate, we adjusted our selling price to tailor such market price fluctuation while considering the best pricing strategy to stimulate customer orders. For example, the purchase price of several Chinese herbs used in the manufacturing of Guben Yanling Pill increased in fiscal year 2019, which increased its production costs. In light of the increase in demand and sales orders of Guben Yanling Pill, we increased its selling price. As a result, the average per unit selling price of Guben Yanling Pill increased by $0.34, or 11.3%, from $2.99 in fiscal year 2018 to $3.33 in fiscal year 2019. In addition, our research and development efforts in improving the formulation of our products may help lower our production costs , allowing us to sell products at lower prices, and making our products more attractive to our customers. For example, we improved the formulation of Shenrong Weisheng Pill, Wuzi Yanzong Oral Liquid and Isatis Root Granule in 2019, which decreased the unit cost of these products by 8.3%, 4.7% and 8.5%, respectively, and allowed us to lower the selling price for these products by 13.2%, 10.3% and 6.6%, respectively. As a result, purchase orders of these products from our customers increased in fiscal year 2019.

 

Revenue from sales of third-party products

 

In order to diversify our product portfolio and offerings and to increase our sales, we also sell pharmaceutical products manufactured by third-party companies, including (i) biochemical drugs, such as such as liquid glucose, prednisolone, and citicoline, (ii) medical instruments, such as drug-eluting stents, surgical tubes and syringes, (iii) TCMP products, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules and (iv) dietary supplements, including vitamins, probiotic powder, and calcium tablets. Revenue generated from sales of third-party products accounted for 37.1% and 38.2% of our total revenue for the years ended September 30, 2019 and 2018, respectively.

 

Sales of third-party products increased by $1,440,418, or 13.2%, from $10,893,357 in fiscal year 2018 to $12,333,774 in fiscal year 2019, because of an increase in the sales volume of third-party products by 0.8%, from 7,669,369 units sold in fiscal year 2018 to 7,734,333 units sold in fiscal year 2019, and an increase in their average selling price by 12.3%, from $1.42 per unit in fiscal year 2018 to $1.59 per unit in fiscal year 2019. Among the total sales of third-party products, sales of biochemical drugs increased by 31.6% or $2,282,588, from $7,226,228 in fiscal year 2018 to $9,508,816 in fiscal year 2019 because of 6.7% increase in sales volume and 23.3% increase in average selling price, while sales of medical instruments decreased by $814,630 or 23.4% due to decreased sales volume by 381,527 units or 42.2% and offset by an increase in average selling price by $1.25 per unit. Sales of TCMP products decreased by $33,095, or 18.9%, from $175,503 in fiscal year 2018 to $142,409 in fiscal year 2019, primarily because we lowered the average selling price by 19.0% to promote our sales of other products. Sales of dietary supplements products slightly increased by $5,554, or 64.8%, from $8,574 in fiscal year 2018 to $14,127 in fiscal year 2019, due to an increase in average selling price. However, sales of dietary supplements products are immaterial in our total sales. In fiscal year 2019, due to an overall increase in the market prices of raw materials used in the manufacturing of third-party products, we paid higher purchase prices when we purchased those products from third-party pharmaceutical companies. The average per unit cost of dietary supplements, biochemical drugs and TCMP products increased by 145.5%, 6.9% and 1.0%, respectively, and as a result, our average selling price on dietary supplements, biochemical drugs and TCMP products was adjusted to tailor this change, and increased by $4.78, $0.25 and $1.25 per unit, respectively. On the other hand, the average unit cost of medical instruments only increased by $0.02 per unit or 1%. In order to reduce the slow-moving inventory stock of some medical instruments we had purchased and to promote the sales of our products to customers, we lowered the average selling price of medical instruments by 19%, or $0.59 per unit, which led to a 23.4% decrease in the sales revenue of medical instrument as discussed above.

 

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Cost of Revenues. Our cost of revenues primarily consists of inventory costs (raw materials, labor, packaging cost, depreciation and amortization, third-party products purchase price, freight costs and overhead) and business tax. Cost of revenues generally changes as our production costs change, which are affected by factors including the market price of raw materials, labor productivity, or the purchase price of third-party products, and as the customer and product mix changes.

 

   For the years ended September 30, 
   2019   2018   Change 
   Amount   Amount   Amount   % 
                 
 Cost of revenues - TCMD products  $11,894,117   $7,628,763   $4,265,354    55.9%
 Cost of revenues –third-party products   7,927,714    7,476,502    451,212    6.0%
 Total cost of revenues  $19,821,831   $15,105,265   $4,716,566    31.2%

 

Our cost of revenues increased by $4,716,566, or 31.2%, from $15,105,265 for the year ended September 30, 2018 to $19,821,831 for the year ended September 30, 2019. The increase in our cost of revenues was due to the following reasons: (1) an increase in sales volume by 7.5% from 23,715,193 units of products sold in fiscal year 2018 to 25,500,882 units of products sold in fiscal year 2019. As sales volume increased, our cost of revenues also increased; (2) in addition, the weighted cost per unit for our TCMD products increased by 40.8%, from $0.48 per unit in fiscal year 2018 to $0.67 per unit in fiscal year 2019, which was attributable to an increase in the costs of raw materials used in our production, the weighted average cost per unit for third-party products increased by 6.2%, from $0.97 per unit in fiscal year 2018 to $1.03 per unit in fiscal year 2019 due to higher purchase costs of third-party products. As a result, weighted per unit cost for all of our products sold during fiscal year 2019 increased by $0.14, or 22.0%, from $0.64 in fiscal year 2018 to $0.78 in fiscal year 2019; (3) in June 2019, as a local government policy change, Jiangxi Food and Drug Administration (“Jiangxi FDA”) strengthened the administration and monitoring of all pharmaceutical companies within Jiangxi Province where our factory is located. New policies require that the GMP Certificate, the certification that a pharmaceutical company complies with the Good Manufacturing Practice standards, shall no longer be issued by local FDA authorities, and that all pharmaceutical companies within Jiangxi Province shall renew or reapply for their GMP Certificates with the Jiangxi FDA at the provincial level. Pursuant to the new policies, in August and September 2019 we conducted maintenance for our manufacturing facility to improve its environment, including cleaning and upgrading the machineries and equipment, in order to both meet the strict requirements for the renewal of our GMP Certificate and ensure the quality and safety of our products. In doing so, we temporarily suspended our manufacturing activities. Costs associated with the maintenance of manufacturing facilities, including depreciation, maintenance and repair, and base salary paid to workers totaled $262,049 (RMB 1.8 million) has been included in the cost of revenue during this period. We resumed our manufacturing activities in late September 2019 after we successfully renewed our GMP Certificate. As a result of the above-mentioned reasons, our cost of revenues increased by $4,716,566, or 31.2%, in fiscal year 2019 compared to fiscal year 2018.

 

44

 

 

   For the years ended September 30, 
   2019   2018   Change   Unit cost   Unit cost   Unit cost   % of 
   Amount   %   Amount   %   Amount   %   2019   2018   change   change 
                                         
Costs of TCMD products:                                        
Shiquan Dabu Medicinal Liquor  $298,893    1.5%  $404,236    2.7%  $(105,342)   (26.1)%  $0.90   $0.80   $0.10    12.2%
Shenrong Medicinal Liquor   242,021    1.2%   259,029    1.7%   (17,008)   (6.6)%   1.20    1.02    0.18    17.4%
 Fengtong Medicinal Liquor   642,199    3.2%   667,275    4.4%   (25,076)   (3.8)%   0.81    0.69    0.12    17.4%
Fengshitong Medicinal Liquor   45,944    0.2%   46,363    0.3%   (419)   (0.9)%   0.78    0.85    (0.06)   (6.7)%
Qishe Medicinal Liquor,   66,933    0.3%   50,957    0.3%   15,976    31.4%   1.20    0.97    0.23    23.5%
Guben Yanling Pill   4,808,839    24.3%   1,848,250    12.2%   2,960,589    160.2%   1.49    0.75    0.74    99.0%
Quanlu Pill   100,573    0.5%   232,698    1.5%   (132,126)   (56.8)%   0.75    0.75    (0.00)   (0.7)%
Shenrong Weisheng Pill   1,242,180    6.3%   806,539    5.3%   435,640    54.0%   0.44    0.40    0.04    10.3%
Yangxue Danggui Syrup   845,696    4.3%   736,542    4.9%   109,154    14.8%   0.68    0.57    0.12    20.3%
Wuzi Yanzong Oral Liquid   122,169    0.6%   48,427    0.3%   73,742    152.3%   1.00    1.04    (0.03)   (3.3)%
Qiangli Pipa Syrup   1,678,414    8.5%   1,365,598    9.0%   312,816    22.9%   0.41    0.32    0.09    27.7%
 Isatis Root Granule   1,358,625    6.9%   867,257    5.7%   491,368    56.7%   0.58    0.44    0.15    33.4%
Paracetamol Granule for Children   441,631    2.2%   295,592    2.0%   146,039    49.4%   0.19    0.16    0.03    17.0%
Subtotal: costs of TCMD products   11,894,117    60.0%   7,628,763    50.5%   4,265,354    55.9%   0.67    0.48    0.19    40.8%
                                                   
Costs of third party products:                                                  
Biochemical drugs   6,317,779    31.9%   5,477,734    36.3%   840,045    15.3%   0.88    0.82    0.06    6.9%
Traditional Chinese Medicine Pieces   124,393    0.6%   123,457    0.8%   935    0.8%   2.19    2.17    0.02    1.0%
Medical instruments   1,479,063    7.5%   1,869,423    12.4%   (390,360)   (20.9)%   2.83    2.07    0.76    36.5%
Dietary supplements   6,479    0.0%   5,888    0.0%   592    10.1%   3.02    1.23    1.79    145.4%
Subtotal:  costs of third party products   7,927,714    40.0%   7,476,502    49.5%   451,212    6.0%   1.03    0.97    0.06    6.2%
                                                   
Total costs of revenue  $19,821,831    100.0%  $15,105,265    100.0%  $4,716,566    31.2%  $0.78   $0.64   $0.14    22.0%

 

Cost of revenues of TCMD products

 

Cost of revenues of TCMD products accounted for 60.0% and 50.5% of our total costs of revenues for the fiscal year 2019 and 2018, respectively. Cost of revenues of TCMD products increased by $4,265,354, or 55.9%, from $7,628,763 in fiscal year 2018 to $11,894,117 in fiscal year 2019. The increase in cost of revenues of our TCMD products was due to the following reasons: (1) sales volume of TCMD products increased by 10.7%, from 16,045,824 units sold in fiscal year 2018 to 17,766,549 units sold in fiscal year 2019, while the average per unit cost of our TCMD products increased by $0.19, or 40.8%, from $0.48 in fiscal year 2018 to $0.67 in fiscal year 2019. Among the 13 varieties of TCMD products, cost of revenues of Guben Yanling Pill, one of our representative product, accounted for 24.3% and 12.2% of our total cost of revenues for the years ended September 30, 2019 and 2018, respectively. Sales of Guben Yanling Pill increased by $3,392,695, because sales volume increased by 759,462 units, or 30.8%. However, the purchase price of several Chinese herbs used in the manufacturing of Guben Yanling Pill increased in fiscal year 2019, which increased its production costs. As a result, costs of Guben Yanling Pill increased from $0.75 per unit to $1.49 per unit, thereby increasing the total cost of revenues of Guben Yanling Pill by $2,960,589, which represented the most significant increase in our cost of revenues associated with our TCMD products sales. In addition, due to the increase in the purchase price of raw materials, unit production cost of Shengrong Medicinal Liquor and Fengtong Medicinal liquor, Qishe Medicinal liquor, Yangxue Danggui Syrup, Qiangli Pipa Syrup, Isatis Root Granule and Paracetamol Granule for Children increased by 17.4%, 17.4%, 23.5%, 20.3%, 27.7%, 33.4% and 17.0%, respectively. These factors increased the overall of cost of revenues associated with our TCMD products sales; (2) as discussed above, our manufacturing activities were temporarily suspended from August to late September 2019. Costs associated with the maintenance of manufacturing facilities, including depreciation, maintenance and repair, and base salary paid to workers totaled $262,049 (RMB 1.8 million) has been included in the cost of revenue during this period. The increase in our cost of revenues of our TCMD products in fiscal year 2019 as compared to fiscal year 2018 reflected the above mentioned factors combined.

 

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Cost of revenues of third-party products

 

Cost of revenues of third-party products accounted for 40.5% and 49.5% of our total costs of revenues for the fiscal year 2019 and 2018, respectively. Cost of revenues of third-party products increased by $451,212, or 6.0%, from $7,476,502 in fiscal year 2018 to $7,927,714 in fiscal year 2019, because of an increase in sales volume by 0.8%, from 7,669,369 units sold in fiscal year 2018 to 7,734,333 units sold in fiscal year 2019, and an increase in the average unit cost of third-party products by $0.06 per unit, or 6.2%, from $0.97 per unit in fiscal year 2018 to $1.03 per unit in fiscal year 2019. In fiscal year 2019, due to an overall increase in the market prices of raw materials used in the manufacturing of third-party products, we sourced third-party products at higher prices from third-party pharmaceutical companies, the average unit cost of biochemical drugs, TCMP products, medical instruments and dietary supplements increased by 6.9%, 1%, 36.5% and 145.5%, respectively, as a result, our unit cost on biochemical drugs, TCMP products, medical instruments and dietary supplements has been adjusted to tailor this change, and increased by $0.06, $0.02, $0.76 and $1.79 per unit, respectively. In addition, as discussed above, our manufacturing activities were temporarily suspended from August to late September 2019. During this period of time, we fulfilled our sales orders primarily through purchasing third-party products instead of manufacturing our own TCMD products. As a result, our sales volume of third-party products increased and accordingly, our cost of revenue associated with the third-party products also increased. These factors led to the increase in cost of revenues associated with third-party product sales in fiscal year 2019 as compared to fiscal year 2018.

 

Gross profit

 

Our gross profit decreased by $1,430, from $13,408,915 in fiscal year 2018 to $13,407,485 in fiscal year 2019. Our gross margin decreased by 6.7% from 47.0% in fiscal year 2018 to 40.3% in fiscal year 2019. The decrease in our gross profit was primarily due to the increase in cost of revenues of our TCMD products as the raw material purchase price for several Chinese herb materials used in the manufacturing of our TCMD products increased. In addition, during our temporary suspension of our manufacturing activities from August to late September 2019, a one-time maintenance cost of $262,049 further reduced our gross profit. Our gross margin was affected by the sales of different product mix during each reporting period. The decrease in our gross margin was primarily due to the sales of more products with lower margin during fiscal year 2019 as compared to fiscal year 2018.

 

   For the years ended September 30, 
   2019   2018   Change 
   Amount   Amount   Amount   % 
                 
Gross profit – sales of TCMD products  $9,001,425   $9,992,060   $(990,635)   (9.9)%
Gross profit – sales of third-party products   4,406,060    3,416,855    989,205    29.0%
Total gross profit  $13,407,485   $13,408,915   $(1,430)   (0.0)%
                     
Gross margin – sales of TCMD products   43.1%   56.7%        (13.6)%
Gross margin – sales of third-party products   35.7%   31.4%        4.3%
Total gross margin   40.3%   47.0%        (6.7)%
                     
Average selling price per unit - TCMD products  $1.18   $1.10   $0.08    7.0%
Average cost per unit – third-party products  $0.67   $0.48   $0.19    40.8%
                     
Average selling price per unit – third-party products  $1.59   $1.42   $0.17    12.3%
Average cost per unit – third-party products  $1.03   $0.97   $0.06    6.2%

 

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Gross profit from TCMD products sales decreased by $990,635 or 9.9%, from $9,992,060 in fiscal year 2018 to $9,001,425 in fiscal year 2019, while gross margin of TCMD products sales decreased by 13.6% from 56.7% in fiscal year 2018 to 43.1% in fiscal year 2019. The decrease in our gross profit from TCMD product sales was due to the following reasons: (1) during our temporary suspension of our manufacturing activities from August to late September 2019, we reported a one-time maintenance costs of $262,049 as our costs of revenue, which reduced our gross profit for fiscal year 2019; (2) as discussed above, the weighted average cost per unit for our TCMD products increased by $0.19, or 40.8%, from $0.48 in fiscal year 2018 to $0.67 in fiscal year 2019, because of an increase in the costs of raw materials used in our production, and an increase in the weighted average selling price of our TCMD products by $0.08 per unit, or 7%, which was outpaced by the larger increase in the weighted average unit cost by $0.19 per unit. As a result, our gross margin associated with sales of our TCMD products decreased by 13.6%, from 56.7% in fiscal year 2018 to 43.1% in fiscal year 2019; (3) in addition, our gross profit and gross margin are also affected by sales of different product mix during each reporting period. Our gross margin increase as we sell more products with lower costs and higher margin, while our gross margin decrease as we sell more high costs and lower margin products are sold. For example, in fiscal year 2019, sales of Guben Yanling Pill increased by $3,392,695 since its sales volume increased, but related cost of revenues increased by $2,960,589 due to the increase in unit costs, which resulted from an increase in raw material costs, and as a result, our gross profit on Guben Yanling Pill decreased by $432,106. This contributed to the largest portion of our decrease in gross profit associated with our TCMD products sales.

 

Gross profit from third-party product sales increased by $989,205, or 29.0%, from $3,416,855 in fiscal year 2018 to $4,406,060 in fiscal year 2019, while the gross margin of third-party product sales increased by 4.4%, from 31.4% in fiscal year 2018 to 35.7% in fiscal year 2019. As discussed above, during August to late September 2019, our manufacturing activities were temporarily suspended from August to late September 2019, during which time we fulfilled our sales orders primarily through purchasing third-party products. Due to an increase in the overall market price of raw materials used in the manufacturing of third-party products, the purchase price of third-party products was higher, with the average per unit cost of third-party products increased by $0.06, or 6.2%, from $0.97 in fiscal year 2018 to $1.03 in fiscal year 2019. However, the weighted average selling price of third-party products increased by $0.23 per unit, or 12.3%, from $1.42 per unit in fiscal year 2018 to $1.59 per unit in fiscal year 2019, which absorbed the increase in the weighted average unit cost by $0.06. As a result, our gross margin associated with sales of third-party products increased by 4.3%, from 31.4% in fiscal year 2018 to 35.7% in fiscal year 2019.

 

Operating expenses

 

The following table sets forth the breakdown of our operating expenses for the fiscal years ended September 30, 2019 and 2018:

 

   For the Years Ended September 30, 
   2019   2018   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Total revenue  $33,229,316    100%  $28,514,180    100%  $4,715,136    16.5%
Total operating expenses:                              
Selling expenses   1,578,826    4.8%   1,680,258    5.9%   (101,432)   (6.0)%
General and administrative expenses   1,497,351    4.4%   1,282,946    4.5%   214,405    16.7%
Research and development expenses   618,437    1.9%   789,382    2.8%   (170,945)   (21.7)%
Total operating expenses  $3,694,614    11.1%  $3,752,586    13.2%  $(57,972)   (1.5)%

 

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Selling expenses

 

Our selling expenses primarily include salaries and welfare benefit expenses paid to our sales personnel, advertising expenses to increase our brand awareness, shipping ad delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.

 

   For the Years Ended September 30, 
   2019   2018   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses  $657,370    41.6%  $567,667    33.8%  $89,703    15.8%
Advertising expenses   367,513    23.3%   488,423    29.1%   (120,910)   (24.8)%
Shipping and delivery expenses   457,407    29.0%   500,659    29.8%   (43,252)   (8.6)%
Business travel and meals expenses   59,465    3.8%   75,039    4.5%   (15,574)   (20.8)%
Other sales promotion related expenses   37,071    2.3%   48,470    2.9%   (11,399)   (23.5)%
Total selling expenses  $1,578,826    100.0%  $1,680,258    100.0%  $(101,432)   (6.0)%

 

Our selling expenses decreased by $101,432, or 6.0%, from $1,680,258 in fiscal year 2018 to $1,578,826 in fiscal year 2019, primarily attributable to (i) a decrease in advertising expenses by $120,910, or 24.8%, from $488,423 in fiscal year 2018 to $367,513 in fiscal year 2019; We use outdoor billboard, magazine and social media such as WeChat and Weibo to advertise our brand and products in order to increase customer awareness. In fiscal year 2018, in connection with our sales promotion of several new products to targeted customers, we spent more on advertising than we did in fiscal year 2019, which led to higher advertising expenses in fiscal 2018; (ii) a decrease in shipping and delivery expenses by $43,252, or 8.6%, from $500,659 in fiscal year 2018 to $457,407 in fiscal year 2019, because we formed our own logistic team to deliver some of the products to customers located in nearby cities in 2019. In 2018, we outsourced most of the shipping and delivery services to third-party logistic companies, which resulted in higher shipping and delivery expenses in fiscal 2018 as compared to fiscal 2019; (iii) a decrease in business travel and meals expenses by $15,574, or 20.8%, from $75,039 in fiscal year 2018 to $59,465 in fiscal year 2019; from August to late September 2019, we temporarily suspended our manufacturing activities for the renewal of our GMP Certificate. During that period, we fulfilled our sales orders primarily through purchasing third-party products instead of manufacturing our own TCMD products. Since our sales and marketing activities were temporarily reduced during this period, our travel and meals expenses associated with our sales activities decreased; (iv) an increase in our salary and benefit expenses paid to our sales employees by $89,703, or 15.8%, from $567,667 in fiscal year 2018 to $657,370 in fiscal year 2019. The number of our sales employees increased from 45 in fiscal year 2018 to 47 in fiscal year 2019. In addition, in early fiscal 2019, we increased our employee salary base to reflect inflation. These above-mentioned factors combined led to the increase in our selling expenses in fiscal year 2019 as compared to fiscal year 2018. As a percentage of revenues, our selling expenses accounted for 4.8% and 5.9% of our total revenue for the years ended September 30, 2019 and 2018, respectively.

 

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General and Administrative Expenses

 

Our general and administrative expenses primarily consist of employee salaries, welfare and insurance expenses, depreciation, bad debt reserve expenses, inspection and maintenance expenses, office supply and utility expenses, business travel and meals expenses, land and property taxes and professional service expenses. As a percentage of revenues, general and administrative expenses were 4.4% and 4.5% of our revenue for the years ended September 30, 2019 and 2018, respectively. 

 

   For the Years Ended September 30, 
   2019   2018   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expense  $529,745    36.3%  $502,306    39.2%  $27,439    5.5%
Depreciation and amortization   209,194    14.4%   233,811    18.2%   (24,617)   (10.5)%
Bad debt reserve expenses   297,972    20.4%   103,446    8.1%   194,526    188.0%
Land and property tax   98,943    6.8%   104,043    8.1%   (5,100)   (4.9)%
Office supply and utility expense   77,443    5.3%   99,632    7.8%   (22,189)   (22.3)%
Transportation, business travel and meals expense   51,553    3.5%   102,928    8.0%   (51,375)   (49.9)%
Consulting fee   54,906    3.8%   -    0.0%   54,906    100.0%
Inspection and maintenance fee   65,919    4.5%   58,535    4.6%   7,384    12.6%
Stamp tax and other expenses   71,718    4.9%   78,245    6.1%   (6,527)   (8.3)%
Total general and administrative expenses  $1,457,393    100.0%  $1,282,946    100.0%  $174,447    13.6%

 

Our general and administrative expenses increased by $174,447 or 13.6% from $1,282,946 for the year ended September 30, 2018 to $1,457,393 for the year ended September 30, 2019, primarily attributable to (i) an increase in our salaries, welfare expenses and insurance expenses paid to administration employees by $27,439, or 5.5%. The number of our administrative employees increased from 25 in fiscal year 2018 to 30 in fiscal year 2019. In addition, in early fiscal 2019, we adjusted the employee salary base to reflect inflation. These factors led to an increase in our salary and employee benefit expenses in fiscal year 2019; (ii) our bad debt reserve expenses increased by $194,526, or 188.0%, from $103,446 in fiscal year 2018 to $297,972 in fiscal year 2019. We generally extend our customers a credit term of 90 days. Based on our management’s assessment of the collectability of our outstanding accounts receivable, we accrued increased bad debt reserve than we did in fiscal year 2018. This led to the increase in our bad debt reserve expenses in fiscal year 2019 as compared to fiscal year 2018; (iii) our business travel, transportation and meals expenses decreased by $51,375, or 49.9%, from $102,928 in fiscal year 2018 to $51,553 in fiscal year 2019, primarily as a result of the temporary suspension of our manufacturing facility in August and September 2019 as discussed above, which also led to a decrease in our office supply and utility expenses by $22,189 in fiscal year 2019 as compared to fiscal year 2018; (v) our professional consulting expenses increased by $54,906 in fiscal year 2019 as compared to fiscal year 2018. In order to prepare for listing in overseas market, we consulted with professional service providers for legal structure setup and business strategy in fiscal year 2019. The overall increase in our general and administrative expenses in fiscal year 2019 as compared to fiscal year 2018 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 4.5% and 4.5% of our revenue for the years ended September 30, 2019 and 2018, respectively. 

 

Research and development expenses

 

Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing new TCMD products, depreciation and other miscellaneous expenses.

 

   For the Years Ended September 30, 
   2019   2018   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses to R&D staff  $76,973    12.4%  $90,427    11.5%  $(13,454)   (14.9)%
Materials used in R&D activities   524,094    84.7%   674,033    85.4%   (149,939)   (22.2)%
Depreciation and others   17,370    2.8%   24,922    3.2%   (7,552)   (30.3)%
Total research and development expenses  $618,437    100.0%  $789,382    100.0%  $(170,945)   (21.7)%

 

Our research and development expenses decreased by $170,945, or 21.7%, from $789,382 for the fiscal year 2018 to $618,437 for the fiscal year 2019, primarily attributable to a decrease in the materials used in the R&D activities by $149,939. In fiscal year 2018, in order to develop new products and improve the formulation of several existing products, we conducted more testing on product stability and safety, and as a result, more materials were used in our R&D activities. As a percentage of revenues, research and development expenses were 1.9% and 2.8% of our revenue for the years ended September 30, 2019 and 2018, respectively.

 

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Other income (expenses)

 

Our other income (expenses) primarily include interest expenses incurred on our short-term bank loans, gain or loss from disposal of fixed assets and investment income from our long-term investment in exchange for a 5% ownership interest in a local bank.

 

Interest expenses decreased by $35,654, or 21.6%, from $164,922 in fiscal year 2018 to $129,268 in fiscal year 2019. The decrease in our interest expenses was because we carried lower amount of bank loans during fiscal year 2019 as compared to fiscal year 2018. Our subsidiaries Jiangxi Universe and Universe Trade obtained loans from Luling Rural Commercial Bank (“LRC Bank”) for working capital purposes. At the beginning of fiscal year 2018, we had an aggregate of RMB 30.2 million ($4.5 million) loans payable to LRC bank. During the fiscal year 2018, we repaid a total of RMB36 million ($5.5 million) loans upon maturity, and also obtained additional RMB23.8 million ($3.6 million) loans from LRC bank. As of September 30, 2018, the balance of our outstanding loans payable was RMB18 million ($2.62 million), and the weighted average loan balance we carried on a daily basis for the year ended September 30, 2018 was RMB 22,122,527 ($3,384,747). For the year ended September 30, 2019, we paid back a RMB21 million ($3.1 million) bank loan upon maturity, and then we obtained a loan in the amount of RMB 21million ($3.1 million) from LRC Bank in the second half of fiscal year 2019. As a result, the weighted average loan balance we carried on a daily basis during the fiscal year ended September 30, 2019 amounted to RMB15,824,176 ($2,302,418). As of September 30, 2019, we carried a total of RMB18 million ($2.5 million) outstanding bank loans. Therefore, our interest expense for the year ended September 30, 2019 was lower because of the lower weighted average loan balance we carried during the fiscal year 2019, as compared to fiscal year 2018.

 

Our other income was $29,501 and $26,644 for the years ended September 30, 2019 and 2018, respectively, primarily consisting of investment income of $26,741 and $21,630 and other income of $2,760 and $5,014 for the years ended September 31, 2019 and 2018, respectively. From March 2009 to September 2017, we invested approximately RMB5 million ($0.7 million) in Jiangxi Jian Rural Commercial Bank (“JX RCB Bank”) in exchange for a 5% ownership interest in the bank. The purpose of these equity investment agreements with JX RCB Bank was to earn investment income as the bank continues to grow. We account for this investment using the measurement alternative in accordance with ASC 321. As of September 30, 2019 and 2018, the value of this investment amounted to $700,500 and $728,000, respectively, and was reported as long-term investment in equity investee on our consolidated balance sheets. During fiscal year 2019, JX RCB Bank reported higher amount of profit, and accordingly our investment income increased from $21,630 in fiscal year 2018 to $26,741 in fiscal year 2019. Our other income of $2,760 and $5,014 for fiscal year 2019 and 2018, respectively, primarily included rental payments we received for renting the roof of one of our factory building to a local energy company for purposes of installing solar panel, as well as gain from disposal of fixed assets.

 

Provision for Income Taxes

 

Our provision for income taxes was $2,101,597 in fiscal year ended September 30, 2019, an increase of, $186.478, or 9.7% from $1,915,118 in fiscal year ended September 30, 2018 due to our increased taxable income. Under the EIT Law, domestic enterprises and Foreign Investment Enterprises (“FIEs”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on a case-by-case basis. EIT grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for their HNTE status every three years. Jiangxi Universe, one of our main operating subsidiaries in the PRC, was approved as a HNTE and was entitled to a reduced income tax rate of 15% beginning November 2016 with a term of three years. Jiangxi Universe’s HNTE status was successfully renewed in December 2019 for a term of three additional years. EIT is typically enforced by the local tax authorities in the PRC. Each local tax authority has the discretion to grant tax holidays to local enterprises as a way to encourage entrepreneurship and stimulate local economy. The corporate income taxes for the years ended September 30, 2019 and 2018 were reported at a blended reduced rate since Jiangxi Universe enjoys a 15% reduced income tax rate due to its HNTE status and Universe Trade is subject to a standard 25% income tax rate. The impact of the tax holidays noted above decreased the corporate income taxes for our PRC subsidiaries by $312,357 and $471,275 for the years ended September 30, 2019 and 2018, respectively. The benefits of tax holidays on net income per share (basic and diluted) were $6.25 and $9.43 for the years ended September 30, 2019 and 2018, respectively.

 

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Net Income

 

As a result of the foregoing, we reported a net income of $7,551,465 for the fiscal year ended September 30, 2019, representing a $51,468 decrease from a net income of $7,602,933 for the fiscal year ended September 30, 2018.

 

B. Liquidity and Capital Resources

 

As of September 30, 2019, we had $3,177,321 in cash on hand as compared to $6,190,176 as of September 30, 2018. We also had $6,420,986 in accounts receivable. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. As of the date of this prospectus, approximately 98%, or $6.3 million of our net accounts receivable balance as of September 30, 2019 have been subsequently collected. We expect to collect the remaining balance by June 2020. Collected accounts receivable will be used as working capital in our operations, if necessary.

   

As of September 30, 2019, our inventory balance amounted to $2,615,155, primarily consisting of raw materials and work-in-progress and finished TCMD products, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products. We also had short-term bank loans of $2,521,800 that we obtained from LRC Bank for working capital purposes. We expect that we will be able to renew all of the existing bank loans upon their maturity based on past experiences and our outstanding credit history. The balance of our due to related parties was$54,705 as of September 30, 2019, representing cash advances from our controlling shareholders to be used as our working capital.

 

As of September 30, 2019, our working capital balance was $6,776,942. In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We believe that our current cash and cash flows provided by operating activities, borrowings from banks and from our principal shareholders will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued.

 

In the coming years, we will be looking to other sources, such as raising additional capital by issuing shares of stock, to meet our needs for cash. Even though we face uncertainties in regards to the size and timing of capital-raising, we are confident that we can continue to meet operational needs solely by utilizing cash flows generated from our operating activities and shareholder working capital funding, as necessary.

 

The following table sets forth summary of our cash flows for the periods indicated:

 

   For the Years Ended September 30, 
   2019   2018 
Net cash provided by operating activities  $13,203,755   $4,455,599 
Net cash used in investing activities   (86,033)   (145,095)
Net cash used in financing activities   (16,003,857)   (4,914,580)
Effect of exchange rate change on cash and restricted cash   (126,720)   (189,162)
Net decrease in cash   (3,012,855)   (793,238)
Cash, beginning of year   6,190,176    6,983,414 
Cash, end of year  $3,177,321   $6,190,176 

 

Operating Activities

 

Net cash provided by operating activities was $13,203,755 for the year ended September 30, 2019, primarily consisting of the following:

 

Net income of $7,551,466 for the fiscal year;

 

  A decrease in accounts receivable of $665,485 because we collected the same amount of accounts receivable. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. As of date of this prospectus, approximately 98%, or $6.3 million of our net accounts receivable balance as of September 30, 2019 have been subsequently collected. Collected accounts receivable will be used as working capital in our operations, if necessary.

 

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  A decrease in inventory balance of $5,586,177. As discussed above, our manufacturing activities were temporarily suspended from August and September 2019 we conducted maintenance for our manufacturing facility to improve its environment, including cleaning and upgrading the machineries and equipment, in order to both meet the strict requirements for the renewal of our GMP Certificate renewal and ensure the quality and safety of our products. During the period when our business was temporarily closed, we reduced the purchase of our raw material inventories, which led a decrease in our ending inventory balance as of September 30, 2019.

  

  A decrease in accounts payable of $924,444 for the fiscal year. The decrease in our accounts payable balance as of September 30, 2019 was largely attributable to our temporary suspension of our manufacturing activities in August and September 2019 as discussed above. During this period, we conducted maintenance for our manufacturing facility to improve its environment, including cleaning and upgrading the machineries and equipment, in order to both meet the strict requirements for the renewal of our GMP Certificate renewal and ensure the quality and safety of our products. As a result, we reduced the purchase of raw materials on credit from our suppliers, which led to a decrease in our accounts payable balance as of September 30, 2019.

 

  A decrease in taxes payable of $320,611 for the fiscal year primarily due to our reduced VAT tax payable from decrease in the amount of  raw materials purchased in August and September 2019 when our manufacturing facility was temporarily closed.

 

Net cash provided by operating activities was $4,455,599 in fiscal year ended September 30, 2018, primarily consisted of:

 

  Net income of $7,602,933 for the fiscal year;

 

  An increase in accounts receivable of $2,815,443 due to an increase in credit sales to our customers. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. As of September 30, 2018, we had outstanding accounts receivable of $7,637,177. Approximately $7.3million, or 95%, of the accounts receivable balance as of September 30, 2018 was collected back during fiscal year 2019. Collected accounts receivable will be used as working capital in our operations, if necessary;
     
  An increase in inventory balance of $327,259 because based on our increased sales  in 2018, we increased the purchase of raw materials in preparation for production to fulfill future sales orders;

 

  A decrease in accrued expenses and other current liabilities of $1,129,019, which was primarily attributable to a decrease in other payable balance. In May 2016, we outsourced our sewage construction project to a third-party, Jiangxi Minda Industrial Co., Ltd., to construct the sewage pipeline and related facilities in our manufacturing facility, with the total contract price of approximately RMB8.1 million ($1.2 million). The project was completed in May 2017 and passed inspection in late 2017. We paid $1.2 million to this third-party during fiscal year 2018, resulting in a decrease in our other payable balance as of September 30, 2018.

 

  An increase in taxes payable of $444,790 primarily due to an increase in VAT tax payables when we increased our raw materials purchase during fiscal 2018, which was in line with our increased inventory balance as of September 30, 2018.

 

Investing Activities

 

Net cash used in investing activities amounted to $86,033 for the year ended September 30, 2019, and primarily included the purchase of fixed assets of $86,324 and proceeds of $291 from disposal of fixed assets.

 

Net cash used in investing activities amounted to $145,095 for the year ended September 30, 2018, and primarily included the purchase of fixed assets in the same amount. 

 

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Financing Activities

 

Net cash used in financing activities amounted to $16,003,857 for the year ended September 30, 2019, primarily include the following:

 

  Proceeds from short-term bank loans of $3,055,500. During fiscal year 2019, our subsidiaries Jiangxi Universe and Universe Trade obtained additional loans in an aggregate amount of RMB 21 million ($3.1 million) from LRC Bank for working capital purposes.

 

  Repayment of short-term bank loans of $3,055,500 upon loan maturities. In fiscal year 2018, our subsidiaries Jiangxi Universe and Universe Trade obtained additional loans in an aggregate amount of RMB21 million from LRC Bank for working capital purposes. We repaid these loans upon maturity and entered into new loan contracts with LRC bank during fiscal year 2019.
     
  Dividend payment of $16,005,000. On September 21, 2016, September 13, 2017, February 2, 2018, September 20, 2018 and February 21, 2019, the board of directors of our subsidiary Jiangxi Universe approved resolutions to pay cash dividends of RMB 40 million, RMB 30 million, RMB 20 million, RMB 10 million and RMB 30 million, respectively, to its shareholders at the time of record out of the retained earnings balance of Jiangxi Universe, to be paid to these shareholders when Jiangxi Universe has sufficient available earnings funds. A total of $19.1 million (RMB130 million) cash dividend was declared from September 2016 to February 2019, among which $3.1 million (RMB20 million)  was paid in cash to its shareholders in fiscal year 2018 and the remaining $16 million (RMB 110 million) was paid to its shareholders in fiscal year 2019.

 

  Proceeds from related party borrowings of $1,143. The balance due to related party mainly consisted of advances from our principal shareholder for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand.

 

Net cash used in financing activities amounted to $4,914,580 for the year ended September 30, 2018, primarily include the following:

 

  Proceeds from short-term bank loans of $3,641,400. During fiscal year 2018, our subsidiaries Jiangxi Universe and Universe Trade obtained additional loans in an aggregate amount of RMB 23.8 million from LRC Bank for working capital purposes.

 

  Repayment of short-term bank loans of $5,508,000 upon loan maturities. In fiscal year 2017, our subsidiaries Jiangxi Universe and Universe Trade obtained loans in an aggregate amount of RMB 36 million from LRC Bank for working capital purposes. We repaid these loans upon maturity and entered into new loan contracts with LRC bank during fiscal year 2018.
     
  Dividend payment of $3,060,000. On September 21, 2016, September 13, 2017, February 2, 2018, September 20, 2018 and February 21, 2019, the Board of Directors of our subsidiary Jiangxi Universe approved resolutions to pay cash dividend of RMB40 million, RMB30 million, RMB20 million, RMB10 million and RMB30 million, respectively, to its shareholders at the time of record out of the retained earnings balance of Jiangxi Universe, to be paid to these shareholders when Jiangxi Universe has sufficient available earnings and funds. A total of RMB130 million ($19.1 million) cash dividend was declared from September 2016 to February 2019, among which RMB20 million ($3.1 million) was paid in cash to the shareholders in fiscal year 2018 and the remaining RMB110 million ($16 million) was paid to its shareholders in fiscal year 2019.

 

  Proceeds from related party borrowings of $12,020. The balance due to related party mainly consisted of advances from our principal shareholder for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand.

 

Commitments and contingencies

 

From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the years ended September 30, 2019 and 2018, we did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on our consolidated financial position, results of operations and cash flows.

 

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We do not have material commitments as of September 30, 2019 and 2018.

 

Trend Information

 

Other than as disclosed elsewhere in this prospectus, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of September 30, 2019 and 2018.

 

Inflation

 

Inflation does not materially affect our business or the results of our operations.

 

Seasonality

 

Seasonality does not materially affect our business or the results of our operations.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable and inventories, useful lives of property, plant and equipment and intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this prospectus reflect the more significant judgments and estimates used in preparation of our consolidated financial statements.

 

Risks and Uncertainties

 

Our main operation is located in the PRC. Accordingly, our business, financial condition, and results of operations may be influenced by political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. Our results may be adversely affected by changes in the political, regulatory and social conditions in the PRC. Although we have not experienced losses from these situations and believes that we are in compliance with existing laws and regulations including our organization and structure, this may not be indicative of future results.

 

Our business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, such as the recent outbreak and spread of the COVID-19, which could significantly disrupt our operations. 

   

The development and commercialization of new pharmaceutical products is highly competitive, and the industry currently is characterized by rapidly changing technologies, significant competition and a strong emphasis on intellectual property. We may face competition with respect to our current and future pharmaceutical product candidates from major pharmaceutical companies in China.  

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Uses of estimates

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”), management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information as of the date of the consolidated financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for estimated uncollectible receivables, inventory valuation, useful lives of property, plant and equipment, intangible assets, the recoverability of long-lived assets, provision necessary for contingent liabilities, revenue recognition and realization of deferred tax assets. Actual results could differ from those estimates. 

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Accounts receivable, net

 

Accounts receivable are presented net of allowance for doubtful accounts. We determine the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. We establish a provision for doubtful receivables when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. Allowance for uncollectable balances amounted to $517,754 and $239,904 as of September 30, 2019 and 2018, respectively.

 

 Inventories, net

 

Inventories are stated at net realizable value using weighted average method. Costs include the cost of raw materials, freight, direct labor and related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. We evaluate inventories on a quarterly basis for its net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected future product sales. We recorded inventory reserve of $179,412 and $373,855 as of September 30, 2019 and 2018, respectively.

 

Revenue recognition

 

We adopted Accounting Standards Codification (“ASC”) 606 using the modified retrospective approach. The adoption of this standard did not have a material impact on our consolidated financial statements. Therefore, no adjustments to opening retained earnings were necessary.

 

ASC 606, Revenue from Contracts with customers, establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that we (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way we record our revenue. We have assessed the impact of the guidance by reviewing our existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, we concluded that there was no change to the timing and pattern of revenue recognition for our current revenue streams.

 

In accordance to ASC 606, we recognize revenue when we transfer our goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in such exchange. We account for the revenue generated from sales of TCMD and third-party products on a gross basis as we are acting as a principal in these transactions, are subject to inventory risk, have latitude in establishing prices, and are responsible for fulfilling the promise to provide customers the specified goods, which we have control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. All of our contracts have one single performance obligation as the promise is to transfer the individual goods to customers, and there is no separately identifiable other promises in the contracts. Our revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at delivery. Our products are sold with no right of return and we do not provide other credits or sales incentive to customers. Revenue is reported net of all value added taxes (“VAT”). 

 

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Contract Assets and Liabilities

 

Payment terms are established on our pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery occurs. As of September 30, 2019 and 2018, other than accounts receivable and advances from customers, we had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred.

 

Disaggregation of Revenues

 

We disaggregate our revenue from contracts by product types, as we believe it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors.

 

The summary of our total revenues by product categories for the years ended September 30, 2019 and 2018 was as follows:

 

Revenue by product source

 

   For the year ended
September 30,
 
   2019   2018 
Sales of TCMD products manufactured by us  $20,895,542   $17,620,823 
Sales of third-party products    12,333,774    10,893,357 
Total revenue  $33,229,316   $28,514,180 

 

Revenue by product categories

 

   For the years ended
September 30,
 
   2019   2018 
         
Sales of TCMD products:        
Medicinal liquor products  $2,356,015   $2,857,283 
Other chronic condition treatment products   14,056,228    10,529,642 
Cold and flu medicines   4,483,299    4,233,898 
Sub-total of TCMD products sales   20,895,542    17,620,823 
           
Sales of third-party products:          
Biochemical drugs   9,508,816    7,226,228 
Traditional Chinese medicine pieces   142,409    175,503 
Medical instruments   2,668,422    3,483,052 
Dietary supplements   14,127    8,574 
Subtotal of third-party products sales   12,333,774    10,893,357 
           
Total revenue  $33,229,316   $28,514,180 

 

Income Tax

 

We account 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.

 

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An uncertain tax position is recognized 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 September 30, 2019 and 2018. We do not believe there was any uncertain tax provision at September 30, 2019 and 2018.

 

Our operating subsidiary in China is subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the fiscal years ended September 30, 2019 and 2018. As of September 30, 2019, all of our tax returns of our PRC Subsidiaries remain open for statutory examination by PRC tax authorities.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases, including operating leases, with a term in excess of 12 months. The guidance also expands the quantitative and qualitative disclosure requirements. The new guidance requires the lessee to record operating leases on the balance sheet with a right-of-use asset and corresponding liability for future payment obligations. In July 2018, FASB issued ASU 2018-11 Leases (Topic 842) – Targeted Improvements that reduces costs and eases implementation of the leases standard for financial statement preparers. The ASU simplifies transition requirements and, for lessors, provides a practical expedient for the separation of non-lease components from lease components. In November 2019, FASB released ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which modified the implementation date of the standard. For public entities, the guidance will be effective for fiscal year beginning after December 15, 2018 and interim periods therein. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. As an emerging growth company, we will adopt this guidance effective October 1, 2021. We do not expect the cumulative effect resulting from the adoption of this guidance will have a material impact on its consolidated financial statements.

 

In August 2018, the FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for all entities for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. We do not expect this guidance will have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 was subsequently amended by Accounting Standards Update 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Accounting Standards Update 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and Accounting Standards Update 2019-05, Targeted Transition Relief. For public entities, ASU 2016-13 and its amendments is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For all other entities, this guidance and its amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As an emerging growth company, we plan to adopt this guidance effective October 1, 2022. We are currently evaluating the impact of our pending adoption of ASU No. 2016-13 on our consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, which is fiscal 2021 for us, with early adoption permitted. We do not expect adoption of the new guidance to have a significant impact on our financial statements. 

 

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INDUSTRY

 

All the information and data presented in this section have been derived from Frost & Sullivan (Beijing) Inc., Shanghai Branch Co.’s industry report commissioned by us in December 2019 entitled “The PRC Chinese Patent Medicine Industry Independent Market Research”, unless otherwise noted. Frost & Sullivan has advised us that the statistical and graphical information contained herein is drawn from its database and other sources. The following discussion projections for future growth, which may not occur at the rates that are projected or at all.

 

OVERVIEW OF THE MACROECNOMIC ENVIRONMENT IN THE PRC

 

Population of High-Aged Group

 

 

Source: National Bureau of Statistics of China, Frost & Sullivan Report

 

According to the National Bureau of Statistics of China, by the end of 2018, the Chinese population aged 65 or above reached 166.6 million, accounting for 11.9% of the total population in China. With the rising life expectancy and the “One Child Policy” from the 1980s to the 2010s in the PRC, population is aging fast with the population aged 65 or above growing at a CAGR of approximately 4.9% from 2014 to 2018. Demand for healthcare products and services is also increasing rapidly due to the aging population and the rise of chronic diseases such as arthritis, asthma, diabetes and etc. It is forecasted that the Chinese population aged 65 or above will reach 208.0 million by the end of 2023, accounting for 14.7% of the total population in China.

 

Per Capita Annual Disposable Income

 

 

Source: National Bureau of Statistics of China, Frost & Sullivan Report

 

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According to the National Bureau of Statistics of China, during the past five years, in line with the steady economic growth, per capita annual disposable income of the PRC rose from RMB20.2 thousand in 2014 to RMB28.2 thousand in 2018, representing a CAGR of approximately 9.0% from 2014 to 2018. The rise in disposable income contributes to improvements in living standards and increase in health awareness, supporting the development of the Chinese patent medicine market in the PRC. It is expected that the per capita annual disposable income in the PRC will grow from RMB30.6 thousand in 2019 to RMB43.2 thousand in 2023, with a CAGR of approximately 8.9%.

 

OVERVIEW OF THE CHINESE PATENT MEDICINE MARKET IN THE PRC

 

Definition and Categorization of Traditional Chinese Medicine

 

Traditional Chinese medicine (TCM) has been widely accepted and used in the PRC for thousands of years to treat wounds and diseases, with the use of traditional Chinese medicine such as herbs, herbal materials, herbal preparations and finished products. The traditional Chinese medicine market consists of four segments based on the complexity of processing and product types, namely Chinese herbal medicine, decoction pieces, Chinese patent medicine and traditional Chinese dietary supplements.

 

Chinese herbal medicine

 

Chinese herbal medicine represents the raw or unfinished products of Chinese herbs. It usually refers to the medicinal parts of plants, animals and mineral materials that can be used to produce decoction pieces and Chinese patent medicine.

 

Decoction pieces

 

Decoction pieces are produced by further processing raw Chinese herbs based on TCM theories and procedures including dehairing, slicing, chopping, boiling, steaming, frying and etc. Recent years have witnessed the development of modernized decoction technologies such as modernized extraction, concentration, ultra-fine pulverization and etc.

 

Chinese patent medicine

 

Chinese patent medicine or propriety Chinese medicine refers to any proprietary product composed solely of Chinese herbal medicines and/or materials of herbal, animal or mineral origin, formulated in a finished dose form and used for the diagnosis, treatment, prevention or alleviation of disease or symptom of a disease in human beings.

 

Traditional Chinese dietary supplements

 

Traditional Chinese dietary supplements are Chinese herbal supplements used for the prevention of disease. Compared to herbal medicine, traditional Chinese dietary supplements usually choose herbs that are considered mild and moderate.

 

Value Chain Analysis

 

 

Note: The Company is a vertically integrated Chinese patent medicine enterprise engaging in the supply, manufacture and distribution of Chinese patent medicine in the PRC.

 

Source: Frost & Sullivan Report

 

The upstream of Chinese patent medicine market in the PRC mainly refers to raw material suppliers such as crop and livestock producers who provide mineral, animal and plant tissues that can be used for the manufacture of TCM. Midstream Chinese patent medicine manufacturers procure TCM herbs through direct sales or distributors and produce Chinese patent medicine. Finished products will be sold to downstream medical service providers such as hospitals, clinics and etc. directly or through distributors. Downstream healthcare consumers can purchase Chinese patent medicine from medical service providers.

 

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Market Size of Chinese Patent Medicine

 

 

Source: Frost & Sullivan Report

 

As stated in the Frost & Sullivan Report, from 2014 to 2018, stimulated by favorable government policies including the expansion of the National Drug Catalog for Basic Medical Insurance, Work-Related Injury Insurance, and Maternity Insurance and rising market demand for Chinese patent medicine, the total market size of Chinese patent medicine by principal business revenue in the PRC grew from RMB580.7 billion in 2014 to RMB630.9 billion in 2018, representing a CAGR of approximately 2.1%. The market experienced a fall in 2017, primarily due to more stringent regulations and the winding up of a number of manufacturing enterprises.

 

According to the Frost & Sullivan Report, in spite of the continuously aging population and rising awareness of healthcare, the market size of Chinese patent medicine in the PRC is anticipated to increase at a CAGR of approximately 6.0% in the next five years, from RMB668.8 billion in 2019 to RMB844.3 billion by the end of 2023.

 

Market Size of Traditional Chinese Dietary Supplements

 

 

Source: Frost & Sullivan Report

 

Alongside rising healthcare awareness and improving living standards of the PRC population, the traditional Chinese dietary supplements market experienced a rapid growth from RMB60.9 billion in 2014 to RMB86.6 billion in 2018, representing a CAGR of approximately 9.2%. Looking forward, with the expanding expenditure on healthcare product and service, market size of traditional Chinese dietary supplements by revenue is anticipated to rise with a CAGR of approximately 9.6%, from RMB93.7 billion in 2019 to RMB135.1 billion by the end of 2023.

 

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Market Drivers

 

Increasing disposable income and healthcare awareness. Under supportive economic policies promulgated by the PRC government, the PRC has maintained a stable economic growth amidst the uncertainties in the global economic environment over the past five years. Consumers in the PRC are paying more attention on improvements in living standards and healthcare products and service, accompanying the economic development and rise in disposable income. According to International Monetary Fund (IMF), per capita annual disposable income of the PRC increased with a CAGR of approximately 9.0%, reaching RMB28,200 by the end of 2018. In addition, with the healthcare reform and the implementation of the 13th Five-Year Plan, per capita annual expenditure on healthcare attained RMB1,766.9 in 2018 with a CAGR of approximately 12.0% from 2014, which supports the steady development of Chinese patent medicine market in the PRC.

 

Growing aging population and prevalence of chronic diseases. As stated by the National Bureau Statistics of China, the PRC population is aging rapidly with the population aged 65 or above increasing at a CAGR of approximately 4.9% during the period from 2014 to 2018. The aging population usually have weaker immune systems and higher possibility of illness. In particular, chronic diseases are prevalent among the elderly, driving the healthcare demand among people aged 65 or above. In addition, as TCM products are usually considered helpful in protecting and improving the health and well-being of people, consumers in the PRC usually prefer TCM products and service to maintain health, and prevent and treat diseases, which brings sustained market demand for Chinese patent medicine. In the next five years, the aging population is forecasted to account for 14.7% of the total population of the PRC, continuously driving the market of Chinese patent medicine in the PRC.

 

Favorable governmental policies and regulations. In February 2017, the Ministry of Human Resources and Social Security issued a new version of the National Drug Catalogue for Basic Medical Insurance, Work-Related Injury Insurance, and Maternity Insurance to include additional types of pharmaceutical products in the coverage of insurance and reimbursement. The total number of products in the Catalogue reached 2,535, with 1,238 being Chinese patent medicine. Compared to the old version, the total number of Chinese patent medicine increased by 25.4%, accounting for 48.8% of the total number of products in the Catalogue. Insurance and reimbursement coverage by the PRC government is forecasted to encourage market demand and consumption of Chinese patent medicine in the PRC. In addition, the Outline for the Strategic Development of Chinese Medicine (2016-2030) (《中医药发展战略规划纲要(2016-2030)》) aims to allow every citizen to enjoy quality TCM services by the end of 2020. The Outline of the 13th Five-Year Plan for the National Economic and Social Development of the People’s Republic of China (《中华人民共和国国民经济和社会发展第十三个五年规划纲要》) also highlights the importance of TCM and sets TCM as a strategic priority in the PRC.

 

Outbreak of COVID-19. A new corona virus, COVID-19, emerged in December 2019 and then spread rapidly worldwide in 2020. The outbreak of COVID-19 caused 81,669 infections and 3,329 deaths in the PRC as of April 4, 2020, based on official numbers. Common symptoms of COVID-19 include fever, cough, and shortness of breath. Currently, there is no specific antiviral treatment of COVID-19 or cure for an infection. Treatments focusing on managing symptoms are generally accepted in the clinical applications. For example, according to Shanghai Municipal Health Commission, paracetamol is recognized as the only recommended antipyretic-analgesic drug for the clinical application of COVID-19 treatment. Apart from conventional treatment, the use of TCM as a supplement to conventional therapy has been recommended by Wuhan Municipal Health Commission and National Health Commission of the PRC. Furthermore, as consumers in the PRC usually prefer TCM products to maintain health and prevent disease, the Chinese patent medicine market in the PRC is expected to demonstrate a strong growth in 2020 and afterwards.

 

Market Trend

 

Integration of e-commerce. Starting from 2016, with the issue of the “Internet + Human Resources and Social Security” 2020 Program (《“互联网+人社”2020行动计划》) by the Ministry of Human Resources and Social Security, e-commerce platform became the new main retail sales channel for Chinese patent medicine in the PRC. In 2017, the National Administration of Traditional Chinese Medicine, a state agency under the jurisdiction of National Health Commission that oversees China’s traditional Chinese medicine industry published the Guiding Opinions on Promoting the Integration of Traditional Chinese Healthcare Service and Internet, which supports online development of TCM product and service. It is expected that with the supportive government policies and rising adoption of e-commerce in the PRC, online expansion and integration of e-commerce will become a new market trend in the Chinese patent medicine market in the PRC.

 

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Development of overseas market. The National Development and Reform Commission and the National Administration of Traditional Chinese Medicine of the PRC together issued the Development Plan for the “Belt and Road Initiative” of Traditional Chinese Medicine (2016-2020) (《中医药“一带一路”发展规划(2016-2020年) 》) (the “Development Plan”). Based on the Development Plan, China plans to establish 30 TCM centers and 50 TCM demonstration bases for promoting traditional Chinese medicine in foreign countries. Expansion and development of an overseas TCM market is expected to be another trend of the Chinese patent medicine market in the next five years.

 

COMPETITIVE LANDSCAPE OF CHINESE PATENT MEDICINE MARKET IN THE PRC

 

Competition Overview

 

The Chinese patent medicine market in the PRC is fragmented with over 1,500 sizable Chinese patent medicine enterprises by the end of 2018. As stated in the 13th Five Year Plan, the PRC government will encourage mergers and acquisitions in the industry, which is expected to increase the concentration of the overall Chinese patent medicine market in the PRC.

 

Major Competitors

 

Company Name  Year of Establishment  Headquarter  Description
Guangzhou Pharmaceutical Holdings Ltd.  1951  Guangzhou, the PRC  Guangzhou Pharmaceutical is dedicated to the research and development of Chinese patent medicine, Chinese herbal medicine, chemical pharmaceutical products, biological medicine and healthcare products. It engages in the supply, manufacture, logistics and distribution of healthcare products and services.
Beijing Ton Ren Tang Group Co., Ltd.  1669  Beijing, the PRC  With a history of over 300 years, Tong Ren Tang is a Chinese pharmaceutical company specializing in the manufacturing and retail sales of TCM. It has 5 manufacturing bases with over 40 production lines to produce over 1,000 types of products.
Yunnan Baiyao Group Co., Ltd.
(SZSE: 000538)
  1971   Kunming, the PRC  

With over 100 years of history, Yunnan Baiyao is a pharmaceutical enterprise which develops, manufactures, distributes and sells TCM products. Its products are sold in the PRC, Southeast Asia and other regions and countries. Yunnan Baiyao Group Co., Ltd. was listed on the Shenzhen Stock Exchange in 1993.

 

Entry Barrier Analysis

 

License and qualification. Market participants in the Chinese patent medicine market in the PRC are required to obtain a Pharmaceutical Production License from the National Medical Products Administration. The license will be issued only after it is determined, through an inspection, that the a company’s relevant production facilities are at or above the applicable standards for sanitary conditions, quality assurance systems, management structure and equipment standards. Meanwhile, manufacturers must produce in accordance with the Standards for Quality Control of Pharmaceutical Production formulated by the Department of Pharmaceutical Supervisory and Administrative under the State Council and obtain GMP Certificate.

 

Qualified and experienced personnel. Chinese patent medicine enterprises rely heavily on qualified and experienced talents, as their expertise and knowledge will directly affect the research and development, manufacturing, and distribution activities of market participants. Established market participants with proven track record and good industry reputation are more likely to attract professional talents. New market entrants may not be able to recruit enough qualified workers to establish their business in the Chinese patent medicine market in the PRC.

 

Significant capital investment. It is crucial for Chinese patent medicine market participants to have sufficient capital for the research and development for new products, maintenance and upgrade of manufacturing and production facilities and etc. Market participants with years of establishment generally possess sufficient capital for the R&D and manufacturing activities. In addition, established market participants have a proven track record and industry reputation to raise external funds. New market entrants, on the other hand, may find it hard to raise sufficient initial capital investment to enter the Chinese patent medicine market.

 

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BUSINESS

 

Our Mission

 

Our mission is to provide solutions to the physical conditions of the elderly during their aging process and to promote their general well-being.

 

Overview

 

Traditional Chinese Medicine (“TCM”) is a comprehensive form of healthcare that has been widely adopted in China for more than 23 centuries. TCM rests upon the assumption that the human body is an ecosystem, embodying the fusion of Shen (psyche), Essence (soma), Qi, Moisture (body fluids), and Blood (tissue). Health in the context of TCM is more than just the absence of diseases, but to identify imbalance in human body and restore harmony. TCM is not only intended to cure diseases but to enhance the capacity for fulfillment, happiness and general well-being of people.

 

We are a pharmaceutical company based in Jiangxi, China, specializing in the manufacturing, marketing, sales and distribution of traditional Chinese medicine derivatives (“TCMD”) products targeting the elderly with the goal of addressing their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products, which are sold in approximately 280 cities of 31 provinces in China as of the date of this prospectus. In addition, through our subsidiary Jiangxi Universe Pharmaceuticals Commercial Trade Co., Ltd. (“Universe Trade”), we sell biomedical drugs medical instruments, Traditional Chinese Medicine Pieces (“TCMP”) products, and dietary supplements manufactured by third-party pharmaceutical companies.

 

Products manufactured by us. The 13 TCMD products currently manufactured by us fall into two categories: (1) treatment and relief for common chronic health conditions in the elderly designed to achieve physical wellness and longevity (“Chronic Condition Treatments”), and (2) cold and flu medications.

 

Chronic Condition Treatments: Guben Yanling Pill, Shenrong Weisheng Pill, Quanlu Pill, Yangxue Danggui Syrup, Wuzi Yanzong Oral Liquid, Fengtong Medicinal Liquor, Shenrong Medicinal Liquor, Qishe Medicinal Liquor, Fengshitong Medicinal Liquor, and Shiquan Dabu Medicinal Liquor.

 

Cold and flu medicines: Paracetamol Granule for Children, Isatis Root Granule and Qiangli Pipa Syrup.

 

As people age, they have an increasing risk of developing chronic health conditions. According to a report published by the Chinese Center for Disease Control and Prevention in March 2019, 75.8% of seniors have at least one chronic health condition, and 35.1% of them have two or more. Some of the most common chronic diseases in the elderly include arthritis, chronic kidney disease, fatigue, and low back pain. Our products under the category of Chronic Condition Treatments are designed to address some of the aforementioned diseases. Our cold and flu medicines, on the other hand, include products designed to treat and relieve symptoms of respiratory illnesses caused by bacteria and viruses.

 

Our third-party products. Through our subsidiary, Universe Trade, we also distribute and sell products manufactured by third-party producers, including biomedical drugs, medical instruments, TCMP products and dietary supplements. As of March 31, 2020, we had distributed over 4,000 third-party products.

 

Our Customers. Our major customers are pharmaceutical companies, hospitals, clinics and drugstore chains, primarily located in Jiangxi Province, Jiangsu Province, Guangdong Province, and 27 other provinces in China.

 

We believe we have implemented a successful business model, and our business has grown substantially since our inception. Our customer base continue to grow meaningfully, from a total of 1,304 customers in 2017 to 2,603 customers at the end of fiscal year 2019. Our revenues from selling our own products increased from $17,620,823 for the fiscal year ended September 30, 2018 to $20,895,542 for the fiscal year ended September 30, 2019. Our revenues from distributing and selling products manufactured by third-party companies increased from $10,893,357 for the fiscal year ended September 30, 2018 to $12,333,774 for the fiscal year ended September 30, 2019. Our net income was $7,602,933 for the fiscal year ended September 30, 2018 and $7,551,465 for the fiscal year ended September 30, 2019.

 

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Our Competitive Strengths

 

We believe we have the following competitive strengths:

 

A recognized manufacturer of TCMD products in China’s rapidly growing health and wellness market

 

We are a recognized manufacturer of TCMD products in China’s rapidly growing health and wellness market. We own a number of famous brands in the industry, which are also our registered trademarks in China. For instance, our brand “Hu Zhuo Ren (胡卓人)”, with over 17 years of history, is especially well-recognized in Jiangxi Province. Further, our brand “Bai Nian Dan (百年丹)” is famous for specializing in products targeted at the physical wellness of older population. Our other recognized brands include “Long Zhong (龙种)”, “Yi Ke Ting (益克停)”, “Xue Li (血力)”, “Duo Lai Mei (朵来美)”, “Shu Er Kang (舒儿康)”, “Hu Zhuo Ren (胡卓仁)”, “Ai Bi Xin (爱必欣)”, and “Yong He Shuang Feng (永和双凤)”.

 

The Chinese patent medicine industry is growing rapidly and steadily in China. According to Frost & Sullivan, from 2014 to 2018, the total market size of Chinese patent medicine grew from RMB580.7 billion ($89.3 billion) in 2014 to RMB630.9 billion ($97.1 billion) in 2018, representing a Compound Annual Growth Rate (“CAGR”) of 2.1%, and is expected to further increase to RMB844.3 billion ($122.4 billion) in 2023, representing a CAGR of 6.0% between 2019 and 2023. The primary growth drivers of China’s Chinese patent medicine industry include the increasing disposable income and healthcare awareness in China, growing aging population and the prevalence of chronic diseases, and favorable governmental policies and regulations.

 

We attribute our success to our recognized brand names, strong relationships with our suppliers, loyal and stable customer base, and proven capability to develop and manufacture TCMD products aligned with the preferences of end consumers.

 

Rigorous quality control standards and manufacturing protocols

 

We believe that the quality of our products is crucial to our success as a pharmaceutical company, and we have implemented an overall quality control system, as well as strict manufacturing protocols specifically designed for each product. Our quality control system starts from procurement. The raw materials we source from our suppliers must first be examined and certified for quality. We review the performance of our suppliers based on the quality of their products and adjust future orders from them accordingly. Further, an average of three inspections are made by our personnel throughout the manufacturing process to ensure that the manufacturing protocols are strictly followed, and that the quality of semi-products are at or above standard. After completion of manufacturing, our personnel will perform an overall quality examination. Through the implementation of a quality control system, we are able to identify the weakness in our production process and improve our operations overtime. We believe our quality control standards and manufacturing protocols have contributed to the high quality and consistency of our products.

 

Visionary management team with substantial industry experience

 

Our visionary management team is the bedrock of our success. Many members of our leadership possess extensive experience in the pharmaceutical, biomedical, chemical and related industries. For instance, our chief executive officer, Mr. Gang Lai, has over 20 years of corporate management experiences. Mr. Xiaojun Deng, the deputy manufacturing manager of Jiangxi Universe, holds a degree in Traditional Chinese Medicine Manufacturing from Jiangxi Medical School with over 25 years of working experience in the Chinese patent medicine industry. Ms. Lin Yang, our chief financial officer, has over 14 years of finance and management experience working in pharmaceutical companies. Mr. Yajun Hu, the general manager of Jiangxi Universe, has over five years of experiences in managing a pharmaceutical company. Moreover, many members of the team have worked together for an extended period of time and helped build the Company from the ground up. The rapport that the team has built extends beyond the talent and skills of individual team members and contributes to a collective sense of mission.

 

Strong record of growth and profitability

 

We have been profitable since 2008 and we believe we are well-positioned to benefit from the rapid growth of the TCMD market in China and to leverage the leading market position of our flagship products in order to further grow our business. Our revenue was $33,229,316 for the fiscal year ended September 30, 2019, which represents an increase of $4,715,316, or 16.5%, compared with the revenue of $28,514,180 for the fiscal year ended September 30, 2018. Our net income was $7,551,465 for the fiscal year ended September 30, 2019, which represents a slight decrease of $51,468, or 0.7%, compared with the net income of $7,602,933 for the fiscal year ended September 30, 2018.

 

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Our Growth Strategy

 

Build a Strong Brand Image to Achieve National Recognition

 

We believe that broader recognition and favorable perception of our brand by consumers in our target markets are crucial to our future success. Our brand has gained a solid reputation in Southern China, especially Jiangxi Province, and we plan to increase the awareness of our brand among consumers in other parts of China. Specifically, we plan to build a strong brand image that we are a TCMD producer specializing in the development and manufacture of products designed to address the physical conditions of the elderly during the aging process and to promote their general well-being. To achieve our goal, we plan to spend most of our efforts on the development and marketing of our brand “Bai Nian Dan (百年丹)” as the brand to be associated with our ideal brand image because “Bai Nian” (百年) signifies longevity in the Chinese language, and “Dan” (丹) alludes to our signature product, Guben Yanlin Pill. We also intend to advertise targeting at older customers, including transmitting our advertisements through traditional media platforms such as television, live radio stations, newspapers, as well as in-person marketing at drug stores and clinics.

 

Enhance Our Distribution Network to Increase Market Penetration and Customer Stickiness

 

As of the date of this prospectus, our products are sold in 31 provinces in China. We plan to enter the markets in other parts of China. To achieve this goal, we have made efforts to further strengthen and expand our distribution network through connecting with more local distributors, chain drugstores, malls and supermarkets in other parts of China. Currently, our strategic focus is to attract more marketing talents and build a stronger sales and marketing team to keep us on top of the latest information of local markets, customer preferences and industry trends. We also plan to create an online store to reach a wider consumer demographic. In the future, we plan to start our own retail chain stores and further diversify our distribution channels to increase our market penetration and customer base.

 

Integrate Our Internal Manufacturing Capability to Ensure Productivity, Supply, and Selection of Products

 

We plan to further optimize our production facilities to increase the productivity, supply and selection of our products, so that we may gain competitive edges over our competitors. Specifically, we intend to increase productivity and supply by expanding the existing production lines and converting them into automated production lines. To increase the selection of our products, we plan to build additional production facilities for our licensed TCMD products to be launched in the future.

 

Further Grow Our Research and Development Capacities

 

According to the Frost & Sullivan Report, the size of the Chinese patent medicine market have been growing steadily. To respond to increasing market demand, we will continue to provide financial and operational resources to focus on the research and development of TCMD products and dietary supplements designed to address the physical conditions of the elderly during the aging process and promote their general well-being.

 

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Our Manufactured Products

 

As of March 31, 2020, we have been manufacturing, marketing and selling 13 different TCMD products to about 2,603 customers in 30 different provinces in China. Our TCMD products fall under two categories: Chronic Condition Treatments and cold and flu medications. The following list outlines our current products:

 

Product         Percentage oxf Gross Sales    
Category  Product Name  Posology  2019   2018   Intended Uses
Chronic Condition Treatments  Guben Yanling Pill  Pills   32.4%   25.9%  To relieve fatigue, palpitation, low back pain, and generalized weakness and soreness.
   Shenrong Weisheng Pill  Pills   5.3%   5.2%  To relieve fatigue, dizziness, excessive sweating, and pain in the waist and the knees.
   Quanlu Pill  Pills   0.4%   1.1%  To improve kidney functions and spleen functions, and relieve fatigue, low back pain, and knee pain.
   Wuzi Yanzong Oral Liquid  Oral liquid   0.7%   0.3%  To improve kidney functions.
   Yangxue Danggui Syrup  Syrup   3.5%   4.5%  To improve blood circulation and treating dizziness, headaches and menstrual pains.
   Fengshitong Medicinal Liquor  Medicinal liquor   0.2%   0.2%  To treat low back pain and numbness in the feet and hands, and relieve rheumatoid arthritis pain.
   Shiquan Dabu Medicinal Liquor  Medicinal liquor   1.9%   3.4%  To treat dizziness, palpitation, fatigue, and weakness, and ease menstrual flow.
   Fengtong Medicinal Liquor  Medicinal liquor   2.9%   3.9%  To treat low back pain and numbness in the feet and hands, and relieve symptoms of arthritis.
   Shenrong Medicinal Liquor  Medicinal liquor   1.6%   2.0%  To improve blood circulation and relieve symptoms of fatigue, low back pain and leg pain.
   Qishe Medicinal Liquor  Medicinal liquor   0.4%   0.5%  To treat blood stasis, arthritis, and numbness in the feet and hands.
Cold and Flu Medicines Medicinal Liquor  Qiangli Pipa Syrup  Syrup   6.9%   8.2%  Relieve cough and reduce mucus and phlegm.
   Paracetamol Granule for Children  Granules   1.6%   1.4%  To relieve children’s headaches, muscle aches, toothaches, colds and fevers.
   Isatis Root Granule  Granules   5.0%   5.3%  To treat common colds and other infections of the upper respiratory tract.

 

Among the 13 TCMD products we manufacture, Guben Yanlin Pill is our signature product. For the fiscal years ended September 30, 2019 and 2018, the revenue derived from the sale of Guben Yanlin Pill represented 32.4% and 25.9% of our total revenue.

 

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Our Manufacturing Process

 

The following chart illustrates our main manufacturing process from raw material purchase to marketing:

 

 

Our Raw Materials and Suppliers

 

We select our raw materials for the manufacturing of our products strictly in accordance with the guidance in Pharmacopoeia of the People’s Republic of China (《中华药典》) (the “PPRC”), an official compendium of drugs covering both TCM and western medications complied by the Pharmacopoeia Commission of the Ministry of Health of People’s Republic of China. The PPRC specifies the standards of description, dosage, purity, storage, and other material information for each drug. In the manufacturing of our TCMD products, a total of more than 110 raw materials are regularly used, among which angelica, codonopsis, poria mushroom, isatis root, loquat leaves, safflower, and Baijiu liquor represent our main raw materials.

 

Currently, we have stable access to all the raw materials necessary for our production. There are many suppliers in the industry for the regularly used raw materials, and therefore we are not relying on a single supplier for any of our raw materials. If we are unable to purchase any of the raw materials from one supplier, we do not expect to face material difficulties in locating another supplier at substantially the same price. While the prices of such raw materials may vary greatly from time to time due to market forces beyond our control, we believe we can hedge such risk by adjusting our price, or absorbing higher costs if and when necessary.

 

To source the raw materials required for our products, we regularly contract with our suppliers by placing bulk orders with them at below market prices. Our raw material suppliers include mostly traditional Chinese medicine manufacturers and pharmaceutical trading companies. After years of business cooperation, we believe that our relationships with our current suppliers are strong and stable.

 

We consider our raw materials suppliers whose sales to us accounted for more than 10% of our overall purchases in any given period to be our major suppliers for such period. We had one such supplier during the fiscal year ended September 30, 2019, Jiangxi Hongjing Pharmaceutical Co., Ltd., whose sales to us accounted for approximately 14.1% of our overall purchases in that fiscal year. We had one such supplier during the fiscal year ended September 30, 2018, Jiangxi Boyuantang Pharmaceutical Co., Ltd., whose sales to us accounted for approximately 15.2% of our overall purchases in that fiscal year.

 

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Manufacturing Process

 

The following is a brief description of the manufacturing process of the TCMD products we currently produce by dosage forms.

 

Pill Products

 

To make our pill products, the raw materials first go through a preparation process, during which such materials are dried, roughly ground and sterilized. Processed raw materials are then finely ground, mixed with honey, and made into pills before they are finally packaged.

 

Granule Products

 

The raw materials of our granule products typically go through a purifying process, during which such materials are stewed, filtered, condensed, and let stand. Processed raw materials are then mixed with supplemental ingredients before they are made into granules, dried, and finally packaged.

 

Syrup Products

 

The raw materials of our syrup products are first stewed together and condensed. Condensed liquid is then filtered and mixed with supplemental ingredients before it is bottled and packaged.

 

Oral Liquid Products

 

The raw materials of our oral liquid products are first filtered, condensed, and fixed with other supplemental ingredients. The processed materials are then further filtered and sterilized before being bottled and packaged.

 

Medicinal Liquor Products

 

The raw materials of our medicinal liquor products first go through a purifying process, during which such materials are selected, cut, rinsed, stewed, and refrigerated. Processed raw materials then go through an extraction process that involves mixing with solvents and filtering. Then, the liquor products are bottled and packaged.

 

Quality Control and Assurance

 

In China, each pharmaceutical manufacturer is required to comply with the Good Manufacturing Practice (the “GMP”) standards and obtain Pharmaceutical Manufacturing Permits and GMP Certificates granted by National Medical Products Administration (the “NMPA”) or its local branches before it engages in any pharmaceutical manufacturing and distribution. The GMP standards regulate whole processes and procedures adopted to manufacture pharmaceutical products to ensure their high quality. We are a GMP-certified company and have obtained the Pharmaceutical Manufacturing Permit with the product manufacturing scopes covering our pharmaceutical products in the forms of tablets, pills, granules, syrup, oral liquid, and medicinal liquor.

 

We seek to ensure the high quality of our products through our quality control system and by conducting product testing and review. Our entire manufacturing process is strictly supervised pursuant to internal quality control standards that have been set up in strict adherence to the guidelines provided in PPRC. We conduct our quality testing by examining the quality of each and every type of raw materials. If the raw materials meet our quality standards, we start the manufacturing process, during which we continue our quality testing for every substantial procedure, including filtering, grinding, mixing, and pill making. After our products are packaged, we will examine various features of our final products thoroughly, including appearance, weight, taste, water content, and microorganism content.

 

Third-party Product Distribution

 

In addition to manufacturing our own products, we also distribute and sell, through our subsidiary Universe Trade, biomedical drugs, medical instruments, TCMP products and dietary supplements manufactured by third-party pharmaceutical companies. For the year ended September 30, 2019, we had distributed roughly 3,590 third-party products, of which approximately 71.55% are biochemical drugs, such as liquid glucose, prednisolone, and citicoline, approximately 18.68% are medical instruments, such as drug-eluting stents, surgical tubes and syringes, approximately 9.05% are TCMP products, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules and approximately 0.72% are dietary supplements, such as vitamins, probiotic powder, and calcium tablets. We distribute these products to hospitals, drugstore chains, clinics, and pharmaceutical companies.

 

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Our Suppliers of Third-party Products

 

We source third-party pharmaceutical products from their manufacturers in China. Our third-party product suppliers include mostly medical instrument manufacturers, pharmaceutical product manufacturers and dietary supplement manufacturers. For all of the products that we source and sell, we can generally find similar replacements in the market from the competitors of our current suppliers. Accordingly, we do not have any continuous or long-term supply agreements with any of these suppliers. We purchase third-party medical products from our suppliers on a per purchase order basis.

 

For the fiscal year ended September 30, 2019 and 2018, we purchased products from over 650 and over 500 suppliers, respectively. For the fiscal years ended September 30, 2019 and 2018, we did not have any supplier of third-party products whose sales to us accounted for more than 10% of our overall purchases of that fiscal year.

 

Our Customers

 

Our customers are mostly pharmaceutical companies, hospitals, clinics and drugstore chains with pharmaceutical business qualification certificates, awarded and authorized by the National Medical Products Association (the “NMPA”) and are authorized to sell and deliver our products to end consumers. As of March 31, 2020, our customers are scattered over 280 cities of 31 provinces in China. We determine whether to establish long-term business relationships with our customers primarily based on two factors, their ability to promote our products and their ability to make payments on time.

 

As of September 30, 2019, we generated revenues from a total of 2,603 customers, of which 1,341 were pharmaceutical companies, 573 were clinics, 449 were drug stores, and 240 were hospitals. For the fiscal year ended September 30, 2019, our revenues generated from sales to pharmaceutical distributors, hospitals, clinics and drugstore chains represented 58.89%, 21.22%, 19.40%, and 0.48% our of total revenues, respectively. For the fiscal year ended September 30, 2018, our revenues generated from sales to pharmaceutical distributors, hospitals, clinics and drugstore chains represented 69.47%, 20.19%, 8.65% and 1.7% of our total revenues, respectively. None of our customers generated more than 10% of our revenue for the fiscal years ended September 30, 2019 and 2018. However, our top 10 customers aggregately accounted for 34.5% and 31.6% of our total revenue for the years ended September 30, 2019 and 2018, respectively.

 

Marketing and Sales

 

We believe that marketing activities are crucial to our success in the competitive Chinese patent medicine industry. As of March 31, 2020, we had a total of 57 employees in our marketing department. Employees in our marketing department are mainly responsible for performing various marketing activities, including researching the most updated industry and market information, analyzing market trends and consumer preferences, setting up marketing strategies, executing sales contracts, communicating with existing customers and networking with potential customers.

 

Our marketing and sales initiatives for the next several years will focus on three objectives: developing a strong brand image, building a successful marketing team, and expanding retail channels. To develop our brand image as a producer of TCMD products aiming at addressing the physical conditions of the elderly during the aging process and promoting their general well-being, we seek to promote our brand “Bai Nian Dan (百年丹)” utilizing both online marketing channels such as WeChat official account and other social media and traditional platforms such as television, newspapers, and live radio stations. As part of the efforts to build a successful marketing team, we intend to hire additional sales talents and provide monetary and equity incentives to sales employees. For purposes of expanding our retail channels, we plan to open an online retail store, and according to the preferences of online shoppers, we may adjust the sizes, packaging, or prices of our products.

 

Research and Development

 

We established a research and development department in 1998. Our research and development team has been focusing on the upgrade of current products and the development of production techniques to increase productivity. After years of continued development, our research and development department has become the core of our technological innovation efforts. As of March 31, 2020, we had 9 employees dedicated to research and development.

  

R&D Achievements

 

Our research and development team has invented patented technologies to enhance the quality of our products and our manufacturing efficiency. For instance, our patented TCM mixer is able to mix powders more evenly and thoroughly compared to a traditional mixing machine, thereby increasing the quality of the mixed medicine powder. The special design of our patented TCM concentration device is able to increase the contact area of the liquid medicine as compared to a regular concentration device, thereby increasing the manufacturing efficiency of our products in liquid dosage form.

 

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As a result of our efforts, our subsidiary, Jiangxi Universe, became certified as a National High-Tech Enterprise by the Science and Technology Department of Jiangxi Province in December 2013, with a term of three years. We successfully renewed the certificate in December 2019. This certification entitles us to a favorable corporate income tax of 15%, rather than the unified tax rate of 25% we would pay if we were not certified.

 

R&D Development Plan

 

To further our strong brand image, we plan to develop products designed to address the physical conditions of the elderly during the aging process and promoting their general well-being, including TCMD products and dietary supplements. In the upcoming years, we intend to focus on the development of immunity boost products and sleep aids.

 

In addition to our own efforts, our research and development team also intends to collaborate with other industry professionals and TCM experts with respect to the development of products we plan to launch in the future.

 

Competition

 

We compete with pharmaceutical companies in China that manufacture and sell products similar to ours. Furthermore, many of these companies are more established than we are, and have significantly greater financial, technical, and other resources than we presently possess. Some of our competitors may be able to respond more quickly to new opportunities, market changes or changes of customer preferences, and may be able to undertake more extensive promotional activities, offer more attractive terms to distributors, and adopt more aggressive pricing strategies than we are. Despite that, we believe we are well-positioned to compete in this market with our diversified product portfolio, recognized brand name, established sales and marketing network and experienced management team with a proven track record.

 

Competitors of products manufactured by us

 

The following table sets forth the competitors of products manufactured by us.

 

Products  Competitors
Guben Yanling Pill  Taiyuan Daningtang Pharmaceuticals Co., Ltd.;
Shenyang Dongxin Pharmaceutical Industry Co., Ltd.
    
Shenrong Weisheng Pill  China Beijing Tong Ren Tang Group Co., Ltd.;
Jiangxi Zhongyuan Pharmaceutical Co., Ltd.
    
Quanlu Pill  Renhe Pharmaceuticals Co.;
Guangzhou Pharmaceutical Co., Ltd.
    
Fuzi Lizhong Pill  China Beijing Tong Ren Tang Group Co., Ltd.
    
Yangxue Danggui Syrup  Sichuan Tiancheng Pharmaceuticals Co., Ltd.
    
Qiangli Pipa Syrup  Jiangzhong Pharmaceuticals Co., Ltd.;
China Resources Sanjiu Medical & Pharmaceuticals Co., Ltd.;
Jiangxi Tengwangge Pharmaceuticals Co., Ltd.
    
Paracetamol and Chlorpheniramine Maleate
Granules for Children
  China Resources Sanjiu Medical & Pharmaceuticals Co., Ltd.; Sunflower Pharmaceutical Group Co., Ltd.
    
Isatis Root Granules  Guangzhou Pharmaceuticals Co., Ltd.;
China Resources Sanjiu Medicine & Pharmaceuticals Co., Ltd.;
China Beijing Tong Ren Tang Group Co., Ltd.
    
Wuzi Yanzong Oral Liquid  China Beijing Tong Ren Tang Group Co., Ltd.
    
Shuquan Dabu Medicinal Liquor  Jiangxi Puzheng Pharmaceuticals Co., Ltd.
    
Shenrong Medicinal Liquor  Jiangxi Puzheng Pharmaceuticals Co., Ltd.
    
Qishe Medicinal Liquor  Jiangxi Zhongyuan Pharmaceuticals Co., Ltd.
    
Fengtong Medicinal Liquor  Jiangxi Zhongyuan Pharmaceuticals Co., Ltd.

 

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Competitors of Third-party Products

 

Our competitors of pharmaceutical products, including biochemical drugs and TCMP products, are many internationally and nationally well-known manufacturers and distributors, including China Beijing Tong Ren Tang Group Co., Ltd., Yunnan Baiyao Group, China Resources Sanjiu Medicine & Pharmaceuticals Co., Ltd., and Guangzhou Baiyunshan Pharmaceutical Holdings Co., Ltd.

 

Our competitors in the medical instrument market include many well-known manufacturers and distributors of medical instruments, including Shinva Medical Instrument Co., Ltd., Jiangsu Yuyue Medical Equipment & Supply Co., Ltd., Lepu Medical Technology (Beijing) Co., Ltd., and Shanghai Runda Medical Technology Co., Ltd.

 

Our competitors in the dietary supplement market include internationally and nationally well-known manufacturers and distributors of dietary supplements, such as By-health Co., Ltd., Amway (China) Co., Ltd., and Perfect (China) Co., Ltd.

 

We intend to compete with these larger companies by appealing to the specific needs and preferences of our customers and offering competitive prices. For details regarding competitive landscape of the Chinese patent medicine industry, see “Industry.”

 

Employees

 

As of March 31, 2020, we had a total of 176 employees, all of which are located in China. The following table sets forth the number of our employees by function as of March 31, 2020.

 

Function 

Number of

Employees

  

% of

Total

 
Purchasing Department   9    5.11%
Warehouse Department   14    7.95%
Manufacturing Department   60    34.09%
Quality Control Department   11    6.25%
Research and Development Department   9    5.11%
Marketing Department   47    26.70%
Finance Department    8    4.55%
Administration Department   18    10.23%
Total   176    100%

 

Our success depends on our ability to attract, retain and motivate qualified personnel. As part of our human resources strategy, we offer employees competitive salaries and other bonuses and incentives.

 

We primarily recruit our employees in China through direct hiring. We provide training to new employees that we hire. We also conduct regular and specialized internal training to meet the need of our employees in different departments. We believe that such training is effective in equipping our employees with the skill set and worth ethics we require.

 

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As required under PRC regulations, we participate in various employee social security plans that are organized by applicable local municipal and provincial governments, including housing, pension, medical, work-related injury, maternity and unemployment benefit plans.

 

We enter into standard contracts and agreements regarding confidentiality, intellectual property, employment, ethic policies and non-competition with most of our executive officers, managers and employees. These contracts typically include a non-competition provision effective during and up to one year after termination of their employment with us and a confidentiality provision effective during and up to one year after their employment with us.

 

Our employees have not formed any employee union or association. We believe that we maintain a good working relationship with our employees and we have not experienced any difficulty in recruiting staff for our operations as of the date of this prospectus.

 

Properties and Facilities

 

Our corporate headquarter is located in Jinggangshan, Jiangxi Province, China. We own properties in Jingggangshan as office spaces, storage facilities and manufacturing facilities with an aggregate gross floor area of approximately 825,563 square feet. We believe that our existing facilities are generally adequate to meet our current needs, but we expect to seek additional space as needed to accommodate future growth. Following is a list of our properties all of which we own the land use rights to:

 

No.  Land Use Right Holder  Property Address  Use of Property  Area in
Square Feet
  Terms of Use
                
1  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Manufacturing  173,467  October 2053
2  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Manufacturing  470,921  October 2053
3  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Manufacturing  57,010  October 2053
4  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Storage  27,426  October 2053
5  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Manufacturing  29,276  October 2053
6  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Storage  57,083  October 2053
7  Jiangxi Universe  265 Jingjiu Avenue, Economy and Technology Development District, Jinggangshan, Ji’an, Jiangxi, China  Manufacturing  10,380  October 2053

 

We manufacture all of our products at the properties listed above. Currently, we are capable of producing a maximum of approximately 12 million bottles of liquid products, 13 million boxes of pill products, and 10 million boxes of solid products annually.

 

Intellectual Property

 

We regard our patents, trademarks, domain names and other intellectual property critical to our business operations. We rely on laws and regulations on patents, trademarks and domain names to protect our intellectual property.

 

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Patents

 

As of March 30, 2020, we had 11 effective patents in China. The following table sets forth the title, patent number, application date, and the category of each patent.

 

No.  Patent Title  Patent Number  Application Date  Expiration Date  Patent Category
1  A Coarse Grinder for Chinese Medicine    CN201520922379.1  11/18/2015  11/17/2025  Utility Model
2  An Automatic Chinese Medicine Pill Maker  CN201821790286.8  10/31/2018  10/30/2028  Utility Model
3  A Chinese Medicine Boiler  CN201821787013.8  10/31/2018  10/30/2028  Utility Model
4  A Chinese Medicine Extractor  CN201821789886.2  10/31/2018  10/30/2028  Utility Model
5  A Chinese Medicine Distiller  CN201821787483.4  10/31/2018  10/30/2028  Utility Model
6  An Automatic Grinder for Chinese Medicine  CN201821789843.4  10/31/2018  10/30/2028  Utility Model
7  An Intelligent Traditional Chinese Medicine Sterilizer  CN201821787111.1  10/31/2018  10/30/2028  Utility Model
8  An Efficient Traditional Chinese Medicine Mixer  CN201821786741.7  10/31/2018  10/30/2028  Utility Model
9  A Traditional Chinese Medicine Concentration Device  CN201821795987.0  11/01/2018  5/6/2020  Utility Model
10  A Temperature-controlled Traditional Chinese Medicine Dryer  CN201821786955.4  6/18/2019  4/30/2028  Utility Model
11  A Chinese Medicine Pill Intelligent Bottling Machine  CN201821791526.6  10/31/2018  4/30/2020  Utility Model

 

Trademarks

 

Through Jiangxi Universe, we currently have 25 Chinese trademarks.

 

Trademark Number  Trademark Class  Issue Date  Expiration Date  Trademark Title
1456583  5  October 14, 2000  October 13, 2020*  永和双凤(Yong He Shuang Feng)
1715278  33  February 14, 2002  February 13, 2022*  胡卓人(Hu Zhuo Ren)
1728438  5  March 14, 2002  March 13. 2022*  龍種(Long Zhong)
1770559  5  May 21, 2002  May 20, 2022*  百年丹(Bai Nian Dan)
3222662  5  April 7, 2006  April 6, 2026*  舒儿康(Shu Er Kang)
3226175  5  September 21, 2003  September 20, 2023*  益克停 (Yi Ke Ting)
3226176  5  January 21, 2006  January 20, 2026*  血力(Xue Li)
3265593  30  February 28, 2004  February 27, 2024*  血力(Xue Li)
3279793  30  March 7, 2004  March 6, 2014* 
3279794  5  January 14, 2004  January 13, 2024* 
3279795  5  January 14, 2004  January 13, 2024* 
3362654  5  June 7, 2004  June 6, 2024*  胡卓仁(Hu Zhuo Ren)
3824261  30  September 21, 2005  September 20, 2025*  朵来美(Duo Lai Mei)
3829764  5  May 14, 2006  May 13, 2026*  朵来美(Duo Lai Mei)
3829765  5  May 14, 2006  May 13, 2026*  爱必欣(Ai Bi Xin)
4324589  5  November 28, 2007  November 27, 2027*  UPC
4361774  5  January 14, 2008  January 13, 2028*  万咛(Wan Ning)
4892932  5  January 14, 2009  January 13, 2029*  小益克停(Xiao Yi Ke Ting)
5597261  5  November 7, 2009  November 6, 2029*  百年丹(Bai Nian Dan)
5597262  5  November 7, 2009  November 6, 2029*  龙种 (Long Zhong)
5597263  5  November 7, 2009  November 6, 2029*  益克停 (Yi Ke Ting)
10664817  5  May 21, 2013  May 20, 2023  慕兰静 (Mu Lan Jing)

 

 

*The duration of this trademark has been extended for additional 10 years.

     

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We implement a set of comprehensive measures to protect our intellectual property, in addition to making trademark and patent registration application. Key measures include : (i) timely registration, filing and application for ownership of our intellectual property, (ii) actively tracking the registration and authorization status of our intellectual property and take action in a timely manner if any potential conflicts with our intellectual property are identified, (iii) clearly stating all rights and obligations regarding the ownership and protection of our intellectual property in all employment contracts and commercial contracts we enter into.

 

As of the date of this prospectus, we have not been subject to any material dispute or claims for infringement upon third parties’ trademarks, licenses and other intellectual property rights in China.

 

Seasonality

 

We currently do not experience seasonality in our business.

 

Environmental Matters

 

We comply with the Environmental Protection Law of China as well as applicable local regulations. In addition to statutory and regulatory compliance, we actively ensure the environmental sustainability of our operations. Parties may be levied upon us if we fail to adhere to and maintain certain standards. Such failure has not occurred in the past, and we generally do not anticipate that it will occur in the future, but no assurance can be given in this regard.

 

Insurance

 

We maintain certain insurance policies to safeguard us against risks and unexpected events. For example, we provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees in compliance with applicable PRC laws. We do not maintain business interruption insurance or product liability insurance, which are not mandatory under PRC laws. We do not maintain key man insurance, insurance policies covering damages to our network infrastructures or information technology systems nor any insurance policies for our properties. During the fiscal years ended September 30, 2019 and 2018, we did not make any material insurance claims in relation to our business.

 

Legal Proceedings

 

We may from time to time become a party to various legal administrative proceedings arising in our ordinary course of our business. As of the date of this prospectus, neither we nor any of our subsidiaries is a party of any pending legal proceedings, nor are we aware of any such proceedings threatened against us or our subsidiaries.

 

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REGULATIONS

 

This section sets forth a summary of the principal PRC laws and regulations relevant to our business and operations in China.

 

We are a pharmaceutical manufacturer in China. This section sets forth a summary of applicable laws, rules, regulations, government and industry policies and requirement that have a significant impact on our operations and business in China. This summary does not purport to be a complete description of all laws and regulations, which apply to our business and operations. Investors should note that the following summary is based on relevant laws and regulations in force as of the date of this prospectus, which may be subject to change.

 

Major Regulatory Authorities

 

The pharmaceutical industry in the PRC is mainly administered by four governmental agencies: (i) the NMPA, a department under the State Administration for Market Regulation (the “SAMR”) (国家市场监督管理总局), (ii) the National Health Commission (the “NHC”) (国家卫生健康委员会), (iii) the National Administration of Traditional Chinese Medicine (the “NATCM”) (国家中医药管理局), and (iv) the National Healthcare Bureau (the “NHB”) (国家医疗保障局).

 

The NMPA, whose predecessor is the China Food and Drug Administration, or the CFDA, is the primary regulator of almost all key stages of the life-cycle of pharmaceutical products, including non-clinical researches, clinical trials, marketing approvals, manufacturing, advertising and promotion, distribution and pharmacovigilance.

 

The NHC, formerly known as the National Health and Family Planning Commission, is the principal regulator of healthcare in China. It is primarily responsible for drafting national healthcare policies and regulating public health, medical services and health contingency system, coordinating the healthcare reform and overseeing the operation of medical institutions and professional practice of medical personnel. The NHC is responsible for (1) the research, production, circulation and use of Chinese medicines, including traditional Chinese medicine; (2) the preparation and publication of the Chinese Pharmacopoeia; and (3) the supervision of the selection, approval, distribution and revision of the National OTC Drug Catalogue. In addition, the CFDA and its local administrative authorities may take a number of enforcement actions to enforce their regulations.

 

The NATCM is an agency under the NHC that oversees China’s traditional Chinese medicine industry.

 

The NHB, a new authority established in May 2018, is responsible for (1) drafting and implementing policies, plans and standards on medical insurance, maternity insurance and medical assistance; (2) administering healthcare fund; (3) formulating a uniform medical insurance catalogue and payment standards on drugs, medical disposables and healthcare services; and (4) formulating and administering the bidding and tendering policies for drugs and medical disposables.

 

Regulations Related to Pharmaceutical Manufacture

 

Manufacturing License

 

Pursuant to the Pharmaceutical Administration Law of the People’s Republic of China (《中华人民共和国药品管理法》), which was promulgated in 1984 by the SCNPC and last amended in April 2015, a pharmaceutical manufacturer is required to obtain its manufacturing license from the NMPA before it starts to manufacture pharmaceutical products. Prior to granting such permit, the relevant government authority will inspect the applicant’s production facilities, and assess whether the sanitary conditions, quality assurance system, management structure and equipment at the production facilities have met the required standards. A manufacturing license is valid for a period of five years and the manufacturer is required to apply for renewal within six months prior to its expiration date. The manufacturer will be subject to reassessment by the authority in accordance with then prevailing legal and regulatory requirements for the purposes of such renewal. Currently, our subsidiary Jiangxi Universe holds a valid manufacturing license from the NMPA issued on January 1, 2016 and valid until December 31, 2020.

 

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Good Manufacturing Practice (GMP)

 

The manufacturing process of a pharmaceutical manufacturer must be compliant with the Good Manufacturing Practice for Drugs (药品生产质量管理规范) (2010 version) issued by the Ministry of Health in January 2011, which sets forth the requirements on the manufacturer’s organization and employee qualifications, manufacture premises and facilities, equipment, hygiene conditions, manufacture management, product management, maintenance of sales records and the procedure of handling customer complaints and adverse reaction reports.

 

According to the Notice of the State Food and Drug Administration, the Ministry of Health and the State Administration of Traditional Chinese Medicine on strengthening the supervision and administration of ready-to-use slices of traditional Chinese medicine (《国家食品药品监督管理局、卫生部、国家中医药管理局关于加强中药饮片监督管理的通知》) issued on January 5, 2011, a manufacturer of ready-to-use slices of traditional Chinese medicine is required to obtain manufacturing license and a Good Manufacturing Permit certificate (“GMP Certificate”). Our subsidiary Jiangxi Universe obtained its GMP Certificate on January 2015, which was valid until January 2020. In September 2019, Jiangxi Universe successfully renewed its GMP Certificate for additional five years.

 

Pursuant to the Certification Measures for Good Manufacturing Practice for Drugs (《药品生产质量管理规范认证管理办法》) issued by the NMPA in August 2011, in any of the following cases, the Drug Supervision and Administration Department (the “DSAD”) will recall a manufacturer’s GMP Certificate: (1) the manufacturer does not meet the GMP requirements; (2) the manufacturer is ordered to suspend manufacturing to rectify a violation of drug management regulations; and (3) other circumstances where the GMP shall be recalled. Such manufacturer is required to correct the practices that have resulted in the recall of its GMP Certificate. After the manufacturer corrects its practices, it shall inform the DSAD of its correction. If, through an on-site inspection, the DSAD determines that the manufacturer meets the GMP requirements, it shall return the original GMP Certificate to the manufacturer.

 

In any of the following circumstances, the original license-issuing authority shall revoke the GMP Certificate of a manufacturer: (1) the manufacturer’s manufacturing license is revoked, cancelled, or withdrawn according to applicable laws; (2) the manufacturing scope of the manufacturer is revoked or withdrawn according to applicable laws; (3) the manufacturer’s GMP Certificate has expired and has not been renewed; and (4) others circumstances where the GMP Certificate shall be cancelled.

 

The revised Drug Administration Law of the People’s Republic of China (《药品管理法》) (“Drug Administration Law”), which became effective on December 1, 2019, states that the pharmaceutical supervisory and administrative department shall, in accordance with relevant provisions, certify whether a pharmaceutical manufacturer meets the requirements set forth in the regulations on the quality of pharmaceuticals. The GMP certification shall be issued to manufacturers who meet the requirements.

 

According to the Notice of the State Food and Drug Administration on the Implementation of the Drug Administration Law of the People’s Republic of China (《国家药监局关于贯彻实施<中华人民共和国药品管理法>有关事项的公告》), starting from December 1, 2019, GMP Certificates are cancelled and will no longer be issued. Certification applications received before December 1, 2019 shall be handled in accordance with the original GMP certification provisions. GMP certificates shall be issued to those manufacturers who complete on-site inspections and meet the requirements before December 1, 2019. Where on-site inspections are required by existing regulations, they shall continue to be conducted after December 1, 2019, and the results of on-site inspections shall be notified to the manufacturers.

 

Contract Manufacturing of Drugs

 

Pursuant to the Administrative Regulations for the Contract Manufacturing of Drugs (《药品委托生产监督管理规定》) (the “Contract Manufacturing Regulations”) issued by the NMPA in August 2014, in the event that a drug manufacturer in China with drug marketing authorization temporarily lacks manufacturing capability as a result of technology upgrade or is unable to meet market demand due to insufficient manufacturing capacity, it may use contract manufacturer for its drug manufacturing. Contract manufacturing arrangements need to be approved by the provincial branch of the NMPA. The Contract Manufacturing Regulations prohibit contract manufacturing arrangements for certain special drugs, including narcotic drugs, psychoactive drugs, biochemical drugs and active pharmaceutical ingredients.

 

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Other Regulations in relation to the Pharmaceutical Industry

 

“Two-vote system” for drug sales

 

The NHC and other six ministries and commissions issued the Notice on the Opinions on the Implementation of the “Two-Invoice System” in Drug Procurement by Public Medical Institutions (for Trial Implementation) (《关于在公立医疗机构药品采购中推行两票制的实施意见 (试行) 的通知》) (the “Notice on Two-Invoice System”) on January 11, 2017. “Two-invoice system” means that one invoice shall be issued by a pharmaceutical manufacturer to a distributor, and another invoice shall be issued by the distributor to a hospital. An internal transfer of drugs from a group pharmaceutical distributor to its wholly owned or controlled subsidiary or a transfer of drugs between such wholly owned subsidiaries may not be deemed as “one invoice” however, the invoicing for the whole group can be done only once. Pharmaceutical manufacturers and distributors shall reasonably determine the markup level in the spirit of fairness, legality, legitimacy and integrity. Public medical institutions is encouraged to settle the payment for drugs directly with pharmaceutical manufacturers, and pharmaceutical manufacturers and are encouraged to settle the delivery cost with distributors.

 

In the sale of drugs, drug manufacturers and distributors shall issue value-added tax (“VAT”) special invoices or normal VAT invoices in accordance with the regulations regarding invoice control. The sold drug shall also be delivered in a way that confirms to the requirements of the Good Supply Practice for Pharmaceutical Products (2013) (《药品经营质量管理规范(2013)) , and the names of the purchaser and seller on the invoices shall be consistent with the delivery form, payment flow and amount.

 

Drug Advertisements

 

Pursuant to the Provisions for Drug Advertisement Examination (《药品广告审查办法》) promulgated on March 13, 2007 and effective on May 1, 2007, an enterprise seeking to advertise its drugs must apply for an advertising approval code. An advertisement approval code is valid for one year. The contents of an approved advertisement shall not be altered without prior approval. Where an advertisement needs to be edited, the enterprise shall submit an application for a new advertisement approval code.

 

Insert Sheet, Labels and Packaging of Pharmaceutical Products

 

According to the Measures for the Administration of the Insert Sheets and Labels of Drugs (《药品说明书和标签管理规定》) effective on June 1, 2006, the insert sheets and labels of a pharmaceutical product shall be reviewed and approved by the NMPA. A drug insert sheet should include the scientific data, conclusions and information concerning drug safety and efficacy in order to direct the safe and reasonable use of pharmaceutical products. The inner label of a pharmaceutical product shall indicate the product name, indication or function, strength, dose and usage, production date, batch number, expiration date and drug manufacturer, and the outer label of a pharmaceutical product shall indicate the product name, ingredients, description, indication or function, strength, dose and usage and adverse reactions.

 

According to the Measures for the Administration of Pharmaceutical Packaging (《药品包装管理办法》) effective on September 1, 1988, pharmaceutical packaging must comply with national and professional standards. If no national or professional standards are available, a manufacturer can formulate and implement its own standards after it receives approval from the provincial food and drug administration or bureau of standards. The company shall reapply for approval if it were to change its own packaging standards. Pharmaceutical products with no approved packing standards shall not be sold or traded in the PRC, except for drugs for military use.

 

Drug Technology Transfer

 

On August 19, 2009, the NMPA promulgated the Administrative Regulations for Technology Transfer Registration of Drugs (《药品技术转让注册管理规定》) (the “Technology Transfer Regulations”) to regulate the drug technology transfer process, including the application, evaluation, examination, approval and monitoring of, drug technology transfer. Drug technology transfer means that the owner transfers its pharmaceutical manufacturing technology to a pharmaceutical manufacturer and that the transferee applies for drug registration pursuant to the Technology Transfer Regulations. Drug technology transfer includes the transfer of new drug technology and drug manufacturing technology.

 

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Applications for drug technology transfer shall be submitted to the provincial drug regulatory authority where the transferee is located. The drug regulatory authority examines application materials and conducts on-site inspections of the transferee’s manufacturing facilities. If the transferor and the transferee are located in different provinces, the provincial drug regulatory authority where the transferor is located shall issue examination opinions as well. The Center for Drug Evaluation (the “CDE”), a branch of the NMPA, shall further review the application materials, provide technical evaluation opinions and form a comprehensive evaluation opinion based on the on-site inspection reports and the testing results of the samples. The NMPA shall determine whether to approve the application according to the comprehensive evaluation opinion of the CDE. An approval letter of supplementary application and a drug approval number will be issued for qualified applications.

 

Price of drugs

 

Pursuant to the Drug Administration Law (《药品管理法》), for those drugs whose prices are determined by market, manufacturers and distributors of pharmaceutical products and medical institutions shall set the prices in accordance with the principles of fairness, rationality, and good faith, and provide consumers with drugs at reasonable prices. Pharmaceutical product manufacturers, distributors and medical institutions shall determine and indicate their products’ retail prices in accordance with the regulations over drug prices promulgated by the pricing department of the State Council of the People’s Republic of China (the “State Council”).

 

On May 4, 2015, the National Development and Reform Commission, the National Health and Family Planning Commission, the Ministry of Human Resources and Social Security, the Ministry of Industry and Information Technology, the Ministry of Finance, the MOFCOM and the NMPA jointly issued the Notice Regarding Reforms to the Price of Medical Products (《关于印发推进药品价格改革意见的通知》), pursuant to which, since June 1, 2015, other than anesthetics and Class 1 psychotropic drugs, the actual price of pharmaceutical products shall be decided by market instead of by the government. As of the date of this prospectus, the actual price of all products we sell, including TCMD products and third-party products, are determined by market.

 

Regulation in relation to medical device registration

 

Pursuant to the Regulations on Supervision and Administration of Medical Devices (《医疗器械监督管理条例》) promulgated by the State Council of China with the last amendment effective on May 4, 2017, medical devices are classified based on the invasiveness of, and risks associated with, each medical device. Class I medical devices have relatively low risks, whose safety and effectiveness can be guaranteed through routine administration. Class II medical devices have moderate risks and require strict control and administration to ensure their safety and effectiveness. Class III medical devices have relatively high risks and require especially strict control and administration measures to ensure their safety and effectiveness. Pursuant to the Administrative Measures for the Medical Devices Registration (《医疗器械注册管理办法》), which became effective on October 1, 2014, manufacturers of Class I medical devices are required to file with the local food and drug administrative authority at the city level. Manufacturers of Class II medical devices shall obtain product registration certificates from and be subject to the inspection and approval of the drug administrative authority at the provincial level. Manufacturers of Class III medical devices shall obtain product registration certificates from the NMPA and be subject to its inspection and approval.

 

Pursuant to Regulation on Supervision and Administration of Medical Device Business (amended in 2017) (《医疗器械经营监督管理条例》), the medical device business shall be subject to classified regulations determined by the degree of risks associated with a medical device. No license or registration is required for the selling of Class I medical devices. Sellers of Class II medical devices shall keep records of their purchases and sales, while sellers of Class III medical devices shall obtain licenses from the local branch of NMPA.

 

As of the date of this prospectus, we are engaged in the business of selling medical devices. We sell medical devices categorized as Class I, Class II and Class III under the Regulation on Supervision and Administration of Medical Devices in the PRC, and we obtained our medical device selling license in May 2015 in compliance with the applicable PRC laws and regulations.

 

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Regulation relating to Company Establishment and Foreign Investment

 

The PRC Company Law applies to the establishment, operation and management of both PRC domestic companies and foreign-invested enterprises. Foreign investment in the PRC corporate entities are also regulated by the oreign-Owned Enterprise Law of the PRC (《中华人民共和国外资企业法》) (the “Foreign-Owned Enterprise Law”) promulgated on April 12, 1986 and amended on October 31, 2000 and September 3, 2016, the Implementing Rules for the Foreign-Owned Enterprise Law of the PRC (《中华人民共和国外资企业法实施细则》) promulgated on December 12, 1990 and amended on April 12, 2001 and February 19, 2014, and the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (《外商投资企业设立及变更备案管理暂行办法》) (the “Record-filing Measures”) promulgated on October 8, 2016 and amended on July 30, 2017 and June 29, 2018. Under these laws and regulations, the establishment of a wholly foreign-owned enterprise is subject to the approval of, or the filing with the MOFCOM or its local counterpart, and such wholly foreign-owned enterprises must register and file with the appropriate administrative bureau of industry and commerce.

 

The Foreign Investment Law of the People’s Republic of China (《中华人民共和国外商投资法》) (the “Foreign Investment Law”), which was promulgated by the National People’s Congress On March 15, 2019, and came into effect on January 1, 2020, provides that foreign investment refers to the investment activities in China carried out directly or indirectly by foreign natural persons, enterprises or other organizations (the “Foreign Investors”), including the following: (1) Foreign Investors establishing foreign-invested enterprises in China alone or collectively with other investors; (2) Foreign Investors acquiring shares, equities, properties or other similar rights of Chinese domestic enterprises; (3) Foreign Investors investing in new projects in China alone or collectively with other investors; and (4) Foreign Investors investing through other ways prescribed by laws and regulations or the State Council. The State adopts the management system of pre-establishment national treatment and negative list for foreign investment. The pre-entry national treatment means the treatment given to Foreign Investors and their investments at the stage of investment access is not lower than that of domestic investors and their investments. The negative list management system means that the state implements special administrative measures for access of foreign investment in specific fields. Foreign investors shall not invest in any forbidden fields stipulated in the negative list and shall mean the conditions stipulated in the negative list before investing in any restricted fields. The negative list is released upon approval of the State Council. After the Foreign Investment Law came into effect, it replaced the Foreign-Owned Enterprise Law.

 

The Implementation Regulations for the Foreign Investment Law of the PRC (《中华人民共和国外商投资法实施条例》) (the “Implementation Regulations for the FIL”) was adopted at the 74th executive meeting of the State Council on December 12, 2019 and came into effect on January 1, 2020. The purpose of the Implementation Regulations for the FIL is to encourage and promote foreign investment, protect the legitimate rights and interests of investors, regulate the administration of foreign investment, and continuously optimize the foreign investment environment. For those foreign-invested enterprises established prior to the implementation of the Foreign Investment Law and established in accordance with the Law of the People’s Republic of China on Sino-foreign Joint Ventures (《中华人民共和国中外合资经营企业法》), the Law of the People’s Republic of China on Foreign-invested Enterprises, and the Law of the People’s Republic of China on Sino-Foreign Cooperative Enterprises, they can modify or retain their organizational forms and organizational structures in accordance with the PRC Company Law, Partnership Law of the People’s Republic of China and other applicable laws within 5 years since the implementation of the Foreign Investment Law.

 

Foreign investment in China shall comply with the Catalogue for the Guidance of Foreign Investment Industries (2017 Revision) (《外商投资产业指导目录(2017年修订)) (the “2017 Catalogue”), which was promulgated on June 28, 2017 and became effective on July 28, 2017, and the Special Administrative Measures for the Access of Foreign Investment (Negative List) (Edition 2018) (《外商投资准入特别管理措施(负面清单) (2018年版)) (the “2018 Negative List”) which were promulgated on June 28, 2018 and became effective on July 28, 2018. The Catalogue classifies foreign-invested industries into two categories, (1) encouraged foreign-invested industries; and (2) foreign-invested industries that are subject to the 2018 Negative List. The 2018 Negative List set out restrictions such as shareholding requirements and qualifications of the senior management. According to the Record-filing Measures, foreign investments that are not subject to special access administrative measures are only required to complete an online filing with the MOFCOM or its local counterpart. The Catalogue for Encouraged Foreign Investment (2019 Revision) (《鼓励外商投资产业目录(2019年版)), or the 2019 Catalogue, and the Special Administrative Measures for the Access of Foreign Investment (Negative List) (Edition 2019) (《外商投资准入特别管理措施(负面清单) (2019年版)), or the 2019 Negative List, which were issued on June 30, 2019 and came into effect on July 30, 2019, further reduced restrictions on foreign investment. The 2019 Catalogue and the 2019 Negative List replaced the 2017 Catalogue and the 2018 Negative List. The scope of our business as approved by the licensing authority and the actual scope of our business are not subject to the restrictions set forth in the 2019 Negative List.

 

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The M&A Rules were jointly promulgated by the MOFCOM, the State-Owned Assets Supervision and Administration Commission of the State Council, the SAT, the SAIC, the CSRC, and the SAFE on August 8, 2006 and was amended by MOFCOM on June 22, 2009. The M&A Rules provides that a foreign investor is required to obtain necessary approvals when it: (1) acquires equity interests in a domestic enterprise or subscribes to additional shares in a domestic enterprise; (2) purchases the assets of a domestic enterprise through establishment of a foreign-invested enterprise; or (3) establishes a foreign-invested enterprise through which it purchases the assets of a domestic enterprise and operates these assets. In particular, any PRC company, enterprise or individual is required to obtain approval from the MOFCOM and comply with applicable laws and regulations if it establishes an offshore company and attempts to acquire a domestic enterprise related to such offshore company.

 

Regulation in relation to Intellectual Property Rights

 

In terms of international conventions, China has entered into (including but not limited to) the Agreement on Trade-Related Aspects of Intellectual Property Rights (《与贸易有关的知识产权协定》), the Paris Convention for the Protection of Industrial Property (《保护工业产权巴黎公约》), the Madrid Agreement Concerning the International Registration of Marks (《商标国际注册马德里协定》) and the Patent Cooperation Treaty (《专利合作协定》).

 

Patents

 

Pursuant to the Patent Law of the PRC (《中华人民共和国专利法》), or the Patent Law, promulgated by the SCNPC on March 12, 1984 and last amended on December 27, 2008 and effective from October 1, 2009 and the Implementation Rules of the Patent Law of the PRC (《中华人民共和国专利法实施细则》), promulgated by the State Council on June 15, 2001 and amended on December 28, 2002 and January 9, 2010, respectively, patents in China fall into three categories: invention patents, utility model patents and design patents. The term of patent protection starts from the date of application and lasts 20 years for invention patents and 10 years for utility model patents and design patents. Any individual or entity that utilizes a patent or conducts any other activity that infringes a patent without the patent holder’s authorization shall pay compensation to the patent holder and be subject to a fine imposed by regulatory authorities and, if such behavior constitutes a crime, shall be held criminally liable in accordance with applicable laws. According to the Patent Law, for public health purposes, the State Intellectual Property Office of the PRC, or SIPO, may grant a compulsory license for manufacturing patented drugs and exporting them to countries or regions covered under relevant international treaties to which PRC has acceded. In addition, under the Patent Law, any organization or individual that applies for a patent in a foreign country for an invention or utility model patent established in China is required to report to the SIPO for confidentiality examination.

 

Trade Secrets

 

Pursuant to the PRC Anti-Unfair Competition Law (《中华人民共和国反不正当竞争法》) promulgated by the SCNPC in September 1993, as amended in November 4, 2017 and April 23, 2019 respectively, the term “trade secrets” refers to technical and business information that is unknown to the public, has utility, may create business interests or profits for its legal owners or holders, and is maintained as a secret by its legal owners or holders. Under the PRC Anti-Unfair Competition Law, business persons are prohibited from infringing others’ trade secrets by: (1) obtaining trade secrets from the legal owners or holders by any unfair methods, such as theft, bribery, fraud, coercion, electronic intrusion, or any other illicit means; (2) disclosing, using or permitting others to use the trade secrets obtained illegally under item (1) above; or (3) disclosing, using or permitting others to use the trade secrets, in violation of any contractual agreements or any requirements of the legal owners or holders to keep such trade secrets in confidence. If a third party knows or should have known of the above- mentioned illegal conduct but nevertheless obtains, uses or discloses trade secrets of others, the third party may be deemed to have committed a misappropriation of the others’ trade secrets. The parties whose trade secrets are being misappropriated may petition for administrative corrections, and regulatory authorities may stop any illegal activities and impose fines on the infringing parties.

 

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Trademarks

 

In accordance with the Trademark Law of the PRC (《中华人民共和国商标法》) (the “Trademark Law”), which was promulgated by the SCNPC on August 23, 1982, and was last amended on April 23, 2019 and came into effect on November 1, 2019, any trademark which is registered with the approval of the Trademark Office is a registered trademark, including commodity trademark, service trademark, collective trademark, certification trademark, and the trademark registrant has the exclusive right to use a registered trademark and such right is protected by law. A registered trademark is valid for a period of 10 years commencing from the date on which the registration is approved. Upon expiration of the trademark, the registrant shall apply for renewal within twelve months prior to the expiration date if it intends to maintain exclusive use of the trademark. If the registrant fails to apply for renewal, a grace period of six months may be granted. In the absence of a renewal upon the expiration of a trademark registration, the registered trademark shall be canceled. Use of a trademark that is identical with or similar to a registered trademark, for the same kind of or similar commodities, without authorization of the trademark registrant, constitutes infringement of the exclusive right to use a registered trademark. Industrial and commercial administrative authorities have the authority to investigate any behavior that may constitute an infringement of the exclusive right under a registered trademark.

 

Domain names

 

Domain names are protected under the Administrative Measures on the Internet Domain Names (《互联网域名管理办法》), which was promulgated by the Ministry of Industry and Information Technology, or the MIIT, on August 24, 2017 and came into effect on November 1, 2017, and the Implementing Rules of China Internet Network Information Center on the Registration of Domain Names (《中国互联&#