F-1/A 1 ea129847-f1a1_universepharma.htm AMENDMENT NO. 1 TO FORM F-1

As submitted to the Securities and Exchange Commission on November 17, 2020.

 

Registration No. 333-248067

 

 

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

 

AMENDMENT NO. 1

TO

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

Jinggangshan Economic and Technological Development Zone

Ji’an, Jiangxi, China 343100
+86-0796-8403309

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

 

  Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, NY 10168

+1-212-947-7200

(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
800 Third Avenue, Suite 2800
New York, NY 10022
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$0.003125 per share(3)     5,750,000     $ 7.00     $ 40,250,000     $ 4,391.27  
Underwriter’s warrants(4)                        
Ordinary shares, par value US$0.003125 per share, underlying the underwriter’s warrants     300,000     $ 7.70     $ 2,310,000     $ 252.03  
Total     6,050,000           $ 42,560,000     $ 4,643.30  

 

(1)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) 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) Previously paid. Calculated pursuant to Rule 457(o) 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 five 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 November 17, 2020

 

5,000,000 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 $0.003125 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 $5.00 to $7.00 per Ordinary Share. We have reserved the symbol “UPC” for purposes of listing our Ordinary Shares on the Nasdaq Capital Market and plan to apply to list our Ordinary Shares on the 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 11 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 30 of this prospectus for more information.

 

Following the completion of this offering, our largest shareholder will beneficially own approximately 59.43% of the aggregate voting power of our outstanding Ordinary Shares. As such, we will be deemed a “controlled company” within the meaning of the Nasdaq listing standards. However, we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the Nasdaq listing standards. See “Risk Factors” and “Management—Controlled Company.”

 

    Per Share     Total  
Initial public offering price(1)   $ 6.00     $ 30,000,000  
Underwriter’s discounts(2)   $ 0.0483     $ 1,450,000  
Proceeds to our company before expenses(3)   $ 5.9517     $ 28,550,000  

 

(1)

Initial public offering price per share is assumed as $6.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus.

   
(2)

We have agreed to pay the underwriters a discount equal to (a) seven percent (7%) for the first $10 million Ordinary Shares sold; (b) four percent (4%) for any amount of Ordinary Shares in excess of $10 million but below $20 million; and (c) three percent and half (3.5%) for any amount of Ordinary Shares in excess of $20 million.

 

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.

   
(3)

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, and assuming an offering price of $6.00 per Ordinary Share, which is the midpoint of the range set forth on the cover page of this prospectus, the total gross proceeds to us, before underwriting discounts and expenses, will be $28,550,000.

 

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 11
   
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 30
   
ENFORCEABILITY OF CIVIL LIABILITIES 31
   
USE OF PROCEEDS 32
   
DIVIDEND POLICY 33
   
CAPITALIZATION 34
   
DILUTION 35
   
CORPORATE HISTORY AND STRUCTURE 36
   
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 38
   
INDUSTRY 74
   
BUSINESS 79
   
REGULATIONS 91
   
MANAGEMENT 101
   
EXECUTIVE COMPENSATION 105
   
PRINCIPAL SHAREHOLDERS 106
   
RELATED PARTY TRANSACTIONS 108
   
DESCRIPTION OF SHARE CAPITAL 109
   
SHARES ELIGIBLE FOR FUTURE SALE 127
   
TAXATION 129
   
UNDERWRITING 137
   
EXPENSES RELATING TO THIS OFFERING 141
   
LEGAL MATTERS 142
   
EXPERTS 142
   
WHERE YOU CAN FIND MORE INFORMATION 142
   
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.

i

 

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 249 cities of 30 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 not only our TCMD products, but also biomedical drugs, medical instruments, Traditional Chinese Medicine Pieces (“TCMPs”), 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, in China, 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, TCMPs and dietary supplements. As of October 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 grew meaningfully, from a total of 1,304 customers in 2017 to 2,603 customers at the end of fiscal year 2019. However the number of our customers decreased to 1,162 in the six months ended March 31, 2020 due to the impact of COVID-19. 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. When comparing the six months ended March 31, 2020 to the six months ended March 31, 2019, our revenue from selling our own products decreased by $4,954,925, or 40.0% to $7,439,652 because of the temporary factory closure in February and March 2020. 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. When comparing the six months ended March 31, 2020 to the six months ended March 31, 2019, our revenue from selling third party products increased by $3,218,467, or 56.2%, to $8,949,213 because we increased our purchase of third party products to fulfill customer orders while our factory was closed. Our net income was $7,602,933 for the fiscal year ended September 30, 2018, $7,551,465 for the fiscal year ended September 30, 2019, and $5,074,076 for the six months ended March 31, 2020.

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 formed in 1998 and Jiangxi Universe Pharmaceuticals Trade Co., Ltd. (“Universe Trade”), a PRC company formed 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 formed in Hong Kong on May 21, 2014 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 4, 2019. Universe Technology holds all the capital stock and controls Jiangxi Universe. Jiangxi Universe holds a 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 5,000,000 Ordinary Shares being offered, assuming no exercise of the over-allotment option. 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, Jinggangshan Economic and Technological Development Zone, Ji’an, Jiangxi Province, People’s Republic of China. Our phone number is +86-0796-8403309. 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$0.003125 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   5 million Ordinary Shares
     
Price per Ordinary Share   We currently estimate that the initial public offering price will be in the range of $5.00 to $7.00 per Ordinary Share.
     
Ordinary Shares outstanding prior to completion of this offering   16,000,000 Ordinary Shares
     
Ordinary Shares outstanding immediately after this offering  

21,000,000 Ordinary Shares assuming no exercise of the underwriter’s over-allotment option and excluding 300,000 Ordinary Shares underlying the underwriter warrants.

 

21,750,000 Ordinary Shares assuming full exercise of the underwriter’s over-allotment option and excluding 300,000 Ordinary Shares underlying the underwriter warrants.

     
Listing   We will apply to have our Ordinary Shares listed on Nasdaq Capital Market.
     
Trading symbol   “UPC”
     
Transfer Agent  

Transhare Corporation

     
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 32 for more information.
     
Risk factors   The Ordinary Shares offered hereby involve a high degree of risk. You should read “Risk Factors,” beginning on page 11 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 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 have been derived from our audited consolidated financial statements for those periods included elsewhere in this prospectus. The following selected historical statements of operations for the six months ended March 31, 2020 and 2019, and balance sheet data as of March 31, 2020 and September 30, 2019 have been derived from our unaudited interim consolidated financial statements for those periods included elsewhere in this prospectus. 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 six months ended

March 31,

 
   2020   2019 
   (Unaudited)   (Unaudited) 
REVENUE  $16,388,865   $18,125,314 
COST OF REVENUE   7,868,761    11,082,126 
GROSS PROFIT   8,520,104    7,043,188 
           
OPERATING EXPENSES          
Selling expenses   646,241    904,543 
General and administrative expenses   743,813    633,110 
Research and development expenses   547,627    291,169 
Total operating expenses   1,937,681    1,828,822 
           
INCOME FROM OPERATIONS   6,582,423    5,214,366 
           
OTHER INCOME(EXPENSES)          
Interest expense, net   (63,709)   (62,404)
Other expense, net   (674)   (1,759)
Equity investment income   21,805    26,907 
Total other expense, net   (42,578)   (37,256)
           
INCOME BEFORE INCOME TAX PROVISION   6,539,845    5,177,110 
           
INCOME TAX PROVISION   1,465,769    1,100,908 
           
NET INCOME   5,074,076    4,076,202 
           
OTHER COMPREHENSIVE INCOME          
Foreign currency translation adjustment   18,877    298,473 
COMPREHENSIVE INCOME  $5,092,953   $4,374,675 
           
EARNINGS PER SHARE          
Basic and diluted  $0.32   $0.25 
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          
Basic and diluted*   16,000,000    16,000,000 

 

7

 

 

  

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  $0.47   $0.48 
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          
Basic and diluted*   16,000,000    16,000,000 

8

 

Selected Balance Sheet Information

 

   As of 
   March 31, 2020
(Unaudited)
   September 30, 2019 
ASSETS        
CURRENT ASSETS        
Cash  $11,796,452   $3,177,321 
Accounts receivable, net   4,389,889    6,420,986 
Inventories, net   4,988,410    2,615,155 
Deferred initial public offering costs   90,926    - 
Prepaid expenses and other current assets   26,575    16,300 
TOTAL CURRENT ASSETS   21,292,252    12,229,762 
           
Property, plant and equipment, net   4,445,588    4,566,932 
Intangible assets, net   170,298    171,610 
Investment in equity securities   705,500    700,500 
Deferred tax assets   162,901    168,075 
TOTAL NONCURRENT ASSETS   5,484,287    5,607,117 
           
TOTAL ASSETS  $26,776,539   $17,836,879 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Short-term bank loans  $2,539,800   $2,521,800 
Accounts payable   5,107,027    1,937,095 
Taxes payable   694,442    551,049 
Due to related party   513,874    54,705 
Accrued expenses and other current liabilities   444,384    388,171 
TOTAL CURRENT LIABILITIES   9,299,527    5,452,820 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Ordinary shares, $0.003125 par value, 100,000,000 shares authorized, 16,000,000 shares 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   11,254,833    6,180,757 
Accumulated other comprehensive income   53,644    34,767 
TOTAL SHAREHOLDERS’ EQUITY   17,477,012    12,384,059 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $26,776,539   $17,836,879 

 

9

 

 

    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, $0.003125 par value, 100,000,000 shares authorized, 16,000,000 shares 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  

 

*Retrospectively restated for effect of the forward split of the outstanding ordinary shares at a ratio of 320-for-1 share on August 7, 2020.

 

10

 

 

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 (胡卓仁)” 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.

 

11

 

 

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.

 

12

 

 

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.

 

13

 

 

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 45.4% of the total value of the products we sold for the six months ended March 31, 2020. Our products are produced in our manufacturing facility located in Jinggangshan, Jiangxi Province, China. For the six months ended March 31, 2020, three vendors each 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.

 

14

 

 

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.

 

15

 

 

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 had a material adverse effect on our business.

 

Our business was 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 disrupted our business and operations, slowed down the overall economy, curtailed consumer spending, interrupted our sources of supply, and made it difficult to adequately staff our operations. As a result, our operating results, financial conditions and cash flows were 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. As a result of COVID-19, our revenue and net income for the three months ended March 31, 2020 were adversely affected. However, the negative impacts of the COVID-19 outbreak on our manufacturing and sales was temporary and our revenues started to grow in the three months ended June 30, 2020. Our revenue and net income increased by approximately 33% and 27% for the three months ended June 30, 2020 as compared to the three months ended March 31, 2020. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors that Affect Our Results of Operations—COVID-19 Impact.”

 

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.

 

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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.

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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 2020) (the “2020 Negative List”). We do not intend to conduct any types of business activities restricted or prohibited under the 2020 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 2020 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 $3.88 per share or approximately 64.7% from an assumed offering price of $6.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, 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 the 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 16,000,000 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 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 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 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 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 ending 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 –United States Federal Income Taxation – 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 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; (iv) appointing independent directors, establishing an audit committee, and strengthening corporate governance; and (v) hiring a new chief financial officer who has sufficient expertise in U.S. GAAP to improve the quality of U.S. GAAP reports. As of the date of this prospectus, we have not fully implemented any of these remedial measures, but we have made progress in implementing them. Specifically, we have (i) identified the candidates for chief financial officer and independent directors with U.S. GAAP experience and knowledge, (ii) identified several external consulting firm candidates to work with in setting up a financial and system control framework, (iii) strengthened our day-to-day supervision and review of accounting and financial reporting, (iv) set up an internal control group, and (v) distributed U.S. GAAP study materials to and provided training sessions for some of our accounting and financial reporting personnel. We plan to fully implement the above remedial measures by December 31, 2020.

 

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 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 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 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;
     
  the future development and spread of COVID-19; 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 Cogency Global Inc. at 122 East 42nd Street, 18th Floor, New York, NY 10168 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 $6.00 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 $27,252,258.

 

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

 

  approximately 28% for upgrading and expanding our manufacturing facilities;
     
  approximately 27% for research and development;
     
  approximately 24% for branding, advertising and marketing; and
     
  approximately 21% for 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 Related 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 March 31, 2020:

 

  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 $6.00 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.

 

    March 31,
2020
 
    Actual     Pro Forma As Adjusted  
    US$     US$  
Equity   (Unaudited)        
Share capital $0.003125 par value, 100,000,000 Ordinary Shares authorized, 16,000,000 Ordinary Shares issued and outstanding as of March 31, 2020; Pro forma without over-allotment reflects 21,000,000 Ordinary Shares issued and outstanding   $ 50,000     $ 65,625  
Additional paid-in capital(1)     3,679,000       30,915,633  
Statutory reserve     2,439,535       2,439,535  
Retained earnings     11,254,833       11,254,833  
Accumulated other comprehensive income     53,644       53,644  
Total shareholders’ equity   $ 17,477,012       44,729,270  
                 
Adjusted total capitalization   $ 17,477,012     $ 44,729,270  

  

(1) Reflects the sale of Ordinary Shares in this offering at an assumed initial public offering price of $6.00 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 $27,252,258, assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $27,252,258 are calculated as follows: $30,000,000 gross offering proceeds, less underwriting discounts and non-accountable expense allowance of $1,450,000 and estimated offering expenses of $1,297,742. The pro forma as adjusted total equity of $44,729,270 is the sum of the net proceeds of $27,252,258 and the actual equity of $17,477,012.

 

A $1.00 increase in the assumed initial public offering price of $6.00 per Ordinary Share would increase each of additional paid-in capital, total shareholders’ equity and total capitalization by $4.83 million, while a $1.00 decrease in the assumed initial public offering price of $6.00 per Ordinary Share would decrease each of additional paid-in capital, total shareholders’ equity and total capitalization by $4.67 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

 

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a forward split of our Ordinary shares at a ratio of 320-for-1 share on August 7, 2020.

 

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 March 31, 2020, was $17,306,714 (as calculated by subtracting intangible assets of $170,298 from the actual equity of $17,477,012) , or $1.08 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 5,000,000 Ordinary Shares offered in this offering based on the initial public offering price of $6.00 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 March 31 2020, would have been $44,558,972, or $2.12 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $1.04 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $3.88 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  $6.00   $6.00 
Net tangible book value per Ordinary Share as of March 31, 2020  $1.08   $1.08 
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $1.04   $1.17 
Pro forma net tangible book value per Ordinary Share immediately after this offering  $2.12   $2.25 
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $3.88   $3.75 

 

(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 $2.25, the increase in net tangible book value per Ordinary Share to existing shareholders would be $1.17, and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $3.75.

 

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2020, 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   16,000,000    76.2%  $3,729,000    11.1%  $0.23 
New investors   5,000,000    23.8%  $30,000,000    88.9%  $6.00 
Total   21,000,000    100.0%  $33,729,000    100.0%  $1.61 

 

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 formed in 1998 and Jiangxi Universe Pharmaceuticals Trade Co., Ltd. (“Universe Trade”), a PRC company formed 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 formed in Hong Kong on May 21, 2014 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, Jinggangshan Economic and Technological Development Zone, Ji’an, Jiangxi Province, People’s Republic of China. Our phone number is +86-0796-8403309. 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 5,000,000 Ordinary Shares being offered, assuming no exercise of the over-allotment option.

 

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

 

37

 

 

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. 

  

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented giving effect to a forward split of our Ordinary shares at a ratio of 320-for-1 share on August 7, 2020.

 

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 249 cities in 30 provinces in China as of the date of this prospectus. In addition, we also sell biomedical drugs, medical instruments, traditional Chinese medicine pieces (“TCMPs”)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 23 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, 2014 in accordance with the laws and regulations in Hong Kong.

 

Universe Technology was formed on April 4, 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. Our revenues decreased by $1,736,449, or 9.6%, from $18,125,314 for the six months ended March 31, 2019 to $16,388,865 for the six months ended March 31, 2020. Revenues from sales of TCMD products manufactured by us accounted for 45.4%, 62.9% and 61.8% of our total revenues for the six months ended March 31, 2020 and 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 54.6%, 37.1% and 38.2% of our total revenues for the six months ended March 31, 2020 and 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 Six Months Ended March 31,   For the Years Ended September 30, 
   2020   2019   2019   2018 
   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue   Amount   % of revenue 
                                 
Revenue from sales of self-manufactured TCMD products  $7,439,652    45.4%  $12,394,577    68.4%  $20,895,542    62.9%  $17,620,823    61.8%
Revenue from sales of third-party products   8,949,213    54.6%  $5,730,737    31.6%   12,333,774    37.1%   10,893,357    38.2%
Total revenue  $16,388,865    100.0%  $18,125,314    100.0%  $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 249 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 six months ended March 31, 2020 and 2019, we had total 1,162 and 1,636 customers, and two customers accounted for 14.7% and 11.6% of our total revenue, respectively. 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 52.8%, 29.8%, 34.5% and 31.6% of our total revenues for the six months ended March 31, 2020 and 2019, and for the years ended September 30, 2019 and 2018, 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 (胡卓仁)”, 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, our total revenue and net income was approximately 7% and 21% lower, to approximately $7.2 million and $1.7 million, respectively, during three months ended March 31, 2020 as compared to the same period of last year, because of our reduced business activities and delayed fulfillment of customer sales orders as negatively affected by the COVID-19 outbreak and spread. As of March 31, 2020, we had approximately $5.6 million delayed and unfulfilled customer orders which were subsequently delivered to customers in April 2020. Since our factory has been fully running as normal since March 2, 2020, we received and fulfilled an increasing number of customer orders during the three months ended June 30, 2020. Our revenue and net income increased by approximately 33% and 27%, to approximately $10.9 million and $2.3 million, respectively, during the three months ended June 30, 2020 as compared to the three months ended March 31, 2020. The increase in our revenue and net income during the three months ended June 30, 2020 helped us absorb the decrease in revenue and net income during the three months ended March 31, 2020. As a result of the above, our total revenue increased by approximately 19%, to approximately $18.1 million, and our net income only decreased by 5%, or $0.3 million, for the six months ended June 30, 2020 compared to the same period of 2019. Therefore, we believe that the negative impact of the COVID-19 coronavirus outbreak on our business was temporary.

 

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 Six Months Ended
March 31,
   Variance   For the Years Ended
September 30,
   Variance 
   2020   2019   %   2019   2018   % 
Revenue from sales of self-manufactured TCMD products   45.4%   68.4%   (40.0)%   62.9%   61.8%   18.6%
Revenue from sales of third-party products   54.6%   31.6%   56.2%   37.1%   38.2%   13.2%
Total revenue   100.0%   100.0%        100.0%   100.0%     
                               
Number of customers   1,162    1,636    (29.0)%   2,603    1,518    71.5%
                               
Sales volume by unit- TCMD products   5,760,229    10,527,861    (45.3)%   17,766,549    16,045,824    10.7%
Sales volume by unit- third party products   5,219,039    3,884,571    34.4%   7,734,333    7,669,369    0.8%
Total sales volume   10,979,268    14,412,432    (23.8)%   25,500,882    23,715,193    7.5%
                               
Average selling price per unit- TCMD products  $1.29   $1.18    9.7%  $1.18   $1.10    7.1%
Average selling price per unit- Third-party products  $1.71   $1.48    16.2%  $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.

 

Revenues from sales of TCMD products manufactured by us accounted for 45.4% and 68.4% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. Sales volume of our TCMD products decreased by 45.3%, from 10,527,861 units sold in the six months ended March 31, 2019 to 5,760,229 units sold in the six months ended March 31, 2020, because we temporarily closed down our manufacturing facilities due to the COVID-19 outbreak, and we had limited support from our employees during the period from February to early March 2020. The average selling price of our TCMD products increased by 9.7%, from $1.18 per unit in the six months ended March 31, 2019 to $1.29 per unit in the six months ended March 31, 2020. In addition, the number of our customers decreased by 29.0% from 1,636 in six months ended March 31, 2019 to 1,162 in six months ended March 31, 2020 because transportation restrictions as a result of the COVID-19 led to the delay in shipping and delivery of our products to our customers located in remote geographic areas. These factors led to a 40.0% decrease in our revenue from sales of our TCMD products for the six months ended March 31, 2020 as compared to the same period of 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) TCMPs, 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.

 

Revenues from sales of third-party products accounted for 54.6% and 31.6% of our total revenues for the six months ended March 31, 2020 and 2019, respectively. Sales volume of third-party products increased by 34.4% from 3,884,571 units sold in the six months ended March 31, 2019 to 5,219,039 units sold in the six months ended March 31, 2020, while the average selling price of third-party products increased by 16.2% from $1.48 per unit in the six months ended March 31, 2019 to $1.71 per unit in the six months ended March 31, 2020 due to the increase in purchase price of third-party products. To compensate the negative impact from the COVID-19 outbreak, we increased our purchase of third party products to fulfill our sales orders during the period when our manufacturing facilities were temporarily closed from February to early March 2020. These factors led to a 56.2% increase in our revenue from sales of our third-party products in the six months ended March 31, 2020 as compared to the same period of 2019. However, the above mentioned increase in sales of third-party products was a result of our temporary strategy in response to the COVID-19 outbreak. As of the date of this prospectus, the COVID-19 outbreak in China appears to have slowed down and most provinces and cities have resumed business activities under the guidance and support of the government. We have been focusing on manufacturing and selling our own TCMD products since we resumed our business and manufacturing activities on March 2, 2020. For future third-party product sales, our strategy is to select and distribute certain high-quality products with higher margin. We do not expect that the sales of third party products will continue to outpace the sales of our own TCMD products going forward.

 

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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”.

 

Our cost of revenues accounted for 48.0% and 61.1% of our total revenue for the six months ended March 31, 2020 and 2019, respectively. Our gross margin was 52.0% for the six months ended March 31, 2020, an increase by 13.1% from gross margin of 38.9% for the six months ended March 31, 2019. During the six months ended March 31, 2020, the upgrade and maintenance of our manufacturing facilities in late September 2019 enabled us to streamline our manufacturing process, manage the workflow effectively, improve product quality, and boost manufacturing productivity to lower down our manufacturing cost to certain extent. In addition, during our temporary business shut-down from February to March 2020 due to COVID-19, we increased our purchase of third-party products with higher margin to fulfill our customer orders. As a result, the sales of product mix changed during the six months ended March 31, 2020 as compared to the same period of 2019 because more products with lower costs and higher margin had been sold to our customers to boost our gross margin.

 

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 3.9%, 5.0%, 4.8% and 5.9% of our total revenue for the six months ended March 31, 2020 and 2019, and for the years ended September 30, 2019 and 2018, respectively. Although our selling expenses decreased during the six months ended March 31, 2020 as compared to the same period of 2019 as affected by reduced sales activities due to COVID-19, if we continue to expand our business and promote our products to customers located at extended geographic areas, we still expect our overall selling expenses, including but not limited to, advertising expenses, brand promotion expenses and salaries, to increase in the foreseeable future and facilitate the growth of our business. 

 

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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 4.5%, 3.5%, 4.4% and 4.5% of our revenue for the six months ended March 31, 2020 and 2019, and 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 3.4%, 1.6%, 1.9% and 2.8% of our revenue for the six months ended March 31, 2020 and 2019, and 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 Six Months Ended March 31, 2020 and 2019

 

The following table summarizes the results of our operations during the six months ended March 31, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.

 

   For the six months ended March 31, 
   2020   2019   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
REVENUE  $16,388,865    100.0%  $18,125,314    100.0%  $(1,736,449)   (9.6)%
COST OF REVENUE   7,868,761    48.0%   11,082,126    61.1%   (3,213,365)   (29.0)%
GROSS PROFIT   8,520,104    52.0%   7,043,188    38.9%   1,476,916    21.0%
                               
OPERATING EXPENSES                              
Selling expenses   646,241    3.9%   904,543    5.0%   (258,302)   (28.6)%
General and administrative expenses   743,813    4.5%   633,110    3.5%   110,703    17.5%
Research and development expenses   547,627    3.4%   291,169    1.6%   256,458    88.1%
Total operating expenses   1,937,681    11.8%   1,828,822    10.1%   108,859    6.0%
                               
INCOME FROM OPERATIONS   6,582,423    40.2%   5,214,366    28.8%   1,368,057    26.2%
                               
OTHER INCOME (EXPENSE)                              
Interest expense, net   (63,709)   (0.4)%   (62,404)   (0.3)%   (1,305)   2.1%
Other expense   (674)   0.0%   (1,759)   0.0%   1,085    (61.7)%
Equity investment income   21,805    0.1%   26,907    0.1%   (5,102)   (19.0)%
Total other expense, net   (42,578)   (0.3)%   (37,256)   (0.2)%   (5,322)   14.3%
                               
INCOME BEFORE INCOME TAX PROVISION   6,539,845    39.9%   5,177,110    28.6%   1,362,735    26.3%
                               
PROVISION FOR INCOME TAXES   1,465,769    8.9%   1,100,908    6.1%   364,861    33.1%
                               
NET INCOME  $5,074,076    31.0%  $4,076,202    22.25%  $997,874    24.5%

 

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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 six months ended March 31, 
   2020   2019   Change 
   Amount   Amount   Amount   % 
                 
Revenue - TCMD products sales  $7,439,652   $12,394,577   $(4,954,925)   (40.0)%
Revenue – third-party products sales   8,949,213    5,730,737    3,218,476    56.2%
Total revenue  $16,388,865   $18,125,314   $(1,736,449)   (9.6)%

 

Our total revenues decreased by $1,736,449, or 9.6%, to $16,388,865 for the six months ended March 31, 2020 from $18,125,314 for the six months ended March 31, 2019. The decrease in our revenues was attributable to the decrease in sales volume by 23.8% from 14,412,432 units of TCMD and third-party products sold in six months ended March 31, 2019 to 10,979,268 units of TCMD and third-party products sold in six months ended March 31, 2020. Due to the outbreak and spread of COVID-19, we temporarily closed down our manufacturing facilities from February to early March 2020, and as a result, our production and sales of TCMD products decreased during this period, and we experienced difficulty delivering our products to our customers on a timely basis. At the same time, we increased our purchase of third-party products to fulfill customer orders. As a result, our sales volume of TCMD products decreased by 45.3% and sales volume of third party products increased by 34.4% during the six months ended March 31, 2020 as compared to the same period of 2019. In addition, due to the COVID-19, the shipping and delivery of our products to customers located in remote geographic areas was also negatively impacted, which led to the decrease in the total number of customers by 29.0% from 1,636 in six months ended March 31, 2019 to 1,162 in six months ended March 31, 2020. The decrease in our total sales volume and number of customers was compensated by an increase in our weighted average per unit selling price. The weighted average per unit selling price of our TCMD products increased by 9.7%, from $1.18 per unit in the six months ended March 31, 2019 to $1.29 per unit in the six months ended March 31, 2020, and the weighted average per unit selling price of third-party products increased by 16.2%, from $1.48 per unit in six months ended March 31, 2019 to $1.71 per unit in six months ended March 31, 2020. Furthermore, foreign currency exchange rate was at US$1.00 to RMB 6.8306 for the six months ended March 31, 2019, as compared to US$1.00 to RMB 7.0126 for the six months ended March 31, 2020. The appreciation of RMB had a 2.7% negative impact on our reported revenue. These factors all contributed to the decrease in our revenues by 9.6% from the six months ended March 31, 2019 to the six months ended March 31, 2020.

 

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For the six months ended March 31,
   2020   2019   Change                                 
Product name  Amount   % of revenue   Amount   % of revenue   Amount   %   QTY sold 2020   QTY sold 2019   QTY change   % of change   Average price 2020   Average price 2019   Price change   % of change in price 
                                                         
Sales of TCMD products:                                                                     
Shiquan Dabu Medicinal Liquor  $221,795    1.4%  $345,816    1.9%  $(124,021)   (35.9)%   101,582    195,614    (94,032)   (48.1)%  $2.18   $1.77   $0.42    23.5%
Shenrong Medicinal Liquor   201,733    1.2%   187,286    1.0%   14,447    7.7%   78,399    94,586    (16,187)   (17.1)%   2.57    1.98    0.59    30.0%
Fengtong Medicinal Liquor   164,114    1.0%   606,036    3.3%   (441,922)   (72.9)%   161,588    472,707    (311,119)   (65.8)%   1.02    1.28    (0.27)   (20.8)%
 Fengshitong Medicinal Liquor   21,956    0.1%   34,466    0.2%   (12,511)   (36.3)%   17,909    28,767    (10,858)   (37.7)%   1.23    1.20    0.04    3.2%
Qishe Medicinal Liquor,   54,318    0.3%   77,588    0.4%   (23,270)   (30.0)%   20,000    33,972    (13,972)   (41.1)%   2.72    2.28    0.43    18.9%
Guben Yanling Pill   4,880,131    29.8%   6,372,150    35.2%   (1,492,019)   (23.4)%   1,412,839    1,867,189    (454,350)   (24.3)%   3.45    3.41    0.03    0.9%
Quanlu Pill   106,779    0.7%   70,695    0.4%   36,085    51.0%   107,951    68,613    39,338    57.3%   0.99    1.03    (0.04)   (4.0)%
Shenrong Weisheng Pill   543,084    3.3%   1,177,054    6.5%   (633,970)   (53.9)%   1,143,252    1,906,569    (763,317)   (40.0)%   0.48    0.62    (0.13)   (21.4)%
Yangxue Danggui Syrup   122,614    0.7%   990,379    5.5%   (867,765)   (87.6)%   139,973    1,052,338    (912,365)   (86.7)%   0.88    0.94    (0.07)   (6.9)%
Wuzi Yanzong Oral Liquid   137,557    0.8%   36,640    0.2%   100,917    275.4%   76,077    21,540    54,537    253.2%   1.81    1.70    0.11    6.3%
Qiangli Pipa Syrup   338,544    2.1%   1,303,758    7.2%   (965,214)   (74.0)%   729,262    2,315,936    (1,586,674)   (68.5)%   0.46    0.56    (0.10)   (17.5)%
 Isatis Root Granule   403,293    2.5%   943,639    5.2%   (540,346)   (57.3)%   697,721    1,316,830    (619,109)   (47.0)%   0.58    0.72    (0.14)   (19.3)%
Paracetamol Granule for Children   243,733    1.5%   249,070    1.4%   (5,338)   (2.1)%   1,073,676    1,153,200    (79,524)   (6.9)%   0.23    0.22    0.01    5.1%
Subtotal: sales of TCMD products   7,439,651    45.4%   12,394,577    68.4%   (4,954,926)   (40.0)%   5,760,229    10,527,861    (4,767,632)   (45.3)%   1.29    1.18    0.11    9.7%
                                                                      
Sales of third party products:                                                                      
Biochemical drugs   7,456,837    45.5%   4,571,484    25.2%   2,885,354    63.1%   4,991,264    3,758,382    1,232,881    32.8%   1.49    1.22    0.28    22.8%
Traditional Chinese
Medicine Pieces
   8,483    0.1%   101,110    0.6%   (92,627)   (91.6)%   650    39,815    (39,165)   (98.4)%   13.06    2.54    10.52    414.2%
Medical instruments   1,482,211    9.0%   1,056,836    5.8%   425,375    40.2%   226,622    85,991    140,631    163.5%   6.54    12.29    (5.76)   (46.9)%
Dietary supplements   1,682    0.0%   1,307    0.0%   375    28.7%   504    383    121    31.6%   3.34    3.41    (0.08)   (2.2)%
Subtotal:  sales of third party products   8,949,214    54.6%   5,730,737    31.6%   3,218,476    56.2%   5,219,039    3,884,571    1,334,468    34.4%   1.71    1.48    0.24    16.2%
                                                                       
Total revenue  $16,388,865    100.0%  $18,125,314    100.0%  $(1,736,449)   (9.6)%   10,979,268    14,412,432    (3,433,164)   (23.8)%  $1.49   $1.26   $0.24    18.7%

 

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 45.4% and 68.4% of our total revenue for the six months ended March 31, 2020 and 2019, respectively.

 

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Our TCMD products sales decreased by $4,954,926, or 40.0%, from $12,394,577 in six months ended March 31, 2019 to $7,439,651 in six months ended March 31, 2020, because the sales volume of our TCMD products decreased by 45.3%, from 10,527,861 units sold in six months ended March 31, 2019 to 5,760,229 units sold in six months ended March 31, 2020. The exchange rate between RMB and USD and the appreciation of RMB had a 2.6% negative impact on our reported revenue when comparing the six months ended March 31, 2020 to the six months ended March 31, 2019. As discussed above, due to the outbreak of COVID-19, from February to early March 2020, we had to temporarily close down our manufacturing facilities due to government restrictions. This led to the decrease in the production and sales of our TCMD products for approximately one month. In addition, due to transportation and travel restrictions, we experienced difficulties shipping and delivering our products to customers located in remote geographic areas, which led to the decrease in the total number of customers by 29.0% from 1,636 in six months ended March 31, 2019 to 1,162 in six months ended March 31, 2020. Among the 13 varieties of TCMD products we manufacture, the sales of Guben Yanling Pill, one of our representative products, accounted for 29.8% and 35.2% of our total revenue for the six months ended March 31, 2020 and 2019, respectively. The sales of Guben Yanling Pill decreased by $1,492,019, or 454,350 units, or 24.3%, in six months ended March 31, 2020 as compared to six months ended March 31, 2019. In addition, the sales of Fengtong Medicinal liquor, Shenrong Weisheng Pill, Yangxue Danggui Syrup, Qiangli Pipa Syrup and Isatis Root Granule also decreased by $441,922, $633,970, $867,765 $965,214 and $540,346, representing a 72.9%, 53.9%, 87.6%, 74.0% and 57.3% decrease, respectively, and their sales volume decreased by 17.1%, 40.0%, 86.7%, 68.5% and 47.0% from six months ended March 31, 2019 to six months ended March 31, 2020, respectively. On the other hand, 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, and as a result, the average selling price of our TCMD products increased by 9.7% from $1.18 per unit in six months ended March 31, 2019 to $1.29 per unit in six months ended March 31, 2020. The increase in our average selling price partially compensated the revenue decrease affected by the decrease in sales volume and decrease in number of customers.

 

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) TCMPs, 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 54.6% and 31.6% of our total revenue for the six months ended March 31, 2020 and 2019, respectively.

 

Sales of third-party products increased by $3,218,476, or 56.2%, from $5,730,737 in six months ended March 31, 2019 to $8,949,214 in six months ended March 31, 2020, because of an increase in the sales volume of third-party products by 34.4%, from 3,884,571 units sold in the six months ended March 31, 2019 to 5,219,039 units sold in the six months ended March 31, 2020, and an increase in their average selling price by 16.2%, from $1.48 per unit in the six months ended March 31, 2019 to $1.71 per unit in the six months ended March 31, 2020. Among the total sales of third-party products, sales of biochemical drugs increased by 63.1%, or $2,885,354, from $4,571,484 in the six months ended March 31, 2019 to $7,456,837 in the six months ended March 31, 2020 because of a 32.8% increase in sales volume and 22.8% increase in average selling price. Sales of medical instruments increased by $425,375, or 40.2%. due to increased sales volume by 140,631 units, or 163.5%, and offset by a decrease in average selling price by $5.76 per unit. Sales of traditional Chinese medicine pieces (“TCMPs”) decreased by $92,627, or 91.6%, from $101,110 in the six months ended March 31, 2019 to $8,483 in the six months ended March 31, 2020 because of a 98.4% decrease in sales volume. Sales of dietary supplements products was immaterial in the six months ended March 31, 2020 and 2019 at $1,682 and $1,307, respectively. As discussed above, due to the outbreak and spread of COVID-19, from February to early March 2020, we temporarily closed down our manufacturing facilities due to COVID-19. We increased our purchase of third-party products to fulfill customer orders during this period of time. This led to the increase in our sales volume of third-party products during the six months ended March 31, 2020 as compared to the same period of 2019. 

 

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, purchase price of third-party products, and customer and product mix.

 

   For the six months ended March 31, 
   2020   2019   Change 
   Amount   Amount   Amount   % 
                 
Cost of revenues - TCMD products  $3,129,816   $7,172,185   $(4,042,369)   (56.4)%
Cost of revenues –third-party products   4,738,945    3,909,941    829,004    21.2%
Total cost of revenues  $7,868,761   $11,082,126   $(3,213,365)   (29.0)%

 

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Our cost of revenues decreased by $3,213,365, or 29.0%, from $11,082,126 in the six months ended March 31, 2019 to $7,868,761 in the six months ended March 31, 2020. The decrease in our cost of revenues was due to the following reasons:

 

(1)As discussed above, we temporarily suspended our manufacturing activities for one month from the beginning of February to early March 2020 due to COVID-19, which contributed to a decrease in sales volume by 23.8% from 14,412,432 units of products sold in the six months ended March 31, 2019 to 10,979,268 units of products sold in the six months ended March 31, 2020. As sales volume decreased, our cost of revenues also decreased.

 

(2)As previously disclosed in our audited financial statements for the years ended September 30, 2019 and 2018, in connection with our renewal of GMP Certificate with the Jiangxi FDA, we conducted maintenance for our manufacturing facility during August and September 2019. The maintenance and upgrade of our manufacturing facilities enabled us to streamline our manufacturing process, manage the workflow effectively, improve product quality, and boost our manufacturing productivity to lower down our manufacturing costs to certain extent. As a result, the weighted cost per unit for our TCMD products decreased by 20.2%, from $0.68 per unit in the six months ended March 31, 2019 to $0.54 per unit in the six months ended March 31, 2020.

 

(3)During the six months ended March 31, 2020, when we chose third party products to purchase from various suppliers, we decided not to repurchase approximately 1,102 products with lower margin on the previous purchase list and added 1,765 new products with higher margin to our purchase list. As a result of change in product mix, the weighted average cost per unit for third-party products decreased by 8.8%, from $1.01 per unit in six months ended March 31, 2019 to $0.91 per unit in six months ended March 31, 2020 due to lower purchase costs of third-party products. As a result of the above, weighted per unit cost for all of our products sold during the six months ended March 31, 2020 decreased by $0.05, or 6.8%, from $0.77 in the six months ended March 31, 2019 to $0.72 in the six months ended March 31, 2020.

 

(4)Exchange rate between RMB and USD was US$1.00 to RMB 6.8306 for the six months ended March 31, 2019 as compared to US$1.00 to RMB 7.0126 for the six months ended March 31, 2020. The appreciation of RMB against USD had a 2.7% negative impact on our reported cost of revenues.

 

   For the six months ended March 31,    Unit    Unit    Unit     
   2020   2019   Change    cost     cost   cost    % of 
Product name  Amount   %   Amount   %   Amount   %   2020   2019   change   change 
                                         
Costs of TCMD products:                                        
Shiquan Dabu Medicinal Liquor  $73,072    0.9%  $180,288    1.6%   (107,216)   (595)%  $0.72   $0.92   $(0.20)   (23.0)%
Shenrong Medicinal Liquor   70,831    0.9%   110,188    1.0%   (39,357)   (35.7)%   0.90    1.16    (0.26)   (22.4)%
Fengtong Medicinal Liquor   106,753    1.4%   442,937    4.0%   (336,184)   (75.9)%   0.66    0.94    (0.28)   (29.5)%
Fengshitong Medicinal Liquor   15,563    0.2%   29,342    0.3%   (13,779)   (47.0)%   0.87    1.02    (0.14)   (13.8)%
Qishe Medicinal Liquor,   21,211    0.3%   45,079    0.4%   (23,868)   (52.9)%   1.06    1.33    (0.27)   (20.1)%
Guben Yanling Pill   1,416,706    18.0%   2,203,168    19.9%   (786,462)   (35.7)%   1.00    1.18    (0.18)   (15.0)%
Quanlu Pill   69,086    0.9%   37,704    0.3%   31,382    83.2%   0.64    0.55    0.09    16.5%
Shenrong Weisheng Pill   466,054    5.9%   1,026,206    9.3%   (560,152)   (54.6)%   0.41    0.54    (0.13)   (24.3)%
Yangxue Danggui Syrup   90,304    1.1%   888,821    8.0%   (798,517)   (89.8)%   0.65    0.84    (0.19)   (22.4)%
Wuzi Yanzong Oral Liquid   73,071    0.9%   26,500    0.2%   46,571    175.7%   0.96    1.23    (0.27)   (21.9)%
Qiangli Pipa Syrup   228,827    2.9%   1,085,904    9.8%   (857,077)   (78.9)%   0.31    0.47    (0.16)   (33.1)%
Isatis Root Granule   317,835    4.0%   878,326    7.9%   (560,491)   (63.8)%   0.46    0.67    (0.21)   (31.7)%
Paracetamol Granule for Children   180,503    2.3%   217,722    2.0%   (37,219)   (17.1)%   0.17    0.19    (0.02)   (11.0)%
Subtotal: costs of TCMD products   3,129,816    39.8%   7,172,185    64.7%   (4,042,369)   (56.4)%   0.54    0.68    (0.14)   (20.2)%
                                                   
Costs of third party products:   -         -                                    
Biochemical drugs   4,027,681    51.2%   3,243,171    29.3%   784,510    24.2%   0.81    0.86    (0.07)   (7.6)%
Traditional Chinese
Medicine Pieces
   6,134    0.1%   90,737    0.8%   (84,603)   (93.2)%   9.44    2.28    7.17    314.8%
Medical instruments   703,942    8.9%   575,307    5.2%   128,636    22.4%   3.11    6.69    (3.59)   (53.7)%
Dietary supplements   1,188    0.0%   726    0.0%   462    63.6%   2.36    1.90    0.47    24.9%
Subtotal:  costs of third party products   4,738,945    60.2%   3,909,941    35.3%   829,005    21.2%   0.91    1.01    (0.09)   (8.8)%
                                                   
Total cost of revenue  $7,868,761    100.0%  $11,082,126    100.0%   (3,213,365)   (29.0)%  $0.72   $0.77   $(0.05)   (6.8)%

 

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Cost of revenues of TCMD products

 

Cost of revenues of TCMD products accounted for 39.8% and 64.7% of our total costs of revenues for the six months ended March 31, 2020 and 2019, respectively. Cost of revenues of TCMD products decreased by $4,042,369, or 56.4%, from $7,172,185 in the six months ended March 31, 2019 to $3,129,816 in the six months ended March 31, 2020. The decrease in cost of revenues of our TCMD products was due to the following reasons:

 

(1)Sales volume of TCMD products decreased by 45.3%, from 10,527,861 units sold in the six months ended March 31, 2019 to 5,760,229 units sold in the six months ended March 31, 2020;

 

(2)The maintenance and upgrade of our manufacturing facility in September 2019 enabled us to streamline our manufacturing process, manage the workflow effectively, improve product quality, and boost our manufacturing productivity to lower down our manufacturing cost to certain extent. As a result, our average per unit cost of our TCMD products decreased by $0.14, or 20.2%, from $0.68 in the six months ended March 31, 2019 to $0.54 in the six months ended March 31, 2020. Among the 13 varieties of TCMD products, cost of revenues of Guben Yanling Pill, one of our representative product, accounted for 18.0% and 19.9% of our total cost of revenues for the six months ended March 31, 2020 and 2019, respectively. Sales of Guben Yanling Pill decreased by $1,492,019, because sales volume decreased by 454,350 units, or 24.3%. Costs of Guben Yanling Pill decreased from $1.18 per unit to $1.00 per unit, thereby decreasing the total cost of revenues of Guben Yanling Pill by $786,462. In addition, as a result of the maintenance and upgrade of our facility in 2019, our productivity was enhanced, and unit production cost of Shiquan Dabu medicinal liquor, Fengtong medicinal liquor, Qishe medicinal liquor, Shengrong Weisheng pill, Yangxue Danggui Syrup, Qiangli Pipa Syrup, Isatis Root Granule and Paracetamol Granule for Children decreased by 23.0%, 29.5%, 20.1%, 24.3%, 22.4%, 33.1%, 31.7% and 11.0%, respectively, which led to corresponding decrease in cost of revenues associated with these TCMD products by $107,216, $336,184, $23,868, $560,152, $798,517, $857,077, $560,491 and $37,219, respectively.

 

(3)Exchange rate between RMB and USD and the appreciation of RMB against USD had a 2.6% negative impact on our reported cost of revenues when comparing six months ended March 31, 2020 to six months ended March 31, 2019. The decrease in our cost of revenues of our TCMD products in six months ended March 31, 2020 as compared to six months ended March 31, 2019 reflected the above mentioned factors combined. 

 

Cost of revenues of third-party products

 

Cost of revenues of third-party products accounted for 60.2% and 35.3% of our total costs of revenues for the six months ended March 31, 2020 and 2019, respectively. Cost of revenues of third-party products increased by $829,005, or 21.2%, from $3,909,941 in the six months ended March 31, 2019 to $4,738,945 in the six months ended March 31, 2020, because of an increase in sales volume by 34.4%, from 3,884,571 units sold in the six months ended March 31, 2019 to 5,219,039 units sold in the six months ended March 31, 2020. As discussed above, from February to March 2020, we temporarily closed down our manufacturing facilities due to COVID-19. We increased our purchase of third party products to fulfill customer orders during this period of time. In addition, during the six months ended March 31, 2020, when we chose third party products to purchase from various suppliers, we decided not to repurchase approximately 1,102 products with lower margin on the previous purchase list and added 1,765 new products with higher margin to our purchase list. This led to a decrease in the average unit cost of third-party products by $0.09 per unit, or 8.8%, from $1.01 per unit in the six months ended March 31, 2019 to $0.91 per unit in the six months ended March 31, 2020. The average unit cost of biochemical drugs and medical instruments decreased by 7.6% and 53.7%, respectively, and as a result, our unit cost on biochemical drugs and medical instruments was adjusted to tailor this change, and decreased by $0.07, and $3.59 per unit, respectively. For the six months ended March 31, 2020 and 2019, revenue and cost of revenues for TCMPs and dietary supplements products were immaterial and the fluctuation of the their unit cost did not have material impact on our cost of revenues of third party products. Furthermore, exchange rate between RMB and USD and the appreciation of RMB against USD had a 2.7% negative impact on our reported cost of revenues when comparing the six months ended March 31, 2020 to the six months ended March 31, 2019. These factors led to the increase in cost of revenues associated with third-party product sales in the six months ended March 31, 2020 as compared to the six months ended March 31, 2019.

 

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Gross profit

 

Our gross profit increased by $1,476,916, from $7,043,188 in the six months ended March 31, 2019 to $8,520,104 in the six months ended March 31, 2020. Our gross margin increased by 13.1%, from 38.9% in the six months ended March 31, 2019 to 52.0% in the six months ended March 31, 2020. Our gross profit and gross margin were affected by the sales of different product mix during each reporting period. Although our total sales and total sales volume decreased by 9.6% and 23.8%, respectively, two factors led to the increase in our gross profit and gross margin: (i) as discussed above, the increase in productivity as a result of the maintenance and upgrade of our facility enabled us to lower our manufacturing cost and raise the selling price of our TCMD products; and (ii) we purchased more third party products with higher margin to fulfill customer orders during the six months ended March 31, 2020 as compared to the six months ended March 31, 2019.

 

   For the Six Months Ended March 31, 
   2020   2019   Change 
   Amount   Amount   Amount   % 
                 
Gross profit- TCMD products  $4,309,836   $5,222,392   $(912,556)   (17.5)%
Gross profit- third-party products   4,210,268    1,820,796    2,389,472    131.2%
Total gross profit  $8,520,104   $7,043,188   $1,476,916    21.0%
                     
Gross margin- TCMD products   57.9%   42.1%        15.8%
Gross margin- third party products   47.0%   31.8%        15.3%
Total gross margin   52.0%   38.9%        13.1%
                     
Average selling price per unit- TCMD products  $1.29   $1.18   $0.11    9.7%
Average cost per unit- TCMD products  $0.54   $0.68   $(0.14)   (20.2)%
                     
Average selling price per unit- third party products  $1.71   $1.48   $0.24    16.2%
Average cost per unit - third party products  $0.91   $1.01   $(0.10)   (9.8)%

 

Gross profit from TCMD products sales decreased by $912,556, or 17.5%, from $5,222,392 in the six months ended March 31, 2019 to $4,309,836 in the six months ended March 31, 2020, while gross margin of TCMD products sales increased by 15.8%, from 42.1% in the six months ended March 31, 2019 to 57.9% in the six months ended March 31, 2020. The decrease in our gross profit from TCMD product sales was due to the following reasons: (1) sales revenue and sales volume of our TCMD products decreased by 40.0% and 45.3%, respectively, when comparing the six months ended March 31, 2020 to the six months ended March 31, 2019. The decrease in revenue reduced our gross profit; and (2) our gross profit and gross margin were 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. For example, when comparing the six months ended March 31, 2020 to the six months ended March 31, 2019, largest portion of our decrease in gross profit was associated with three of our TCMD products. Gross profit for Fengtong Medicinal liquor, Guben Yanling Pill and Qiangli Pipa Syrup decreased by $105,738, $705,557, and $108,137, respectively, because sales volume of these products decreased 65.8%, 24.3% and 68.5%, and the decrease in average selling price outpaced the decrease in average unit cost by $0.01, $0.21 and $0.06 per unit, respectively.

 

Gross profit from third-party product sales increased by $2,389,472, or 131.2%, from $1,820,796 in the six months ended March 31, 2019 to $4,210,268 in the six months ended March 31, 2020, while the gross margin of third-party product sales increased by 15.3%, from 31.8% in the six months ended March 31, 2019 to 47.0% in the six months ended March 31, 2020. As discussed above, due to the COVID-19, we temporarily closed down our manufacturing facilities in February and March 2020. We increased our purchase of third-party products to fulfill customer orders during this period of time. In addition, during the six months ended March 31, 2020, when we chose third-party products to purchase from various suppliers, we decided not to repurchase approximately 1,102 products with lower margin on the previous purchase list and added 1,765 new products with higher margin to our purchase list. These factors led to our average selling price of third-party products increased by $0.24 per unit, or 16.2%, and average cost per unit of third-party products decreased by $0.10 per unit, or 9.8%. When sales volume of third-party products increased by 1,334,468 units, or 34.4%, our gross profit and gross margin associated with third-party products sales increased in the six months ended March 31, 2020 as compared to the six months ended March 31, 2019.

 

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Operating expenses

 

The following table sets forth the breakdown of our operating expenses for the six months ended March 31, 2020 and 2019:

 

   For the six months ended March 31, 
   2020   2019   Variance 
   Amount   % of revenue   Amount   % of revenue   Amount   % 
                         
Total revenue  $16,388,865    100.0%  $18,125,314    100.0%  $(1,736,449)   (9.6)%
Operating expenses:                              
Selling expenses   646,241    3.9%   904,543    5.0%   (258,302)   (28.6)%
General and administrative expenses   743,813    4.5%   633,110    3.5%   110,703    17.5%
Research and development expenses   547,627    3.4%   291,169    1.6%   256,458    88.1%
Total operating expenses  $1,937,681    11.8%  $1,828,822    10.1%  $108,859    6.0%

 

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 and delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses.

 

   For the six months ended March 31, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses  $217,439    33.6%  $372,990    41.2%  $(155,551)   (41.7)%
Advertising expenses   168,197    26.0%   204,050    22.6%   (35,853)   (17.6)%
Shipping and delivery expenses   241,826    37.4%   281,723    31.1%   (39,897)   (14.2)%
Business travel and meals expenses   8,346    1.4%   33,143    3.7%   (24,797)   (74.8)%
Other sales promotion related expenses   10,433    1.6%   12,637    1.4%   (2,204)   (17.4)%
Total selling expenses  $646,241    100.0%  $904,543    100.0%  $(258,302)   (28.6)%

 

Our selling expenses decreased by $258,302, or 28.6%, from $904,543 in the six months ended March 31, 2019 to $646,241 in the six months ended March 31, 2020, primarily attributable to the following factors:

 

(i)a decrease in advertising expenses by $35,853, or 17.6%, from $204,050 in the six months ended March 31, 2019 to $168,197 in the six months ended March 31, 2020. 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 the six months ended March 31, 2019, in connection with our sales promotion of several new products to targeted customers, we spent more on advertising than we did in the six months ended March 31, 2020, which led to higher advertising expenses in six months ended March 31, 2019;

 

(ii)a decrease in shipping and delivery expenses by $39,897, or 14.2%, from $281,723 in the six months ended March 31, 2019 to $241,826 in the six months ended March 31, 2020, because we formed our own logistic team to deliver some of the products to customers located in nearby cities. In the six months ended March 31, 2019, we outsourced some of the shipping and delivery services to third-party logistic companies, which resulted in higher shipping and delivery expenses in that period;

 

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(iii)a decrease in business travel and meals expenses by $24,797, or 74.8%, from $33,143 in the six months ended March 31, 2019 to $8,346 in the six months ended March 31, 2020. Due to COVID-19, government imposed measures including lockdowns, travel restrictions, suspension of business activities, and as a result, our sales activities were temporarily reduced from early February to early March 2020, and our travel and meals expenses associated with our sales activities decreased; and

 

(iv)a decrease in our salary and benefit expenses paid to our sales employees by $155,551, or 41.7%, from $372,990 in the six months ended March 31, 2019 to $217,439 in the six months ended March 31, 2020 primarily due to our reduced sales activities from early February to early March 2020 as affected by the COVID-19.

 

These above-mentioned factors combined led to the decrease in our selling expenses in the six months ended March 31, 2020 as compared to the same period of 2019. As a percentage of revenues, our selling expenses accounted for 3.9% and 5.0% of our total revenue for the six months ended March 31, 2020 and 2019, respectively. 

 

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.

 

   For the six months ended March 31, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expense  $233,022    31.4%  $271,867    42.9%  $(38,845)   (14.3)%
Depreciation and amortization   101,902    13.7%   105,467    16.7%   (3,565)   (3.4)%
Bad debt reserve expenses   9,038    1.2%   9,018    1.4%   20    0.2%
Land and property tax   48,485    6.5%   49,777    7.9%   (1,292)   (2.6)%
Office supply and utility expense   64,015    8.6%   51,781    8.2%   12,234    23.6%
Transportation, business travel and meals expense   31,236    4.2%   27,026    4.3%   4,210    15.6%
Professional service fees   229,921    30.9%   66,520    10.5%   163,401    245.6%
Inspection and maintenance fee   11,250    1.5%   21,403    3.4%   (10,153)   (47.4)%
Stamp tax and other expenses   14,944    2.0%   30,251    4.7%   (15,307)   (50.6)%
Total general and administrative expenses  $743,813    100.0%  $633,110    100.0%  $110,703    17.5%

 

Our general and administrative expenses increased by $110,703, or 17.5%, from $633,110 for the six months ended March 31, 2019 to $743,813 for the six months ended March 31, 2020, primarily attributable to (i) our professional service fees increased by $163,401 in the six months ended March 31, 2020 as compared to the same period of 2019, primarily due to increased audit fee in connection with the audits of our financial statements for the years ended September 30, 2019 and 2018 for our intended public offering; (ii) an increase in our office supply and utility expenses by $12,234, or 23.6%, to support our administration activities; and (iii) an increase in our business travel and entertainment expense by $4,210, or 15.6%, because we increased the travel and meals expenses associated with our preparation for listing in the U.S., and offset by a decrease in our salaries, welfare expenses and insurance expenses paid to administration employees by $38,845, or 14.3%, because of lower amount of annual bonus was distributed to administrative staffs in the six months ended March 31, 2020 as compared to the same period of 2019. As a percentage of revenues, general and administrative expenses were 4.5% and 3.5% of our revenue for the six months ended March 31, 2020 and 2019, respectively. 

 

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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 six months ended March 31, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses to R&D staff  $43,709    8.0%  $38,741    13.3%  $4,968    12.8%
Materials used in R&D activities   495,985    90.6%   242,750    83.4%   253,235    104.3%
Depreciation and others   7,933    1.4%   9,678    3.3%   (1,745)   (18.0)%
Total research and development expenses  $547,627    100.0%  $291,169    100.0%  $256,458    88.1%

 

Our research and development expenses increased by $256,458, or 88.1%, from $291,169 for the six months ended March 31, 2019 to $547,267 for the six months ended March 31, 2020, primarily attributable to an increase in the materials used in the R&D activities by $253,235. In the six months ended March 31, 2020, 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 3.3% and 1.6% of our revenue for the six months ended March 31, 2020 and 2019, respectively. 

 

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.

 

Net interest expenses increased by $1,305, or 2.1%, from $62,404 in the six months ended March 31, 2019 to $63,709 in the six months ended March 31, 2020. For the six months ended March 31, 2020, net interest expense of $63,709 included interest expense on the bank loans of $71,447, offset by interest income of $7,616. For the six months ended March 31, 2019, net interest expense included interest expense on the bank loans of $66,551 offset by interest income of $4,147.

 

Interest expense on the bank loans increased by $4,912, or 7.4%, from $66,551 in the six months ended March 31, 2019 to $71,447 in the six months ended March 31, 2020. We carried RMB18 million (approximately $2.6 million) short-term bank loans as of and for the six months ended March 31, 2020 and 2019, respectively, obtained from Luling Rural Commercial Bank (“LRC Bank”) for working capital purposes.

 

Interest income was $7,616 and $4,147 for the six months ended March 31, 2020 and 2019, respectively, which was primarily generated from our cash deposit with PRC banks.

 

Equity investment income was $21,805 and $26,907 for the six months ended March 31, 2020 and 2019, 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 March 31, 2020 and September 30, 2019, the value of this investment amounted to $705,500 and $700,500, respectively, and was reported as long-term investment in equity investee on our consolidated balance sheets.

 

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Provision for Income Taxes

 

Our provision for income taxes was $1,465,769 in the six months ended March 31, 2020, an increase of $364,861, or 33.1%, from $1,100,908 in the six months ended March 31, 2019 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. The EIT Law 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 an 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 until November 2022. The EIT Law 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 six months ended March 31, 2020 and 2019 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 $256,667 and $190,679 for the six months ended March 31, 2020 and 2019, respectively. The benefits of tax holidays on net income per share (basic and diluted) were $0.02 and $0.01 for the six months ended March 31, 2020 and 2019, respectively.

 

Net Income

 

As a result of the foregoing, we reported a net income of $5,074,076 for the six months ended March 31, 2020, representing a $997,874 increase from a net income of $4,076,202 for the six months ended March 31, 2019.

 

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)%

 

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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                             % of 
   Amount   % of revenue   Amount   % of revenue   Amount   %   QTY sold 2019   QTY sold 2018   QTY change   % of change   Average
price 2019
   Average
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%