424B4 1 ea138291-424b4_universepharm.htm PROSPECTUS

Filed pursuant to Rule 424 (b)(4)

Registration No. 333-248067

 

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. The offering price of our Ordinary Shares is $5.00 per Ordinary Share. Our Ordinary Shares have been approved for listing on Nasdaq Global Market under the symbol “UPC”.

 

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 10 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 4 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)  $5.00   $25,000,000 
Underwriter’s discounts(2)  $0.255   $1,275,000 
Proceeds to our company before expenses(3)  $4.745   $23,725,000 

 

(1) Initial public offering price per share is $5.00 per share. The table above assumes that the underwriter does not exercise its over-allotment option. For more information, see “Underwriting” in this prospectus.
   
(2)

We have agreed to pay the underwriter 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 based on an offering price of $5.00 per Ordinary Share, the total gross proceeds to us, before underwriting discounts and expenses, will be $28,750,000.

 

The underwriter expects to deliver the Ordinary Shares against payment as set forth under “Underwriting,” on or about March 25, 2021.

 

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 March 22, 2021.

 

 

TABLE OF CONTENTS

 

  Page
   
PROSPECTUS SUMMARY 1
   
THE OFFERING 7
   
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA 8
   
RISK FACTORS 10
   
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 65
   
BUSINESS 70
   
REGULATIONS 82
   
MANAGEMENT 92
   
PRINCIPAL SHAREHOLDERS 97
   
RELATED PARTY TRANSACTIONS 99
   
DESCRIPTION OF SHARE CAPITAL 100
   
SHARES ELIGIBLE FOR FUTURE SALE 118
   
TAXATION 120
   
UNDERWRITING 128
   
EXPENSES RELATING TO THIS OFFERING 132
   
LEGAL MATTERS 133
   
EXPERTS 133
   
WHERE YOU CAN FIND MORE INFORMATION 133
   
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 [●], 2021 (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.

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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 261 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 January 31, 2021, we had distributed around 5,184 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, Hubei Province, Fujian Province, Guangxi Province and Shandong Province, and 23 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 from a total of 1,535 customers in 2018 to 2,603 customers at the end of fiscal year 2019, and decreased to 2,209 as of December 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, but decreased to $18,374,751 for the fiscal year ended September 30, 2020 due to the impact of COVID-19 pandemic and strong market competition. 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, and decreased slightly to $12,329,209 for the year ended September 30, 2020 primarily due to decreased average selling price and changes in product mix sold. 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 $7,558,222 for the fiscal year ended September 30, 2020. 

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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.

 

Summary of Risk Factors 

 

Investing in our Ordinary Shares involves significant risks. You should carefully consider all of the information in this prospectus before making an investment in our Ordinary Shares. Below please find a summary of the principal risks we face, organized under relevant headings. These risks are discussed more fully in the section titled “Risk Factors.”

 

Risks Related to Our Business and Industry

 

  Price increases in raw materials and sourced products could harm the Company’s financial results;
     
  High quality materials for our products may be difficult to obtain or substantially increase our production costs;
     
  We operate in a highly competitive industry. Our failure to compete effectively could adversely affect our market share, revenues and growth prospectus;
     
  Failure to maintain or enhance our brands or image could have a material adverse effect on our business and results of operations;
     
  Our failure to appropriately respond to changing consumer preferences and demand for new products could significantly harm our customer relationships and product sales; and
     
  We are subject to evolving regulatory requirements, non-compliance with which, or changes in which, may adversely affect our business and prospects.

 

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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;
     
  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; and
     
  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 prospectus.

 

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;
     
  You will experience immediate and substantial dilution; and
     
  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.

 

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”.

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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. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

 

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;”

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  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.

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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;
     
  “RMB” and “Renminbi” refer to the legal currency of China;
     
 

“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;
     
  “US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States;
     
  “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).

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THE OFFERING

 

Ordinary Shares offered by us   5,000,000 Ordinary Shares
     
Price per Ordinary Share   $5.00 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   Our Ordinary Shares have been approved for listing Nasdaq Global Market under the symbol “UPC”.
     
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 10 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 six (6) months from the date on which the trading of the Ordinary Shares on the Nasdaq Stock Market commences, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

 

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following selected historical statements of operations for the fiscal years ended September 30, 2020 and 2019, and balance sheet data as of September 30, 2020 and 2019 have been derived from our audited 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 years ended

September 30,

 
    2020     2019  
             
REVENUE   $ 30,703,960     $ 33,229,316  
COST OF REVENUE     16,610,140       19,821,831  
GROSS PROFIT     14,093,820       13,407,485  
                 
OPERATING EXPENSES                
Selling expenses     1,555,546       1,578,826  
General and administrative expenses     1,703,424       1,457,393  
Research and development expenses     583,125       618,437  
Total operating expenses     3,842,095       3,654,656  
                 
INCOME FROM OPERATIONS     10,251,725       9,752,829  
                 
OTHER INCOME(EXPENSES)                
Interest expense, net     (123,760 )     (129,268 )
Other income (expense), net     (49,352 )     2,760  
Equity investment income     21,820       26,741  
Total other expense, net     (151,292 )     (99,767 )
                 
INCOME BEFORE INCOME TAX PROVISION     10,100,433       9,653,062  
                 
INCOME TAX PROVISION     2,542,211       2,101,597  
                 
NET INCOME     7,558,222       7,551,465  
                 
OTHER COMPREHENSIVE INCOME (LOSS)                
Foreign currency translation adjustment     860,623       (645,978 )
COMPREHENSIVE INCOME   $ 8,418,845     $ 6,905,487  
                 
EARNINGS PER SHARE                
Basic and diluted   $ 0.47     $ 0.47  
                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                
Basic and diluted*     16,000,000       16,000,000  

 

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Selected Balance Sheet Information

 

    As of September 30,  
    2020     2019  
ASSETS
CURRENT ASSETS            
Cash   $ 10,058,202     $ 3,177,321  
Accounts receivable, net     10,871,778       6,420,986  
Inventories, net     1,906,232       2,615,155  
Deferred initial public offering costs     443,709       -  
Prepaid expenses and other current assets     -       16,300  
TOTAL CURRENT ASSETS     23,279,921       12,229,762  
                 
Property, plant and equipment, net     4,428,064       4,566,932  
Intangible assets, net     174,776       171,610  
Investment in equity securities     735,000       700,500  
Deferred tax assets     186,537       168,075  
TOTAL NONCURRENT ASSETS     5,524,377       5,607,117  
                 
TOTAL ASSETS   $ 28,804,298     $ 17,836,879  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
CURRENT LIABILITIES                
Short-term bank loans   $ 2,646,000     $ 2,521,800  
Accounts payable     2,691,193       1,937,095  
Taxes payable     1,331,749       551,049  
Due to related party     956,492       54,705  
Accrued expenses and other current liabilities     375,960       388,171  
TOTAL CURRENT LIABILITIES     8,001,394       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     13,738,979       6,180,757  
Accumulated other comprehensive income     895,390       34,767  
TOTAL SHAREHOLDERS’ EQUITY     20,802,904       12,384,059  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 28,804,298     $ 17,836,879  

 

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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.

 

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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.

 

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If we fail to maintain or renew the requisite licenses, permits, registrations and filings applicable to our business, or fail to obtain additional licenses, permits, registrations or filings that become necessary as a result of new enactment or promulgation of government policies, laws or regulations or the expansion of our business, our business and results of operations may be materially and adversely affected.

 

The Chinese patent medicine industry in China is highly regulated, and multiple licenses, permits, filings and approvals are required to operate our business. Currently, through our PRC subsidiaries, we have obtained a valid pharmaceutical manufacturing license, a medical device selling license, and a pharmaceutical trade license. We have made efforts to obtain all applicable approvals, licenses and permits, but due to the complexities, uncertainties and frequent changes in laws, rules, regulations and their interpretation and implementation, we may not always be able to do so, and we may be penalized by governmental authorities for conducting pharmaceutical manufacturing or sales activities without proper approvals, licenses or permits. Moreover, as we continue to increase our product variety, we may also become subject to new or existing laws and regulations that did not affect us in the past. Failure to obtain, renew or retain requisite licenses, permits or approvals may adversely affect our ability to conduct or expand our business, and may have a material adverse impact on our business prospectus, results of operations and financial condition.

 

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.

 

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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.

 

Further, the application and interpretation of China’s intellectual property laws are still evolving and are uncertain. If we are found to have violated the intellectual property rights of others, we may be subject to liability and penalty for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. In addition, we may incur significant expenses, and may be forced to divert management’s time and other resources from our business and operations to defend against these infringement claims, regardless of their merits. Successful infringement or licensing claims made against us may result in significant monetary liabilities and may materially disrupt our reputation, business and operations by restricting or prohibiting our use of the intellectual property at issue.

 

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 59.8% of the total value of the products we sold for the fiscal year ended September 30, 2020. Our products are produced in our manufacturing facility located in Jinggangshan, Jiangxi Province, China. For the fiscal years ended September 30, 2020, two 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.

 

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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.

 

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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. Although we have resumed our operations and the impact of COVID-19 on our operating results and financial performance for fiscal year 2020 seems to be temporary, a resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disrupt our supply chain, and the continued uncertainties associated with COVID 19 may cause our revenue and cash flows to underperform in the next 12 months. The extent of the future impact of COVID-19 is still considered to be uncertain. 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. The PRC legal system is evolving rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

 

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. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations.

 

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 and will enjoy the reduced income tax rate of 15% for three years through December 2022. 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. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in Hong Kong or other jurisdictions may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, 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. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, it could present significant legal and other obstacles to obtaining information needed for investigations and litigation conducted outside of China, which may further increase difficulties faced by you in protecting your interests. See also “—You may experience difficulty in effecting service of process, enforcing foreign judgments or bringing actions against our directors and officers.”

 

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, our ability to remit dividends, and the value of your investment.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have.

 

Under existing PRC foreign exchange regulations, the Renminbi 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 fact, in light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of the Ordinary Shares. Our capital expenditure plans and 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.

 

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.

    

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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.

 

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 was 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. If you purchase shares in this offering, you will incur immediate dilution of approximately $2.95 per share or approximately 59% from the offering price of $5.00 per share, and after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

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Shares eligible for future sale may adversely affect the market price of our Ordinary Shares if the shares are successfully listed on the Nasdaq Global 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 or 5% or greater shareholders, are or will be freely tradable immediately upon effectiveness of our registration statement on Form F-1, of which this prospectus forms a part. 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.

 

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, 2021 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.

 

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.

 

Our ability to produce accurate financial statements have been materially adversely affected by our failure to establish proper internal financial reporting controls. If we fail to establish and maintain proper internal financial reporting controls in a reasonably timely manner, our ability to produce accurate financial statements or comply with applicable regulations may continue to 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, 2020 and 2019, we identified several material weaknesses in our internal control over financial reporting and other control deficiencies as of September 30, 2020. 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.

 

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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. These adjustments led to an increase in current assets of $443,709 due to deferred initial public offering costs in the same amount being capitalized and a decrease in non-current assets of $153,540 due to adjustment of deferred tax assets and accumulated depreciation, resulting in an increase in total assets by $290,169. In addition, these adjustments led to (i) a decrease in total liabilities by $154,979 because of adjustment of accrued expenses, (ii) a decrease in general and administrative expense by $459,092, (iii) decrease in selling expense by $9,246, (iv) decrease in income tax provision by $10,184, and (v) increase in net income by $468,338. These adjustments had a 1.0%, 1.9%, 4.6% and 6.2% impact on the Company’s consolidated total assets, total liabilities, pre-tax income and net income, respectively, and increased earnings per share by $0.03.

 

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; (v) hiring a new chief financial officer who has sufficient expertise in U.S. GAAP to improve the quality of U.S. GAAP reports; and (vi) implementing the Company’s internal control and risk assessment in accordance with the requirement of the COSO 2013 framework.

 

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 adopted the following measures:

 

We have appointed our independent directors and established an audit committee, effective upon effectiveness of the registration statement of which this prospectus forms a part;

 

We have identified five chief financial officer candidates with U.S. Certified Public Accountant qualification and extensive U.S. GAAP experience and knowledge. We expect to appoint our chief financial officer by March 2021;

 

We have engaged Guangzhou Jingshi Business Consulting Co., Ltd. as our external consulting firm in setting up a financial and system control framework. We expect to fully complete the setup of financial and system control framework by September 30, 2021;

 

We have strengthened our day-to-day supervision and review of accounting and financial reporting. Since September 2020, our chief executive officer, Mr. Gang Lai, our chief financial officer, Ms. Lin Yang, and the management team of our PRC subsidiaries have held meetings on a monthly basis to review our financial statements and operational performance and identify strategies to achieve our business goals;

 

We have set up an internal control department responsible for designing internal control procedures, supervising the implementation of our internal control system, and assessing the effectiveness of our internal controls; and

 

We have distributed U.S. GAAP study materials to and provided training sessions for our accounting and financial reporting personnel. In addition, we have been actively recruiting qualified accounting talents with U.S. GAAP and financial reporting experience and plan to hire two additional qualified talents in the coming months.

 

We plan to fully implement the above-mentioned remedial measures by September 30, 2021. Originally, we expected to fully implement our remedial measures by December 31, 2020, but we encountered difficulties that delayed our implementation process. Our PRC operating subsidiaries are located in Ji’an, Jiangxi Province, and very few companies in this area have sought public listing on a U.S. exchange. Therefore, we were not able to identify qualified accounting candidates with relevant U.S. GAAP experience and expertise from this area. In addition, government-imposed travel restrictions in response to COVID-19 through most of 2020 made it more difficult and time-consuming for us to recruit qualified accounting candidates willing to relocate. A person traveling from a different city may be subject to a variety of restrictive measures, including proof of a negative COVID-19 test result, mandatory quarantine for 14 days upon arrival, and requirement that the person has not travelled to high risk areas recently. We also experienced similar difficulties as we searched for an outside consulting firm. Travel restrictions and protocols made it a lot more time-consuming for staff of outside consulting firm candidates, located in Shanghai, Guangzhou and Hong Kong, to visit our offices and factories. As a result, the implementation process took longer than we expected. Nevertheless, we are committed to fully adopt these measures by September 30, 2021. 

 

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.

 

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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 will be required to attest to and report on the effectiveness of our internal control over financial reporting depending on whether we will be an accelerated filer or even large accelerated filers subsequently. 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.

 

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.

 

Recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and an act passed by the US Senate all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

 

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC, and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years.

 

On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

 

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S.

 

On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. There is currently no legal process under which such a co-audit may be performed in China. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective. The measures in the PWG Report are presumably subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response to the PWG Report, and that the SEC was soliciting public comments and information with respect to these proposals. Since we are listed on the Nasdaq Global Market, if we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible de-listing from the Nasdaq Stock Market, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively terminate, our Ordinary Shares trading in the United States.

 

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The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor is headquartered in Manhattan, New York, and has been inspected by the PCAOB on a regular basis with the last inspection in May 2018 and an ongoing inspection that started in October 2020. The recent developments would add uncertainties to our offering and we cannot assure you whether the national securities exchange we apply to for listing or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach, or experience as it relates to our audit.

 

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. We are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and the selective disclosure rules by issuers of material non-public information under Regulation FD.

 

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

  

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 Act (2021 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.

 

We are 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 the initial public offering price of $5.00 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 $22,349,087.

 

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 September 30, 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 initial public offering price of $5.00 per Ordinary Share, after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us and assuming no exercise of the underwriter’s over-allotment option.

 

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

 

   September 30,
2020
 
   Actual   Pro Forma
As Adjusted
 
   US$   US$ 
Equity        
Share capital $0.003125 par value, 100,000,000 Ordinary Shares authorized, 16,000,000 Ordinary Shares issued and outstanding as of September 30, 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    26,012,462 
Statutory reserve   2,439,535    2,439,535 
Retained earnings   13,738,979    13,738,979 
Accumulated other comprehensive income   895,390    895,390 
Total shareholders’ equity  $20,802,904    43,151,991 
           
Adjusted total capitalization  $20,802,904   $43,151,991 

 

(1) Reflects the sale of Ordinary Shares in this offering at the initial public offering price of $5.00 per share, and after deducting the estimated underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us. 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 $22,349,087, assuming the Underwriter has not exercised the over-allotment option. The net proceeds of $22,349,087 are calculated as follows: $25,000,000 gross offering proceeds, less underwriting discounts and non-accountable expense allowance of $1,275,000 and estimated offering expenses of $1,375,913. The pro forma as adjusted total equity of $43,151,991 is the sum of the net proceeds of $22,349,087 and the actual equity of $20,802,904.

 

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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 September 30, 2020, was $20,628,128 (as calculated by subtracting intangible assets of $174,776 from the actual equity of $20,802,904) , or $1.29 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 $5.00 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 September 30, 2020, would have been $42,977,215, or $2.05 per outstanding Ordinary Share. This represents an immediate increase in net tangible book value of $0.76 per Ordinary Share to the existing shareholders, and an immediate dilution in net tangible book value of $2.95 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  $5.00   $5.00 
Net tangible book value per Ordinary Share as of September 30, 2020  $1.29   $1.29 
As adjusted net tangible book value per Ordinary Share attributable to payments by new investors  $0.76   $0.85 
Pro forma net tangible book value per Ordinary Share immediately after this offering  $2.05   $2.14 
Amount of dilution in net tangible book value per Ordinary Share to new investors in the offering  $2.95   $2.86 

 

(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 $2.14, the increase in net tangible book value per Ordinary Share to existing shareholders would be $0.85, and the immediate dilution in net tangible book value per Ordinary Share to new investors in this offering would be $2.86.

 

The following table summarizes, on a pro forma as adjusted basis as of September 30, 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 
   ($) 
Existing shareholders   16,000,000    76.2%  $3,729,000    13.0%  $0.23 
New investors   5,000,000    23.8%  $25,000,000    87.0%  $5.00 
Total   21,000,000    100.0%  $28,729,000    100.0%  $1.37 

 

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 agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

 

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 261 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 decreased by $2,525,356, or 7.6%, from $33,229,316 in the fiscal year ended September 30, 2019, to $30,703,960 in the fiscal year ended September 30, 2020. Revenues from sales of TCMD products manufactured by us accounted for 59.8% and 62.9% of our total revenues for the fiscal years ended September 30, 2020 and 2019, respectively, revenues from sales of TC products manufactured by third-party pharmaceutical companies accounted for 40.2% and 37.1% of our total revenues for the fiscal years ended September 30, 2020 and 2019, respectively.

 

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

 

   For the Years Ended September 30, 
   2020   2019 
   Amount   % of revenue   Amount   % of revenue 
Revenue from sales of self-manufactured TCMD products  $18,374,751    59.8%  $20,895,542    62.9%
Revenue from sales of third-party products   12,329,209    40.2%   12,333,774    37.1%
Total revenue  $30,703,960    100.0%  $33,229,316    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 261 cities in 30 provinces in China, with significant customers located in Jiangxi Province, Jiangsu Province, Guangdong Province, Hubei Province, Fujian Province, Guangxi Province and Shandong Province in China. For the years ended September 30, 2020 and 2019, we had total 2,209 and 2,603 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 33.3% and 34.5% of our total revenues for the years ended September 30, 2020 and 2019, 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

 

Our business operations may be affected by the ongoing outbreak of COVID-19 pandemic. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to the COVID-19 outbreak, we temporarily closed of our factory and operations from the beginning of February to March 2, 2020, during which time we had limited support from our employees, delayed access to raw material supplies and were unable to deliver products to customers on a timely basis. As a result, our business was negatively impacted and we experienced delay in fulfilling the orders of our customers. Our revenue and net income was approximately 7% and 21% lower, or approximately $7.2 million and $1.7 million lower, respectively, during the three months ended March 31, 2020 as compared to the same period of 2019, because of our reduced business activities and delayed fulfillment of customer sales orders as negatively affected by the COVID-19 outbreak and spread. Although we resumed our operations on March 2, 2020 and the impact of COVID-19 on our operating results and financial performance for fiscal year 2020 seems to be temporary, a resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disrupt our supply chain, and the continued uncertainties associated with COVID 19 may cause our revenue and cash flows to underperform in the next 12 months. The extent of the future impact of COVID-19 is still uncertain.

 

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 revenue is reported net of all value added taxes (“VAT”). Our products are sold with no right of return and we do not provide other credits or sales incentive to customers. Our revenue is driven by changes in the number of customers, sales volume, selling price, and mix of products sold.

 

   For the Years Ended September 30,   Variance 
   2020   2019   % 
Revenue from sales of self-manufactured TCMD products   59.8%   62.9%   (3.1)%
Revenue from sales of third-party products   40.2%   37.1%   3.1%
Total revenue   100.0%   100.0%     
                
Number of customers   2,209    2,603    (15.1)%
                
Sales volume by unit- TCMD products   15,652,999    17,766,549    (11.9)%
Sales volume by unit- third party products   8,763,577    7,734,333    13.3%
Total sales volume   24,416,576    25,500,882    (4.3)%
                
Average selling price per unit- TCMD products  $1.17   $1.18    (0.5)%
Average selling price per unit- Third-party products  $1.41   $1.59    (11.5)%

 

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Revenues from sales of TCMD products manufactured by us accounted for 59.8% and 62.9% of our total revenues for the fiscal years ended September 30, 2020 and 2019, 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 decreased by 2,113,550 units, or 11.9%, from 17,766,549 units sold in fiscal year 2019 to 15,652,999 units sold in fiscal year 2020. The decrease in our sales volume was twofold: (i) due to the outbreak and spread of COVID-19, we temporarily closed down our manufacturing facilities and we had limited support from our employees during the period from February to early March 2020, and as a result, we were unable to timely fulfill the orders of our customer during this period of time; and (ii) among the decrease in total sales volume of 2,113,550 units, 99% of such decrease related to our cold and flu medications because of strong market competition. Average selling price of our TCMD products decreased by 0.5%, from $1.18 per unit in fiscal year 2019 to $1.17 per unit in fiscal year 2020 because we lowered the selling price of certain TCMD products in order to promote the sales. In addition, the number of our customers decreased by 15.1%, from 2,603 in fiscal year 2019 to 2,209 in fiscal year 2020 because we experienced delay in shipping and delivering our products to our customers located in remote geographic areas as a result of the COVID-19 related transportation restrictions. These factors led to a 12.1% decrease in our revenue from sales of our TCMD products from fiscal year 2019 to fiscal year 2020.

  

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 40.2% and 37.1% of our total revenues for the fiscal years ended September 30, 2020 and 2019, respectively. Sales volume of third-party products increased by 1,029,244 units or 13.3%, from 7,734,333 units sold in fiscal year 2019 to 8,763,577 units sold in fiscal year 2020, while the average selling price of third-party products decreased by 11.5% from $1.59 per unit in fiscal year 2019 to $1.41 per unit in fiscal year 2020 as affected by changes in product mix based on customer orders. These factors led to a 0.04% decrease in our revenue from sales of our third-party products from fiscal year 2019 to in fiscal year 2020. To compensate the negative impact from the COVID-19 outbreak, we increased our purchase of third party products to fulfill our sales orders in fiscal year 2020. 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 54.1% and 59.7% of our total revenue for the fiscal year 2020 and 2019, respectively. We expect our cost of revenues to increase as we further expand our operations in the foreseeable future.

 

Our gross margin was 45.9% for fiscal year 2020, an increase by 5.6% from gross margin of 40.3% in fiscal year 2019. Our gross profit and gross margin is 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 August and September 2019, we conducted maintenance for our manufacturing facility to both meet the requirements for renewing our Good Manufacturing Practice Certificate (“GMP Certificate”) and ensure the quality and safety of our products. We completed the upgrade and maintenance of our manufacturing facilities in late September 2019, which 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 fiscal year 2020. In addition, due to COVID-19, we increased our purchase of third-party products with higher margin to fulfill our customer orders in fiscal year 2020. As a result, the sales of product mix changed during fiscal year 2020 as compared to fiscal year 2019 because more products with lower costs and higher margin had been sold to our customers, thereby boosting our gross margin. These factors led to the decrease in our costs of revenue and increase in our gross profit and gross margin. See detailed discussion under “–Results of Operation”.

 

Operating Expenses

 

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

 

Our selling expenses primarily include salary and welfare benefit expenses paid to our sales personnel, advertising expenses to increase the awareness of our brand, shipping ad delivery expenses, expenses incurred for our business travel, meals and other sales promotion and marketing activities related expenses. Our selling expenses accounted for 5.1% and 4.8% of our total revenue for the years ended September 30, 2020 and 2019, respectively. We 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, especially when we continue to expand our business and promote our products to customers located at extended geographic areas. 

 

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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 5.5% and 4.4% of our revenue for the years ended September 30, 2020 and 2019, respectively. We expect our general and administrative expenses, including, but not limited to, salaries and business consulting expenses, to continue to increase in the foreseeable future, as we plan to hire additional personnel and incur additional expenses in connection with the expansion of our business operations. We expect our professional fees for legal, audit, and advisory services to increase as we become a public company upon the completion of this offering.

 

The Chinese patent medicine industry is characterized by rapid and frequent changes in customer demand and launches of new products. If we do not launch new products or improve our existing products to meet the changing demands of our customers in a timely manner, some of our products could become uncompetitive in the market, thereby adversely affecting on our revenues and operating results. Our research and development expenses primarily consist of salaries, welfare and insurance expenses paid to our employees involved in the research and development activities, materials and supplies used in the development and testing of new TCMD products, depreciation, and other miscellaneous expenses. Research and development expenses were 1.9% and 1.9% of our revenue for the years ended September 30, 2020 and 2019, 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

 

The following table summarizes the results of our operations during the fiscal years ended September 30, 2020 and 2019, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such years.

 

    For the Years Ended September 30,  
    2020     2019     Variance  
    Amount     % of
revenue
    Amount     % of
revenue
    Amount     %  
                                     
REVENUE   $ 30,703,960       100.0 %   $ 33,229,316       100.0 %   $ (2,525,356 )     (7.6 )%
COST OF REVENUE     16,610,140       54.1 %     19,821,831       59.7 %     (3,211,691 )     (16.2 )%
GROSS PROFIT     14,093,820       45.9 %     13,407,485       40.3 %     686,335       5.1 %
                                                 
OPERATING EXPENSES                                                
Selling expenses     1,555,546       5.1 %     1,578,826       4.8 %     (23,280 )     (1.5 )%
General and administrative expenses     1,703,424       5.5 %     1,457,393       4.4 %     246,031       16.9 %
Research and development expenses     583,125       1.9 %     618,437       1.9 %     (35,312 )     (5.7 )%
Total operating expenses     3,842,095       12.5 %     3,654,656       11.0 %     187,439 )     5.1 %
                                                 
INCOME FROM OPERATIONS     10,251,725       33.4 %     9,752,829       29.4 %     498,896       5.1 %
                                                 
OTHER INCOME (EXPENSE)                                                
Interest expense, net     (123,760 )     (0.4 )%     (129,268 )     (0.4 )%     5,508       (4.3 )%
Other income (expense), net     (27,532 )     (0.1 )%     29,501       0.1 %     (57,033 )     (193.3 )%
Total other expense, net     (151,292 )     (0.5 )%     (99,767 )     (0.3 )%     (51,525 )     51.6 %
                                                 
INCOME BEFORE INCOME TAX PROVISION     10,100,433       32.9 %     9,653,062       29.0 %     447,371       4.6 %
                                                 
PROVISION FOR INCOME TAXES     2,542,211       8.3 %     2,101,597       6.3 %     440,614       21.0 %
                                                 
NET INCOME   $ 7,558,222       24.6 %   $ 7,551,465       22.7 %   $ 6,757       0.1 %

 

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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,  
    2020     2019     Change  
    Amount     Amount     Amount     %  
                         
Revenue - TCMD products sales   $ 18,374,751     $ 20,895,542     $ (2,520,791 )     (12.1 )%
Revenue – third-party products sales     12,329,209       12,333,774       (4,565 )     (0.0 )%
Total revenue   $ 30,703,960       33,229,316     $ (2,525,356 )     (7.6 )%

 

Our total revenues decreased by $2,525,356, or 7.6%, to $30,703,960 for the year ended September 30, 2020 from $33,229,316 for the year ended September 30, 2019. The decrease in our revenues was attributable to the following reasons: (i) Among the total $2.5 million revenue decrease in fiscal year 2020, our revenue decreased by approximately $2.6 million in the first half of fiscal 2020 as compared to the same period of 2019, while our revenue in the second half of 2020 increased by approximately $0.1 million compared to the same period of 2019. The decrease in sales volume by 4.3% from 25,500,882 units of TCMD and third-party products sold in fiscal year 2019 to 24,416,576 units of TCMD and third-party products sold in fiscal year 2020 are largely affected by the COVID-19 pandemic. 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; (ii) due to strong market competition, sales volume of our flu and cold medication products (including Qiangli Pipa Syrup, Isatis Root Granule and Paracetanol Granule For Children) decreased significantly by approximately 2.3 million units; (iii) in order to compensate decreased sales volume from our TCMD products, we increased our purchase of third-party products to fulfill customer orders.

 

As a result, our sales volume of TCMD products decreased by 11.9% and sales volume of third-party products increased by 13.3% in fiscal year 2020 as compared to fiscal year 2019; (iv) 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 15.1% from 2,603 in fiscal year 2019 to 2,209 in fiscal year 2020; (v) the weighted average per unit selling price of our TCMD products decreased by 0.5%, from $1.18 per unit in fiscal year 2019 to $1.17 per unit in fiscal year 2020, and the weighted average per unit selling price of third-party products decreased by 11.5%, from $1.59 per unit in fiscal year 2019 to $1.41 per unit in fiscal year 2020; and (vi) exchange rate between RMB and US$ was US$1.00 to RMB 6.8729 in fiscal year 2019 as compared to US$1.00 to RMB 7.0077 in fiscal year 2020. The appreciation of RMB against US$ had a 2.0% negative impact on our reported total revenues.

 

Our average monthly revenue was approximately $2.5 million in fiscal year 2020 and $2.7 million in fiscal year 2019. Our monthly revenue normally does not fluctuate significantly except under unusual circumstances. In fiscal year 2020, we closed our facilities for about one month in response to the COVID-19 outbreak, and therefore our revenue decreased by $2.5 million, or 7.6% as compared to fiscal year 2019. After we resumed our business operation on March 2, 2020, our monthly revenue has remained relatively stable, ranging from $2.1 million per month to $2.8 million per month from April 2020 to September 2020.

 

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These factors all contributed to the decrease in our revenues by 7.6% from fiscal year 2019 to fiscal year 2020.

 

    For the years ended September 30,  
    2020     2019     Change                             Average     Average           % of  
Product name   Amount     % of revenue     Amount     % of revenue     Amount     %     QTY sold 2020     QTY sold 2019     QTY change     % of change     price 2020     price 2019     Price change     change
in price
 
                                                                                     
Sales of TCMD products:                                                                                    
Shiquan Dabu Medicinal Liquor   $ 553,457       1.8 %   $ 636,362       1.9 %   $ (82,905 )     (13.0 )%     295,672       331,063       (35,391 )     (10.7 )%   $ 1.87     $ 1.92     $ (0.05 )     (2.6 )%
Shenrong Medicinal Liquor     416,393       1.4 %     538,235       1.6 %     (121,842 )     (22.6 )%     151,997       202,335       (50,338 )     (24.9 )%     2.74       2.66       0.08       3.0 %
Fengtong Medicinal Liquor     478,167       1.6 %     978,217       2.9 %     (500,050 )     (51.1 )%     518,568       794,959       (276,391 )     (34.8 )%     0.92       1.23       (0.31 )     (25.1 )%
Fengshitong Medicinal Liquor     75,025       0.2 %     65,305       0.2 %     9,720       14.9 %     62,909       58,546       4,363       7.5 %     1.19       1.12       0.07       6.0 %
Qishe Medicinal Liquor,     93,038       0.3 %     137,896       0.4 %     (44,858 )     (32.5 )%     40,500       55,618       (15,118 )     (27.2 )%     2.30       2.48       (0.18 )     (7.3 )%
Guben Yanling Pill     11,732,325       38.2 %     10,767,341       32.4 %     964,984       9.0 %     4,076,563       3,229,035       847,528       26.2 %     2.88       3.33       (0.45 )     (13.4 )%
Quanlu Pill     235,314       0.8 %     141,396       0.4 %     93,918       66.4 %     238,202       134,496       103,706       77.1 %     0.99       1.05       (0.06 )     (6.0 )%
Shenrong Weisheng Pill     1,422,642       4.6 %     1,753,747       5.3 %     (331,105 )     (18.9 )%     3,034,812       2,834,898       199,914       7.1 %     0.47       0.62       (0.15 )     (24.2 )%
Yangxue Danggui Syrup     496,523       1.6 %     1,167,048       3.5 %     (670,525 )     (57.5 )%     636,854       1,243,625       (606,771 )     (48.8 )%     0.78       0.94       (0.16 )     (16.9 )%
Wuzi Yanzong Oral Liquid     172,599       0.6 %     226,696       0.7 %     (54,097 )     (23.9 )%     100,859       122,105       (21,246 )     (17.4 )%     1.71       1.86       (0.15 )     (7.8 )%
Qiangli Pipa Syrup     1,013,709       3.3 %     2,308,512       6.9 %     (1,294,802 )     (56.1 )%     2,282,319       4,090,867       (1,808,548 )     (44.2 )%     0.44       0.56       (0.12 )     (21.3 )%
Isatis Root Granule     1,105,932       3.6 %     1,653,536       5.0 %     (547,604 )     (33.1 )%     1,910,415       2,333,506       (423,091 )     (18.1 )%     0.58       0.71       (0.13 )     (18.3 )%
Paracetamol Granule for Children     579,627       1.9 %     521,251       1.6 %     58,376       11.2 %     2,303,329       2,335,496       (32,167 )     (1.4 )%     0.25       0.22       0.03       12.8 %
Subtotal: sales of TCMD products     18,374,751       59.8 %     20,895,542       62.9 %     (2,520,790 )     (12.1 )%     15,652,999       17,766,549       (2,113,550 )     (11.9 )%     1.17       1.18       (0.01 )     (1.0 )%
                                                                                                                 
Sales of third party products:                                                                                                                
Biochemical drugs     10,325,411       33.6 %     9,508,816       28.6 %     816,595       8.6 %     8,376,504       7,153,518       1,222,986       17.1 %     1.23       1.33       (0.10 )     (7.3 )%
Traditional Chinese                                                                                                                
Medicine Pieces     47,097       0.2 %     142,409       0.4 %     (95,311 )     (66.9 )%     23,198       56,915       (33,717 )     (59.2 )%     2.03       2.50       (0.47 )     (18.9 )%
Medical instruments     1,950,238       6.4 %     2,668,422       8.0 %     (718,184 )     (26.9 )%     362,384       521,753       (159,369 )     (30.5 )%     5.38       5.11       0.27       5.2 %
Dietary supplements     6,463       0.0 %     14,127       0.0 %     (7,665 )     (54.3 )%     1,491       2,147       (656 )     (30.6 )%     4.33       6.58       (2.25 )     (34.1 )%
Subtotal:  sales of third party products     12,329,209       40.2 %     12,333,774       37.1 %     (4,565 )     0.0 %     8,763,577       7,734,333       1,029,243       13.3 %     1.41       1.59       (0.18 )     (11.2 )%
                                                                                                                 
Total revenue   $ 30,703,960       100.0 %   $ 33,229,316       100.0 %   $ (2,525,356 )     (7.6 )%     24,416,576       25,500,882       (1,084,307 )     (4.3 )%   $ 1.26     $ 1.30     $ (0.04 )     (2.7 )%

 

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 59.8% and 62.9% of our total revenue for the years ended September 30, 2020 and 2019, respectively.

 

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Sales of our TCMD products decreased by $2,520,791, or 12.1%, from $20,895,542 in fiscal year 2019 to $18,374,751 in fiscal year 2020, because the sales volume of our TCMD products decreased by 11.9% from 17,766,549 units sold in fiscal year 2019 to 15,652,999 units sold in fiscal year 2020, and the average selling price of our TCMD products decreased by 0.5% from $1.18 per unit in fiscal year 2019 to $1.17 per unit in fiscal year 2020. The decrease in the sales of our TCMD product was due to the following specific reasons:

 

a) among the 13 varieties of TCMD products we manufacture, the sales of Guben Yanling Pill, one of our representative products, accounted for 38.2% and 32.4% of our total revenue for the years ended September 30, 2020 and 2019, respectively. The sales of Guben Yanling Pill increased by $964,984, or 847,528 units, or 26.2% from fiscal year 2019 to fiscal year 2020. In August and September 2019, we conducted maintenance for our manufacturing facility. We completed the upgrade and maintenance of our manufacturing facilities in late September 2019, which 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 fiscal year 2020. Our research and development efforts in improving the formulation of our Guben Yanling Pill helped us lower the production costs, allowing us to sell this product at lower prices. Weighted average selling price of our Guben Yanling Pill decreased by $0.45 per unit, or 13.4%, from $3.33 per unit in fiscal year 2019 to $2.88 per unit in fiscal year 2020. The lower selling price contributed to the increase in sales volume of our Guben Yanling Pill in fiscal year 2020.

 

b) 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 a 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 a decrease in the number of customers by 15.1% from 2,603 in fiscal year 2019 to 2,209 in fiscal year 2020. As a result, the sales of Fengtong Medicinal liquor, Shenrong Weisheng Pill and Yangxue Danggui Syrup decreased by $500,050, $331,105 and $670,525, representing a 51.5%, 18.9% and 57.5% decrease, respectively, and their sales volume decreased by 34.8%, 7.1% and 48.8% from fiscal year 2019 to fiscal year 2020, respectively. On the other hand, we adjusted our selling price to promote the products to customers, and as a result, the average selling price of our Fengtong Medicinal liquor, Shenrong Weisheng Pill and Yangxue Danggui Syrup decreased by 25.1%, 24.2% and 16.9%, respectively, in the fiscal year 2020 compared to fiscal year 2019.

 

c) Sales of our flu and cold medication products (including Qiangli Pipa Syrup, Isatis Root Granule and Paracetanol Granule For Children) decreased significantly in fiscal year 2020 due to strong market competition and the impact of COVID-19. Some of our competitors are larger pharmaceutical companies with well-known brand and/or greater financial resources and can offer similar products at lower prices. As a result, sales of our Qiangli Pipa Syrup and Isatis Root Granule decreased by $1,294,802 and $547,604, representing a 56.1% and 33.1% decrease, respectively, and their sales volume decreased by 44.2% and 18.1% from fiscal year 2019 to fiscal year 2020, respectively. On the other hand, we adjusted our selling price to promote our products to customers, and as a result, the average selling price of our Qiangli Pipa Syrup and Isatis Root Granule decreased by 21.3% and 18.3%, respectively, in fiscal year 2020 compared to the fiscal year 2019.

 

Revenue from sales of third-party products

 

In order to diversify our product portfolio and offerings and to increase our sales, we also sell pharmaceutical products manufactured by third-party companies, including (i) biochemical drugs, such as such as liquid glucose, prednisolone, and citicoline, (ii) medical instruments, such as drug-eluting stents, surgical tubes and syringes, (iii) 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 40.2% and 37.1% of our total revenue for the years ended September 30, 2020 and 2019, respectively.

 

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Sales of third-party products slightly decreased by $4,565, or 0.04%, from $12,333,774 in fiscal year 2019 to $12,329,209 in fiscal year 2020. Sales volume of third-party products increased by 13.3%, from 7,734,333 units sold in fiscal year 2019 to 8,763,577 units sold in fiscal year 2020. However, average selling price of third-party products decreased by 11.2%, from $1.59 per unit in fiscal year 2019 to $1.41 per unit in fiscal year 2020. Among the total sales of third-party products, sales of biochemical drugs increased by 8.6% or $816,595, from $9,508,816 in fiscal year 2019 to $10,325,411 in fiscal year 2020 because of 17.1% increase in sales volume, while sales of traditional Chinese medicine pieces, medical instruments and dietary supplements decreased by $95,311, $718,184 and $7,665 when their sales volume decreased by 59.2%, 30.5% and 30.6%, respectively. In fiscal year 2019, due to an overall increase in the market prices of raw materials used in the manufacturing of third-party products, we paid higher purchase prices for products from third-party pharmaceutical companies and accordingly our average selling price of third-party products in fiscal year 2019 was higher than in fiscal year 2020. To compensate the negative impact from the COVID-19 outbreak, we increased our purchase of third party products to fulfill our sales orders in fiscal year 2020. We adopted a strategy to select and distribute certain high-quality products with higher margin in fiscal year 2020. As a result, the average selling price of biochemical drugs, traditional Chinese medicine pieces and dietary supplements decreased by 7.3%, 18.9% and 34.1%, respectively, in fiscal year 2020 as compared to fiscal year 2019. On the other hand, average selling price of medical instruments increased by 5.2% to tailor higher purchase costs from third-parties.  

 

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

 

    For the years ended September 30,  
    2020     2019     Change  
    Amount     Amount     Amount     %  
                         
Cost of revenue- TCMD products   $ 8,581,940     $ 11,894,117     $ (3,312,177 )     (27.8 )%
Cost of revenue- third-party products     8,028,200       7,927,714       100,486       1.3 %
Total cost of revenue   $ 16,610,140     $ 19,821,831     $ (3,211,691 )     (16.2 )%

 

Our cost of revenues decreased by $3,211,691, or 16.2%, from $19,821,831 in fiscal year 2019 to $16,610,140 in fiscal year 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. In addition, as a result of strong market competition, sales of our flu and cold medication products decreased significantly. Also, total number of customers decreased by 15.1% from 2,603 in fiscal year 2019 to 2,209 in fiscal year 2020. These factors contributed to a decrease in sales volume of our TCMD products by 11.9% from 17,766,549 units of  products sold in fiscal year 2019 to 15,652,999  units of products sold in fiscal year 2020. As sales volume decreased, raw materials, labor, packaging, freight and overhead costs associated with our TCMD product sales also decreased. In addition, in August and September 2019, in connection with our renewal of GMP Certificate with the Jiangxi FDA, we conducted maintenance for our manufacturing facility. 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 18.1%, from $0.67 per unit in fiscal year 2019 to $0.55 per unit in fiscal year 2020.  The above combined factors contributed to a 27.8% decrease in our cost of revenue associated with our TCMD products sales.

 

(2) During fiscal year 2020, when we chose third party products to purchase, we decided to remove approximately 1,102 products with lower margin from 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 10.6%, from $1.03 per unit in fiscal year 2019 to $0.92 per unit in fiscal year 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 fiscal year 2020 decreased by $0.10, or 12.5%, from $0.78 in fiscal year 2019 to $0.68 in fiscal year 2020.

 

(3) Exchange rate between RMB and U.S. dollars was US$1.00 to RMB 6.8729 in fiscal year 2019 as compared to US$1.00 to RMB 7.0077 in fiscal year 2020. The appreciation of RMB against U.S. dollars had a 2.0% negative impact on our reported cost of revenues.

 

 

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    For the years ended September 30,  
    2020     2019     Change     Unit cost     Unit cost     Unit cost     % of  
Product name   Amount     %     Amount     %     Amount     %     2020     2019     change     change  
                                                             
Costs of TCMD products:                                                            
Shiquan Dabu Medicinal Liquor   $ 224,111       1.3 %   $ 298,893       1.5 %   $ (74,783 )     (25.0 )%   $ 0.76     $ 0.90     $ (0.14 )     (16.0 )%
Shenrong Medicinal Liquor     142,901       0.9 %     242,021       1.2 %     (99,120 )     (41.0 )%     0.94       1.20       (0.26 )     (21.4 )%
Fengtong Medicinal Liquor     340,501       2.0 %     642,199       3.2 %     (301,698 )     (47.0 )%     0.66       0.81       (0.15 )     (18.7 )%
Fengshitong Medicinal Liquor     54,326       0.3 %     45,944       0.2 %     8,381       18.2 %     0.86       0.78       0.08       10.0 %
Qishe Medicinal Liquor,     42,452       0.3 %     66,933       0.3 %     (24,481 )     (36.6 )%     1.05       1.20       (0.15 )     (12.1 )%
Guben Yanling Pill     3,769,052       22.7 %     4,808,840       24.3 %     (1,039,788 )     (21.6 )%     0.92       1.49       (0.57 )     (38.6 )%
Quanlu Pill     167,128       1.0 %     100,573       0.5 %     66,555       66.2 %     0.70       0.75       (0.05 )     (6.2 )%
Shenrong Weisheng Pill     1,315,730       7.9 %     1,242,180       6.3 %     73,550       5.9 %     0.43       0.44       (0.01 )     (3.3 )%
Yangxue Danggui Syrup     416,006       2.5 %     845,696       4.3 %     (429,690 )     (50.8 )%     0.65       0.68       (0.03 )     (3.9 )%
Wuzi Yanzong Oral Liquid     99,587       0.6 %     122,169       0.6 %     (22,582 )     (18.5 )%     0.99       1.00       (0.01 )     (1.3 )%
Qiangli Pipa Syrup     745,340       4.5 %     1,678,414       8.5 %     (933,074 )     (55.6 )%     0.33       0.41       (0.08 )     (20.4 )%
Isatis Root Granule     868,712       5.2 %     1,358,625       6.9 %     (489,913 )     (36.1 )%     0.45       0.58       (0.13 )     (21.9 )%
Paracetamol Granule for Children     396,095       2.4 %     441,631       2.2 %     (45,535 )     (10.3 )%     0.17       0.19       (0.02 )     (9.1 )%
Subtotal: costs of TCMD products     8,581,940       51.7 %     11,894,117       60.0 %     (3,312,177 )     (27.8 )%     0.55       0.67       (0.12 )     (18.1 )%
                                                                                 
Costs of third party products:     -               -                                                          
Biochemical drugs     6,929,910       41.7 %     6,317,779       31.9 %     612,131       9.7 %     0.83       0.88       (0.05 )     (5.2 )%
Traditional Chinese
Medicine Pieces
    29,650       0.2 %     124,393       0.6 %     (94,743 )     (76.2 )%     1.28       2.19       (0.91 )     (41.5 )%
Medical instruments     1,065,038       6.4 %     1,479,063       7.5 %     (414,025 )     (28.0 )%     2.94       2.83       0.11       4.0 %
Dietary supplements     3,602       0.0 %     6,479       0.0 %     (2,877 )     (44.4 )%     2.42       3.02       (0.60 )     (19.9 )%
Subtotal:  costs of third party products     8,028,200       48.3 %     7,927,714       40.0 %     100,487       1.3 %     0.92       1.03       (0.11 )     (10.6 )%
                                                                                 
Total cost of revenue   $ 16,610,140       100.0 %   $ 19,821,831       100.0 %   $ (3,211,691 )     (16.2 )%   $ 0.68     $ 0.78     $ (0.10 )     (12.5 )%

 

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Cost of revenues of TCMD products

 

Cost of revenues of TCMD products accounted for 51.7% and 60.0% of our total costs of revenues for the fiscal year 2020 and 2019, respectively. Cost of revenues of TCMD products decreased by $3,312,178, or 27.8%, from $11,894,117 in fiscal year 2019 to $8,581,939 in fiscal year 2020. The increase in cost of revenues of our TCMD products was due to the following reasons:

 

The decrease in cost of revenues of our TCMD products was due to the following reasons:

 

(1)Sales volume of TCMD products decreased by 11.9%, from 17,766,549 units sold in fiscal year 2019 to 15,652,999 units sold in fiscal year 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 $0.12, or 18.1%, from $0.67 in fiscal year 2019 to $0.55 in fiscal year 2020. Among the 13 varieties of TCMD products, cost of revenues of Guben Yanling Pill, one of our representative product, accounted for 22.7% and 24.3% of our total cost of revenues in fiscal year 2020 and 2019, respectively. Costs of Guben Yanling Pill decreased from $1.49 per unit in fiscal year 2019 to $0.92 per unit in fiscal year 2020, thereby decreasing the total cost of revenues of Guben Yanling Pill by $1,039,788. In addition, unit production cost of Shiquan Dabu medicinal liquor, Fengtong medicinal liquor, Qishe medicinal liquor, Yangxue Danggui Syrup, Qiangli Pipa Syrup, Isatis Root Granule and Paracetamol Granule for Children decreased by 16.0%, 18.7%, 12.1%, 3.9%, 20.4%, 21.9% and 9.1%, respectively, which led to corresponding decreases in cost of revenues associated with these TCMD products by $74,783, $301,698, $24,481, $429,690, $933,074, $489,913 and $45,535, respectively. The decrease in cost of revenue of Qiangli Pipa Syrup, Isatis Root Granule was also due to decreased sales volume by 44.2% and 18.1% due to strong market competition of flu and cold medication products as discussed above.

 

  (3)

Exchange rate between RMB and U.S. dollars and the appreciation of RMB against U.S. dollars had a 2.0% negative impact on our reported cost of revenues when comparing fiscal year 2020 to fiscal year 2019.

 

The decrease in our cost of revenues of our TCMD products in fiscal year 2020 as compared to fiscal year 2019 reflected the above mentioned factors combined. 

 

Cost of revenues of third-party products

 

Cost of revenues of third-party products accounted for 48.3% and 40.0% of our total costs of revenues for the fiscal year 2020 and 2019, respectively. Cost of revenues of third-party products increased by $100,487, or 1.3%, from $7,927,714 in fiscal year 2019 to $8,028,200 in fiscal year 2020, because of an increase in sales volume by 13.3%, from 7,734,333 units sold in fiscal year 2019 to 8,763,577 units sold in fiscal year 2020, offset by a decrease in the average unit cost of third-party products by $0.11 per unit, or 10.6%, from $1.03 per unit in fiscal year 2019 to $0.92 per unit in fiscal year 2020. In fiscal year 2019, due to an overall increase in the market prices of raw materials used in the manufacturing of third-party products, we sourced third-party products at higher prices from third-party pharmaceutical companies. However, in fiscal year 2020, when we chose third party products to purchase, we decided to remove approximately 1,102 products with lower margin from the 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 $0.11 per unit, or 10.6%, in fiscal year 2020. The average unit cost of biochemical drugs, TCMPs and dietary supplements products decreased by 5.2%, 41.5% and 19.9%, respectively, and as a result, our unit cost on biochemical drugs, TCMPs and dietary supplements was adjusted to tailor this change, and decreased by $0.05, $0.91 and $0.6 per unit, respectively. The average unit cost of medical instruments increased by 4.0% or $0.11 per unit due to higher purchase costs from third-party suppliers. Furthermore, exchange rate between RMB and U.S. dollars and the appreciation of RMB against U.S. dollars had a 2.0% negative impact on our reported cost of revenues when comparing fiscal year 2020 to fiscal year 2019. These factors led to the increase in cost of revenues associated with third-party product sales in fiscal year 2020 as compared to fiscal year 2019.

 

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Gross profit

 

Our gross profit increased by $686,335, from $13,407,485 in fiscal year 2019 to $14,093,820 in fiscal year 2020. Our gross margin increased by 5.6% from 40.3% in fiscal year 2019 to 45.9% in fiscal year 2020. Our gross profit and gross margin were affected by the sales of different product mix during each reporting period. Although our total revenue and total sales volume decreased by 7.6% and 4.3%, respectively, the increase in our gross profit and gross margin was because: (i) as discussed above, the increase in productivity as a result of the maintenance and upgrade of our facility in fiscal year 2019 enabled us to lower our manufacturing cost and adjust the selling price of our TCMD products to stimulate customer orders in fiscal year 2020; and (ii) Our gross margin was affected by the sales of different product mix during each reporting period.

 

    For the years ended September 30,  
    2020     2019     Change  
    Amount     Amount     Amount     %  
                         
Gross profit- TCMD products   $ 9,792,811     $ 9,001,425     $ 791,386       8.8 %
Gross profit- third-party products     4,301,009       4,406,060       (105,051 )     (2.4 )%
Total gross profit   $ 14,093,820     $ 13,407,485     $ 686,335       5.1 %
                                 
Gross margin- TCMD products     53.3 %     43.1 %             10.2 %
Gross margin- third party products     34.9 %     35.7 %             (0.8 )%
Total gross margin     45.9 %     40.3 %             5.6 %
                                 
Average selling price per unit- TCMD products   $ 1.17     $ 1.18     $ (0.01 )     (0.5 )%
Average cost per unit- TCMD products   $ 0.55     $ 0.67     $ (0.12 )     (18.2 )%
                                 
Average selling price per unit- third party products   $ 1.41     $ 1.59     $ (0.18 )     (11.5 )%
Average cost per unit - third party products   $ 0.92     $ 1.03     $ (0.11 )     (11.1 )%

 

Gross profit from the sales of our TCMD products increased by $791,387, or 8.8%, from $9,001,425 in fiscal year 2019 to $9,792,812 in fiscal year 2020, and the gross margin of TCMD products increased by 10.2% from 43.1% in fiscal year 2019 to 53.3% in fiscal year 2020. The increase in our gross profit from the sales of TCMD products was due to the following reasons: Although revenue and sales volume of our TCMD products decreased by 12.1% and 11.9%, respectively, as affected by COVID-19 outbreak and spread as well as affected by strong market competition as discussed above, the increase in productivity as a result of the maintenance and upgrade of our facility in fiscal year 2019 enabled us to streamline our manufacturing process and lower our manufacturing cost of our TCMD products. Average unit cost of our TCMD products decreased by 18.2% or $0.12 per unit, from $0.67 per unit in fiscal year 2019, to $0.55 per unit in fiscal year 2020. The decrease in average unit cost enabled us to lower our average selling price of TCMD products by $0.01 per unit, or 0.5%, from $1.18 per unit in fiscal year 2019 to $1.17 per unit in fiscal year 2020. The decrease in average unit cost outpaced the decrease in average selling price by $0.11 per unit. When cost of revenue decreased more than revenue decrease, our gross profit from TCMD products increased. For example, when comparing fiscal year 2020 to fiscal year 2019, largest portion of our increase in gross profit was associated with our Guben Yanling Pill. Gross profit for Guben Yanling Pill increased by $2,004,772, or 33.6%, from $5,958,502 in fiscal year 2019 to $7,963,274 in fiscal year 2020, because average unit cost of Guben Yanling Pill decreased by 37.9% or $0.56 per unit, from $1.49 per unit in fiscal year 2019 to 0.92 per unit in fiscal year 2020 as a result of the manufacturing process improvement. Although we also lowered down the selling price of Guben Yanling Pill by 14.0% from $3.33 per unit in fiscal year 2019 to $2.88 per unit in fiscal year 2020, the decrease in average unit cost outpaced the decrease in average selling price of Guben Yanling Pill by $0.09 per unit. On the other hand, the increase in our gross profit associated with our Guben Yanling Pill was offset by the decrease in gross profit associated with our Fengtong Medicinal Liquor, Shengrong Weisheng Pill, Yangxue Danggui Syrup and Qiangli Pipa Syrup by $193,352, $404,656, $240,835 and $361,728, respectively, when sales volume of these TCMD products decreased as affected by COVID-19 impact and reduced number of customers.

 

Gross profit from third-party product sales decreased by $105,051, or 2.4%, from $4,406,060 in the fiscal year 2019 to $4,301,009 in the fiscal year 2020, while the gross margin of third-party product sales decreased by 0.8%, from 35.7% in the fiscal year 2019 to 34.9% in the fiscal year 2020. Average unit selling price of third-party products decreased by 11.5%, or $0.18 per unit, while average unit cost of third-party products decreased by 11.1%, or $0.11 per unit. The decrease in average selling price outpaced the decrease in average unit cost of third-party products by $0.07 per unit. Due to the COVID-19, we increased our purchase of third-party products to fulfill customer orders in the fiscal year 2020. The decrease in our gross profit from third-party products was affected by changes in sales of different product mix in the fiscal year 2020 as compared to the fiscal year 2019. For example, largest portion of decrease in gross profit of third-party products was associated with Medical Instrument product, which decreased by $304,160 when average unit purchase cost increased by 3.3% or $0.09 per unit when comparing fiscal year 2020 to fiscal year 2019. Higher purchase price on medical instrument products lowered down our gross profit in fiscal year 2020. In fiscal year 2020, when we chose third-party products to purchase from various suppliers, we decided to remove approximately 1,102 products with lower margin from the previous purchase list and added 1,765 new products with higher margin to our purchase list. However, under the competitive environment, we had to adjust our selling price to promote the products to customers. 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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Operating expenses

 

The following table sets forth the breakdown of our operating expenses for the fiscal years ended September 30, 2020 and 2019:

 

    For the years ended September 30,  
    2020     2019     Variance  
    Amount     % of revenue     Amount     % of revenue     Amount     %  
Total revenue   $ 30,703,960       100.0 %   $ 33,229,316       100.0 %   $ (2,525,356 )     (7.6 )%
Operating expenses:                                                
Selling expenses     1,555,546       5.1 %     1,578,826       4.8 %     (23,280 )     (1.5 )%
General and administrative expenses     1,703,424       5.5 %     1,457,393       4.4 %     246,031       16.9 %
Research and development expenses     583,125       1.9 %     618,437       1.9 %     (35,312 )     (5.7 )%
Total operating expenses   $ 3,842,095       12.5 %   $ 3,654,656       11.0 %   $ 187,439       5.1 %

 

Selling expenses

 

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

 

   For the years ended September 30, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expenses  $586,632    37.7%  $657,370    41.6%  $(70,738)   (10.8)%
Advertising expenses   343,962    22.1%   367,513    23.3%   (23,551)   (6.4)%
Shipping and delivery expenses   576,796    37.1%   457,407    29.0%   119,389    26.1%
Business travel and meals expenses   31,410    2.0%   59,465    3.8%   (28,055)   (47.2)%
Other sales promotion related expenses   16,746    1.1%   37,071    2.3%   (20,325)   (54.8)%
Total selling expenses  $1,555,546    100.0%  $1,578,826    100.0%  $(23,280)   (1.5)%

 

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Our selling expenses decreased by $23,280, or 1.5%, from $1,578,826 in fiscal year 2019 to $1,555,546 in fiscal year 2020, primarily attributable to (i) a decrease in advertising expenses by $23,551, or 6.4%, from $367,513 in fiscal year 2019 to $343,962 in fiscal year 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 fiscal year 2019, in connection with our sales promotion of several new products to targeted customers, we spent more on advertising than we did in fiscal year 2020, which led to higher advertising expenses in fiscal 2019; (ii) a decrease in our salary and benefit expenses paid to our sales employees by $70,738, or 10.8%, from $657,370 in fiscal year 2019 to $586,632 in fiscal year 2020, and a decrease in business travel and meals expense by $28,055 or 47.2%, from $59,465 in fiscal year 2019 to $31,410 in fiscal year 2020, primarily due to our reduced sales activities from early February to early March 2020 as affected by the COVID-19. During the one-month temporary closure of our facilities in response to COVID-19 outbreak, we reduced business travels and we only paid basic salary to our sales personnel during this period of time; (iii) an increase in shipping and delivery expenses by $119,389, or 26.1%, from $457,407 in fiscal year 2019 to $576,796 in fiscal year 2020, because we outsourced most of the shipping and delivery services to third-party logistic companies and used more express shipping services in order to timely deliver products to our customers in response to transportation and logistics disruptions caused by the COVID-19, especially to customers located at remote geographic areas. This resulted in higher shipping and delivery expenses in the fiscal year 2020 as compared to the fiscal year 2019. These above-mentioned factors combined led to the decrease in our selling expenses in the fiscal year 2020 as compared to the fiscal year 2019. As a percentage of revenues, our selling expenses accounted for 5.1% and 4.8% of our total revenue for the years ended September 30, 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 years ended September 30, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
                         
Salary and employee benefit expense  $464,530    27.3%  $529,745    36.3%  $(65,215)   (12.3)%
Depreciation and amortization   188,670    11.1%   209,194    14.4%   (20,524)   (9.8)%
Bad debt reserve expenses   98,101    5.8%   297,972    20.4%   (199,871)   (67.1)%
Land and property tax   97,039    5.7%   98,943    6.8%   (1,904)   (1.9)%
Office supply and utility expense   115,891    6.8%   77,443    5.3%   38,448    49.6%
Transportation, business travel and meals expense   42,151    2.5%   51,553    3.5%   (9,402)   (18.2)%
Consulting fee   616,982    36.2%   54,906    3.8%   562,076    1023.7%
Inspection and maintenance fee   21,825    1.3%   65,919    4.5%   (44,094)   (66.9)%
Stamp tax and other expenses   58,235    3.4%   71,718    4.9%   (13,483)   (18.8)%
Total general and administrative expenses  $1,703,424    100.0%  $1,457,393    100.0%  $246,031    16.9%

 

Our general and administrative expenses increased by $246,031 or 16.9% from $1,457,393 in fiscal year 2019 to $1,703,424 in fiscal year 2020, primarily attributable to (i) our professional service fees increased by $562,076 in fiscal year 2020 as compared to fiscal year 2019, primarily due to increased audit fee in connection with the audits of our financial statements for the years ended September 30, 2020, 2019 and 2018 for our intended public offering, (ii) an increase in our office supply and utility expenses by $38,448, or 49.6%, to support our administration activities, offset by (x) a decrease in our salaries, welfare expenses and insurance expenses paid to administration employees by $65,215, or 12.3%, because of lower amount of annual bonus was distributed to administrative staffs in fiscal year 2020 as compared to fiscal year 2019, and (y) a decrease in bad debt expense by $199,871 or 67.1%. We generally extend our customers a credit term of 90 days. Based on our management’s assessment of the collectability of our outstanding accounts receivable, we accrued increased bad debt reserve in fiscal year 2019 than we did in fiscal year 2020. The overall increase in our general and administrative expenses in fiscal year 2020 as compared to fiscal year 2019 reflected the above-mentioned factors combined. As a percentage of revenues, general and administrative expenses were 5.5% and 4.4% of our revenue for the years ended September 30, 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 years ended September 30, 
   2020   2019   Variance 
   Amount   %   Amount   %   Amount   % 
Salary and employee benefit expenses to R&D staff  $97,444    16.7%  $76,973    12.4%  $20,471    26.6%
Materials used in R&D activities   469,788    80.6%   524,094    84.7%   (54,306)   (10.4)%
Depreciation and others   15,893    2.7%   17,370    2.8%   (1,477)   (8.5)%
Total R&D expenses  $583,125    100.0%  $618,437    100.0%  $(35,312)   (5.7)%

 

Research and development expenses decreased by $35,312, or 5.7%, from $618,437 for the fiscal year 2019 to $583,125 for the fiscal year 2020, primarily attributable to a decrease in the materials used in the R&D activities by $54,306. In fiscal year 2019, 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 in fiscal year 2019 than in fiscal year 2020. As a percentage of revenues, research and development expenses were 1.9% and 1.9% of our revenue for the years ended September 30, 2020 and 2019, respectively.

 

Other income (expenses), net

 

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. Total other expenses, net, increased by $51,525 or 51.6%, from $99,767 in fiscal year 2019 to $151,292 in fiscal year 2020, due to the following reasons:

 

Interest expenses decreased by $5,508, or 4.3%, from $129,268 in fiscal year 2019 to $123,760 in fiscal year 2020. The decrease in our interest expenses was affected by 2.0% negative impact from foreign exchange rate fluctuation when the average rate used to convert RMB into U.S. dollars changed from US$1.00 to RMB 6.8729 in fiscal year 2019 to US$1.00 to RMB 7.0077 in fiscal year 2020. As of September 30, 2020 and 2019, we carried a total of RMB18 million ($2.5 million) outstanding bank loans that we borrowed from LRC Bank for working capital purposes.

 

Other expense increased by $52,112, from other income of $2,760 in fiscal year 2019 to other expense of $49,352 in fiscal year 2020, because the Company paid RMB 330,000 (US$ 49,252) work injury compensation to one worker in fiscal year 2020.

 

Equity investment income was $21,820 and $26,741 for the years ended September 30, 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 September 30, 2020 and 2019, the value of this investment amounted to $735,000 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 $2,542,211 in fiscal year 2020, an increase of, $440,614, or 21.0% from $2,101,597 in fiscal year 2019 due to our increased taxable income. Under the EIT Law, domestic enterprises and 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 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. 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 years ended September 30, 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 PRC corporate income taxes by $118,986 and $312,357 for the years ended September 30, 2020 and 2019, respectively. The benefit of the tax holidays on net income per share (basic and diluted) $0.01 and $0.02 for the years ended September 30, 2020 and 2019, respectively. 

 

Net Income

 

As a result of the foregoing, we reported a net income of $7,558,222 for the fiscal year ended September 30, 2020, representing a $6,757 increase from a net income of $7,551,465 for the fiscal year ended September 30, 2019.

 

Liquidity and Capital Resources

 

As of September 30, 2020, we had $10,058,202 in cash on hand as compared to $3,177,321 as of September 30, 2019. We also had $10,871,778 in accounts receivable. Our accounts receivable primarily include balance due from customers for our pharmaceutical products sold and delivered to customers. As of the date of this prospectus, approximately 95.9%, or $10.4 million of our net accounts receivable balance as of September 30, 2020 have been subsequently collected during the period from October 2020 to February 28, 2021. Collected accounts receivable will be used as working capital in our operations, if necessary.

 

Our gross accounts receivable increased by approximately 69%, or $4.6 million, from approximately $6.9 million as of September 30, 2019 to approximately $11.5 million as of September 30, 2020. As of September 30, 2020 and 2019, respectively, 74.1% and 59.1% of our total accounts receivable aged below 3 months and were not past due. We normally grant our customers 90 days payment terms after the credit sales. However, in fiscal year 2020, some of our pharmaceutical distributors, affected by the COVID-19 outbreak, delayed their payment by an additional 20 to 30 days on average. As of September 30, 2020, approximately $6.9 million in accounts receivable were from 299 pharmaceutical distributors, among which 33 pharmaceutical distributors delayed their payment of approximately $2.2 million by 20 to 30 days after such receivable became past due. In addition, some of our customers, who are local hospitals and drugstore chains distributors, tend to require longer payment terms due to their longer payment processing procedures. As of September 30, 2020, approximately $4.6 million accounts receivable were from 235 hospitals, clinic and drugstore chains distributors, among which 35 hospitals, clinics and drugstores delayed their payment of approximately $0.73 million after such receivable became past due. However we believe that they are unlikely to default because of our long-term business relationships with them and our belief that the collectability risk is low based on our historical experience and collection history with them. As of September 30, 2020, most of our outstanding accounts receivable aged below six months.

 

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The following table summarizes the Company’s accounts receivable and subsequent collection by aging bucket as of the date the consolidated financial statements are issued on February 24, 2021:

 

 

Accounts Receivable by aging bucket

  Balance as of
September 30,
2020
    Subsequent
collection
    % of
subsequent
collection
 
Less than 3 months   $ 8,525,400     $ 7,161,436       84.0 %
From 4 to 6 months     1,347,337       981,700       72.9 %
From 7 to 9 months     967,020       897,539       92.8 %
From 10 to 12 months     670,838       669,626       99.8 %
Over 1 year     1,174       -       -  
Total gross accounts receivable     11,511,769       9,710,301       84.0 %
Allowance for doubtful accounts     (639,991 )     -       -  
Accounts Receivable, net   $ 10,871,778     $ 9,710,301       89.3 %

 

During February 2021, we collected additional $719,415 of the September 30, 2020 accounts receivable balance. The following table summarizes our accounts receivable and subsequent collection by aging bucket as of the date this prospectus:

 

Accounts Receivable by aging bucket   Balance as of
September 30,
2020
    Subsequent
collection
    % of
subsequent
collection
 
Less than 3 months   $ 8,525,400     $ 7,586,581       89.0 %
From 4 to 6 months     1,347,337       1,218,087       90.4 %
From 7 to 9 months     967,020       955,422       98.8 %
From 10 to 12 months     670,838       669,626       99.8 %
Over 1 year     1,174       -       -  
Total gross accounts receivable     11,511,769       10,429,716       90.6 %
Allowance for doubtful accounts     (639,991 )     -       -  
Accounts Receivable, net   $ 10,871,778     $ 10,429,716       95.9 %

 

For the accounts receivable balances due from 531 customers as of September 30, 2020, one customer, Sinopharm Group Co., Ltd., Enshi Branch, accounted for 13.0% of the total accounts receivable balance. The remaining 530 customers aggregately accounted for 87.0% of the total accounts receivable balance and none of them individually accounted for more than 10% of the total accounts receivable balance. Approximately 83.0% of the accounts receivable from Sinopharm Group Co., Ltd., Enshi Branch had been subsequently collected by February 28, 2021 and remaining balance is expected to be collected by March 31, 2021. Therefore, no single customer accounts for a significant portion of the uncollected balance as of the date of this prospectus.

 

As of September 30, 2020, our inventory balance amounted to $1,906,232, primarily consisting of raw materials and work-in-progress and finished TCMD products, which we believe are able to be sold quickly based on the analysis of the current trends in demand for our products. We also had short-term bank loans of $2,646,000 that we obtained from LRC Bank for working capital purposes. We expect that we will be able to renew all of the existing bank loans upon their maturity based on past experiences and our outstanding credit history. The balance of our due to related parties was $956,492 as of September 30, 2020, representing cash advances from our controlling shareholders to be used as our working capital.

 

As of September 30, 2020, our working capital balance was $15,278,527. In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We believe that our current cash and cash flows provided by operating activities, borrowings from banks and from our principal shareholders will be sufficient to meet our working capital needs in the next 12 months from the date the audited financial statements were issued.

 

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

 

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

 

    For the Years Ended
September 30,
 
    2020     2019  
Net cash provided by operating activities   $ 6,115,157     $ 13,203,755  
Net cash used in investing activities     (51,798 )     (86,033 )
Net cash used in financing activities     470,136       (16,003,857 )
Effect of exchange rate change on cash and restricted cash     347,386       (126,720 )
Net increase (decrease) in cash     6,880,881       (3,012,855 )
Cash, beginning of year     3,177,321       6,190,176  
Cash, end of year   $ 10,058,202     $ 3,177,321  

 

Operating Activities

 

Net cash provided by operating activities was $6,115,157 for the year ended September 30, 2020, primarily consisting of the following:

 

Net income of $7,558,222 for the fiscal year;

 

An increase in accounts receivable of $4,107,520. Our accounts receivable primarily includes balance due from customers for our pharmaceutical products sold and delivered to customers. Our average monthly revenue was approximately $2.5 million in fiscal year 2020 and $2.7 million in fiscal year 2019. In fiscal year 2020, since we closed our facilities for one month due to COVID-19 pandemic, our revenue decreased by $2.5 million, or 7.6% as compared to fiscal year 2019. Since we resumed our business operation on March 2, 2020, our monthly revenue has remained relatively stable, ranging from $2.1 million per month to $2.8 million per month from April 2020 to September 2020, with no large or unusual amount of sales at the end of fiscal year 2020. Our sales in September 2020 amounted to approximately $2.8 million, representing a slightly increase of $0.9 million as compared to September 2019. Our revenue in September 2019 was lower because we temporarily closed our manufacturing facilities in August and September 2019 for maintenance. Some of our pharmaceutical distributors, affected by the COVID-19 outbreak, delayed their payment by an average of additional 20 to 30 days. As of September 30, 2020, approximately $6.9 million in accounts receivable were from 299 pharmaceutical distributors, among which 33 pharmaceutical distributors delayed their payment of approximately $2.2 million by 20 to 30 days after such receivable became past due. In addition, some of our customers, who are local hospitals and drugstore chains distributors, tend to require longer payment terms due to their longer payment processing procedures. As of September 30, 2020, approximately $4.6 million in accounts receivable were from 235 hospitals, clinic and drugstore chains distributors, among which 35 hospitals, clinics and drugstores delayed the payment of approximately $0.73 million after such receivable became past due. However, we believe that these customers are unlikely to default because of our long-term business relationships with them and our belief that the collectability risk is low based on our historical experience and collection history with them. As of September 30, 2020, most of our outstanding accounts receivable aged below six months. As of date of this prospectus, approximately 95.9%, or $10.4 million of our net accounts receivable balance as of September 30, 2020 have been subsequently collected and the remaining balanced is expected to be collected by March 31, 2021. Collected accounts receivable will be used as working capital in our operations, if necessary.

 

A decrease in inventory balance of $888,607 because in fiscal year 2020, we have implemented our  inventory control policy based on sales order level in order to avoid over-stockpile of raw materials and third-party products to reduce risks associated with slow-moving and obsolete in inventories.

  

An increase in accounts payable of $639,427 because we normally arrange the payment to suppliers upon receipt of the invoices from them. As of September 30, 2020, the increase in accounts payable was largely due to pending invoices from suppliers. Approximately 80% of the September 30, 2020 accounts payable balance has been subsequently settled as of the date of this prospectus.

 

  An increase in taxes payable of $731,518 primarily due to an increased taxable income.

 

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

 

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

 

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

 

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

  

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

 

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

 

Investing Activities

 

Net cash used in investing activities amounted to $51,798 for the year ended September 30, 2020, and primarily included the purchase of fixed assets in the same amount.

 

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

 

Financing Activities

 

Net cash provided by financing activities amounted to $470,136 for the year ended September 30, 2020, primarily include the following:

 

Proceeds from short-term bank loans of $1,427,000 and repayment of bank loans of $1,427,000. During fiscal year 2020, our subsidiary Universe Trade repaid RMB 8 million loan to LRC Bank upon maturity and at the same time renewed the loan agreement to borrow RMB 8 million for additional six months until to March 31, 2021.

 

Payment for Deferred public offering costs of $441,064. Deferred offering costs consisted principally of legal, underwriting, and other professional service expenses in connection with the Initial Public Offering (the “IPO”) of our Ordinary Shares. As of September 30, 2020, we capitalized $441,064 of deferred offering costs. Such costs will be deferred until the closing of the IPO, at which time the deferred costs will be offset against the offering proceeds.

 

  Proceeds from related party borrowings of $911,200. The balance due to related party mainly consisted of advances from our principal shareholder for working capital purposes during our normal course of business. These advances were non-interest bearing and due on demand.

 

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

 

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

 

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

 

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

 

Commitments and contingencies

 

From time to time, we are a party to various legal actions arising in the ordinary course of business. We accrue costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. For the years ended September 30, 2020 and 2019, we did not have any material legal claims or litigation that, individually or in aggregate, could have a material adverse impact on our consolidated financial position, results of operations and cash flows. 

 

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As of September 30, 2020, we had the following contractual obligations:

 

       Payment Due by Period 
Contractual obligations  Total   Less than 1
year
   1-3 years 
Debt obligations (1) (2)  $2,646,000   $2,646,000   $        - 
Total  $2,646,000   $2,646,000   $- 

 

(1) On September 26, 2019, the Company’s subsidiary Universe Trade signed a loan agreement with LRC Bank to borrow RMB 8 million (equivalent to $1,120,800 as of September 30, 2019 and $1,176,000 as of September 30, 2020) as working capital,, with the original maturity date on September 25, 2020. The fixed interest rate of the loan was 5.655% per annum. Upon maturity date, Universe Trade signed a loan extension agreement with LRC bank to extend the loan repayment date to March 31, 2021 with new interest rate of 4.81% per annum. Related parties including Mr. Gang Lai, the Company’s controlling shareholder, Foshan Shangyu Investment Holding Co., Ltd., an affiliated entity controlled by Mr. Gang Lai, and the Company’s subsidiaries Jiangxi Universe and Universe Technology, as well as three unrelated individuals jointly signed a guarantee agreement with LRC Bank to provide credit guarantee to safeguard this loan.

 

(2) On June 19, 2020, the Company’s subsidiary Jiangxi Universe signed a loan agreement with LRC Bank to borrow RMB 10 million (equivalent to $1,470,000) as working capital for one year, with the maturity date on June 18, 2021. The fixed interest rate of the loan was 4.81% per annum. There was no guarantee requirement for this loan.

 

Trend Information

 

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

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as of September 30, 2020 and 2019.

 

Inflation

 

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

 

Seasonality

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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Risks and Uncertainties

 

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

 

Our business, financial condition and results of operations may also be negatively impacted by risks related to natural disasters, extreme weather conditions, health epidemics and other catastrophic incidents, such as the recent outbreak and spread of the COVID-19, which could significantly disrupt our operations. Our operations may be further affected by the ongoing outbreak of COVID-19 which in March 2020, had been declared as a pandemic by the World Health Organization. To reduce the spread of the COVID-19, the Chinese government has employed measures including city lockdowns, quarantines, travel restrictions, suspension of business activities and school closures. Due to difficulties resulting from the COVID-19 outbreak, including, but not limited to, the temporary closure of our factory and operations beginning in early February until to March 2, 2020, limited support from our employees, delayed access to raw material supplies and inability to deliver products to customers on a timely basis, our business was negatively impacted and generated lower revenue and net income during the period from February to March 2020. Although we resumed our operations on March 2, 2020 and the COVID-19 impact on our operating results and financial performance for fiscal year 2020 seems to be temporary, a resurgence could negatively affect the execution of customer contracts, the collection of customer payments, or disrupt our supply chain, and the continued uncertainties associated with COVID 19 may negatively impact our revenue and cash flows.

 

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

 

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

 

Uses of estimates

 

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

 

Accounts receivable, net

 

Accounts receivable are presented net of allowance for doubtful accounts. We determine the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trend. We establish a provision for doubtful receivables when there is objective evidence that we may not be able to collect amounts due. The allowance is based on management’s best estimate of specific losses on individual exposures, as well as a provision on historical trends of collections. Actual amounts received may differ from management’s estimate of credit worthiness and the economic environment. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. Allowance for uncollectable balances amounted to $639,991 and $517,754 as of September 30, 2020 and 2019, respectively.

 

Inventories, net

 

Inventories are stated at net realizable value using weighted average method. Costs include the cost of raw materials, freight, direct labor and related production overhead. Any excess of the cost over the net realizable value of each item of inventories is recognized as a provision for diminution in the value of inventories. Net realizable value is the estimated selling price in the normal course of business less any costs to complete and sell products. We evaluate inventories on a quarterly basis for its net realizable value adjustments, and reduces the carrying value of those inventories that are obsolete or in excess of the forecasted usage to their estimated net realizable value based on various factors including aging, expiration dates, as applicable, taking into consideration historical and expected future product sales. We recorded inventory reserve of $110,585 and $179,412 as of September 30, 2020 and 2019, respectively.

 

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Revenue recognition

 

To determine revenue recognition for contracts with customers, we perform the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy the performance obligation.

 

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

  

Contract Assets and Liabilities

 

Payment terms are established on our pre-established credit requirements based upon an evaluation of customers’ credit quality. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment or delivery occurs. As of September 30, 2020 and 2019, other than accounts receivable and advances from customers, we had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in selling, general and administrative expense when incurred.

 

Disaggregation of Revenues

 

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

 

The summary of our total revenues by product categories for the years ended September 30, 2020 and 2019 was as follows:

 

Revenue by product source

 

   For the year ended
September 30,
 
   2020   2019 
Sales of TCMD products manufactured by the Company  $18,374,751   $20,895,542 
Sales of third-party products   12,329,209    12,333,774 
Total revenue  $30,703,960   $33,229,316 

 

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Revenue by product categories

 

   For the years ended
September 30,
 
   2020   2019 
         
Sales of TCMD products:        
Medicinal liquor products  $1,616,080   $2,356,015 
Other chronic condition treatment products   14,059,403    14,056,228 
Cold and flu medicines   2,699,268    4,483,299 
Sub-total of TCMD products sales   18,374,751    20,895,542 
           
Sales of third-party products:          
Biochemical drugs   10,325,411    9,508,816 
Traditional Chinese medicine pieces   47,097    142,409 
Medical instruments   1,950,238    2,668,422 
Dietary supplements   6,463    14,127 
Subtotal of third-party products sales   12,329,209    12,333,774 
           
Total revenue  $30,703,960   $33,229,316 

 

Income Tax

 

We account for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

An uncertain tax position is recognized only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended September 30, 2020 and 2019. We do not believe there was any uncertain tax provision at September 30, 2020 and 2019.

 

Our operating subsidiary in China is subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the years ended September 30, 2020 and 2019. As of September 30, 2020 and 2019, all of our tax returns of our PRC Subsidiaries remain open for statutory examination by PRC tax authorities.

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

 

In November 2019, the FASB issued ASU 2019-10, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASU 2019-10”). ASU 2019-10 (i) provides a framework to stagger effective dates for future major accounting standards and (ii) amends the effective dates for certain major new accounting standards to give implementation relief to certain types of entities. Specifically, ASU 2019-10 changes some effective dates for certain new standards on the following topics in the FASB Accounting Standards Codification (ASC): (a) Derivatives and Hedging (ASC 815) – now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (b) Leases (ASC 842) - now effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021; (c) Financial Instruments — Credit Losses (ASC 326) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years; and (d) Intangibles — Goodwill and Other (ASC 350) - now effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the cumulative effect resulting from the adoption of this guidance will have a material impact on our consolidated financial statements.

 

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

 

In February 2020, the FASB issued ASU 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (topic 842)”. This ASU provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. This ASU is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We are evaluating the impact of this guidance on our consolidated financial statements.

 

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INDUSTRY

 

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

 

OVERVIEW OF THE MACROECNOMIC ENVIRONMENT IN THE PRC

 

Population of High-Aged Group

 

 

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

 

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

 

Per Capita Annual Disposable Income

 

 

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

 

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

 

OVERVIEW OF THE CHINESE PATENT MEDICINE MARKET IN THE PRC

 

Definition and Categorization of Traditional Chinese Medicine

 

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

 

Chinese herbal medicine

 

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

 

Decoction pieces

 

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

 

Chinese patent medicine

 

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

 

Traditional Chinese dietary supplements

 

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

 

Value Chain Analysis

 

 

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

 

Source: Frost & Sullivan Report

 

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

 

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Market Size of Chinese Patent Medicine

 

 

Source: Frost & Sullivan Report

 

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

 

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

 

Market Size of Traditional Chinese Dietary Supplements

 

 

Source: Frost & Sullivan Report

 

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

 

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Market Drivers

 

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

 

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

 

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

 

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

 

Market Trend

 

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

 

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

 

COMPETITIVE LANDSCAPE OF CHINESE PATENT MEDICINE MARKET IN THE PRC

 

Competition Overview

 

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

 

Major Competitors

 

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

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

 

Entry Barrier Analysis

 

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

 

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

 

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

 

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BUSINESS

 

Our Mission

 

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

 

Overview

 

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

 

We are a pharmaceutical company based in Jiangxi, China, specializing in the manufacturing, marketing, sales and distribution of traditional Chinese medicine derivatives (“TCMD”) products targeting the elderly with the goal of addressing their physical conditions in the aging process and to promote their general well-being. We have registered and obtained approval for 26 varieties of TCMD products from the National Medical Products Administration (the “NMPA”), and we currently produce 13 varieties of TCMD products, which are sold in approximately 261 cities of 30 provinces in China as of the date of this prospectus. In addition, through our subsidiary Jiangxi Universe Pharmaceuticals Commercial Trade Co., Ltd. (“Universe Trade”), we sell not only our own 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, 75.8% of seniors have at least one chronic health condition, and 35.1% of them have two or more. Some of the most common chronic diseases in the elderly include arthritis, chronic kidney disease, fatigue, and low back pain. Our products under the category of Chronic Condition Treatments are designed to address some of the aforementioned diseases. Our cold and flu medicines, on the other hand, include products designed to treat and relieve symptoms of respiratory illnesses caused by bacteria and viruses.

 

Our third-party products. Through our subsidiary, Universe Trade, we also distribute and sell products manufactured by third-party producers, including biomedical drugs, medical instruments, TCMPs and dietary supplements. As of October 31, 2020, we had distributed around 5,184 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, Hubei Province, Fujian Province, Guangxi Province and Shandong Province, and 23 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 1,535 customers in 2018 to 2,603 customers at the end of fiscal year 2019, and decreased to 2,209 as of December 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, but decreased to $18,374,751 for the fiscal year ended September 30, 2020 due to the impact of COVID-19 pandemic and strong market competition. 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, and decreased slightly to $12,329,209 for the year ended September 30, 2020 primarily due to decreased average selling price and changes in product mix sold. 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 $7,558,222 for the fiscal year ended September 30, 2020.

 

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Our Competitive Strengths

 

We believe we have the following competitive strengths:

 

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

 

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

 

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

 

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

 

Rigorous quality control standards and manufacturing protocols

 

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

 

Visionary management team with substantial industry experience

 

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

 

Strong record of growth and profitability

 

We have been profitable since 2008 and we believe we are well-positioned to benefit from the rapid growth of the TCMD market in China and to leverage the leading market position of our flagship products in order to further grow our business. Due to the impact of COVID-19 pandemic, our revenue was decreased from $20,895,542 for the fiscal year ended September 30, 2019 to $18,374,751 for the fiscal year ended September 30, 2020. In response to the COVID-19 pandemic, we made certain strategic decisions to mitigate the negative impacts, including our decision to focus on selling third-party products during February and March 2020 when our factory was closed. In addition, in August and September 2019, we conducted maintenance and upgrade of our manufacturing facilities, which 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. This contributed to a decrease in the cost of revenue associated with the sales of our TCMD products by 27.8% in fiscal year 2020 as compared to fiscal year 2019. As a result of the change in product mix and decrease in our cost of revenue, our net income increased slightly from $7,551,465 for the fiscal year ended September 30, 2019 to $7,558,222 for the fiscal year ended September 30, 2020.

 

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Our Growth Strategy

 

Build a Strong Brand Image to Achieve National Recognition

 

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

 

Enhance Our Distribution Network to Increase Market Penetration and Customer Stickiness

 

As of the date of this prospectus, our products are sold in 30 provinces in China. We plan to enter the markets in other parts of China. To achieve this goal, we have made efforts to further strengthen and expand our distribution network through connecting with more local distributors, chain drugstores, malls and supermarkets in other parts of China. Currently, our strategic focus is to attract more marketing talents and build a stronger sales and marketing team to keep us on top of the latest information of local markets, customer preferences and industry trends. We also plan to create an online store to reach a wider consumer demographic. In the future, we plan to start our own retail chain stores and further diversify our distribution channels to increase our market penetration and customer base.

 

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

 

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

 

Further Grow Our Research and Development Capacities

 

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

 

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Our Manufactured Products

 

As of January 31, 2021, we have been manufacturing, marketing and selling 13 different TCMD products to customers in 30 different provinces in China. Our TCMD products fall under two categories: Chronic Condition Treatments and cold and flu medications. The following list outlines our current products:

 

            Percentage of
Gross Sales
     
Product
Category
  Product Name   Posology   2020     2019     2018     Intended Uses
Chronic Condition Treatments   Guben Yanling Pill   Pills     38.2 %     32.4 %     25.9 %   To relieve fatigue, palpitation, low back pain, and generalized weakness and soreness.
    Shenrong Weisheng Pill   Pills     4.6 %     5.3 %     5.2 %   To relieve fatigue, dizziness, excessive sweating, and pain in the waist and the knees.
    Quanlu Pill   Pills     0.8 %     0.4 %     1.1 %   To improve kidney functions and spleen functions, and relieve fatigue, low back pain, and knee pain.
    Wuzi Yanzong Oral Liquid   Oral liquid     0.6 %     0.7 %     0.3 %   To improve kidney functions.
    Yangxue Danggui Syrup   Syrup     1.6 %     3.5 %     4.5 %   To improve blood circulation and treating dizziness, headaches and menstrual pains.
    Fengshitong Medicinal Liquor   Medicinal liquor     1.6 %     0.2 %     0.2 %   To treat low back pain and numbness in the feet and hands, and relieve rheumatoid arthritis pain.
    Shiquan Dabu Medicinal Liquor   Medicinal liquor     1.8 %     1.9 %     3.4 %   To treat dizziness, palpitation, fatigue, and weakness, and ease menstrual flow.
    Fengtong Medicinal Liquor   Medicinal liquor     0.2 %     2.9 %     3.9 %   To treat low back pain and numbness in the feet and hands, and relieve symptoms of arthritis.
    Shenrong Medicinal Liquor   Medicinal liquor     1.4 %     1.6 %     2.0 %   To improve blood circulation and relieve symptoms of fatigue, low back pain and leg pain.
    Qishe Medicinal Liquor   Medicinal liquor     0.3 %     0.4 %     0.5 %   To treat blood stasis, arthritis, and numbness in the feet and hands.
Cold and Flu Medicines Medicinal Liquor   Qiangli Pipa Syrup   Syrup     3.3 %     6.9 %     8.2 %   Relieve cough and reduce mucus and phlegm.
    Paracetamol Granule for Children   Granules     1.9 %     1.6 %     1.4 %   To relieve children’s headaches, muscle aches, toothaches, colds and fevers.
    Isatis Root Granule   Granules     3.6 %     5.0 %     5.3 %   To treat common colds and other infections of the upper respiratory tract.

 

Among the 13 TCMD products we manufacture, Guben Yanlin Pill is our signature product. For the fiscal years ended September 30, 2020, 2019 and 2018, the revenue derived from the sale of Guben Yanlin Pill represented 38.2%, 32.4% and 25.9% of our total revenue.

 

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Our Manufacturing Process

 

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

 

 

Our Raw Materials and Suppliers

 

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

 

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

 

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

 

We consider our raw materials suppliers whose sales to us accounted for more than 10% of our overall purchases in any given period to be our major suppliers for such period. We had two such supplier during the fiscal year ended September 30, 2020, Jiangxi Hongjing Pharmaceutical Co., Ltd. and Jiangxi Kangxin Pharmaceutical Packaging Co., Ltd., whose sales to us accounted for approximately 19.6% and 13.6% of our overall purchases in the fiscal year, respectively. We had one such supplier during the fiscal year ended September 30, 2019, Jiangxi Hongjing Pharmaceutical Co., Ltd., whose sales to us accounted for approximately 14.1% of our overall purchases in that fiscal year.

 

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Manufacturing Process

 

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

 

Pill Products

 

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

 

Granule Products

 

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

 

Syrup Products

 

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

 

Oral Liquid Products

 

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

 

Medicinal Liquor Products

 

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

 

Quality Control and Assurance

 

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

 

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

 

Third-party Product Distribution

 

In addition to manufacturing our own products, we also distribute and sell, through our subsidiary Universe Trade, biomedical drugs, medical instruments, TCMPs and dietary supplements manufactured by third-party pharmaceutical companies. For the fiscal year ended September 30, 2020, we had distributed roughly 2,785 third-party products, of which approximately 83.75% are biochemical drugs, such as liquid glucose, prednisolone, and citicoline, approximately 15.82% are medical instruments, such as drug-eluting stents, surgical tubes and syringes, approximately 0.38% are TCMPs, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules and approximately 0.05% are dietary supplements, such as vitamins, probiotic powder, and calcium tablets. For the year ended September 30, 2019, we had distributed roughly 3,590 third-party products, of which approximately 71.55% are biochemical drugs, such as liquid glucose, prednisolone, and citicoline, approximately 18.68% are medical instruments, such as drug-eluting stents, surgical tubes and syringes, approximately 9.05% are TCMPs, such as red sage tables, Longdan Xiegan pills, and Chinese skullcap capsules and approximately 0.72% are dietary supplements, such as vitamins, probiotic powder, and calcium tablets. We distribute these products to hospitals, drugstore chains, clinics, and pharmaceutical companies.

 

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Our Suppliers of Third-party Products

 

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

 

For the fiscal year ended September 30, 2020 and 2019, we purchased products from over 728 and 650 suppliers, respectively. For the fiscal years ended September 30, 2020 and 2019, we did not have any supplier of third-party products whose sales to us accounted for more than 10% of our overall purchases of that fiscal year.

 

Our Customers

 

Our customers are mostly pharmaceutical companies, hospitals, clinics and drugstore chains with pharmaceutical business qualification certificates, awarded and authorized by the National Medical Products Association (the “NMPA”) and are authorized to sell and deliver our products to end consumers. As of the date of this prospectus, our customers are scattered over 261 cities of 30 provinces in China. We determine whether to establish long-term business relationships with our customers primarily based on two factors, their ability to promote our products and their ability to make payments on time.

 

As of September 30, 2020, we have total of 2,209 customers, of which 1,153 were pharmaceutical distributors, 443 were clinics, 403 were drug stores, and 210 were hospitals. For the fiscal year ended September 30, 2020, our revenues generated from sales to pharmaceutical distributors, hospitals, clinics and drugstore chains represented 63.8%, 22.4%, 13.3% and 0.5% of our total revenues, respectively.

 

For the fiscal year ended September 30, 2019, our revenues generated from sales to pharmaceutical distributors, hospitals, clinics and drugstore chains represented 58.89%, 21.22%, 19.40%, and 0.48% our of total revenues, respectively. None of our customers generated more than 10% of our revenue for the fiscal years ended September 30, 2020 and 2019. However, our top 10 customers aggregately accounted for 33.3% and 34.5% of our total revenue for the fiscal years ended September 30, 2020 and 2019, respectively.

 

Marketing and Sales

 

We believe that marketing activities are crucial to our success in the competitive Chinese patent medicine industry. As of September 30, 2020, we had a total of 56 employees in our marketing department. Employees in our marketing department are mainly responsible for performing various marketing activities, including researching the most updated industry and market information, analyzing market trends and consumer preferences, setting up marketing strategies, executing sales contracts, communicating with existing customers and networking with potential customers.

 

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

 

Research and Development

 

We established a research and development department in 1998. Our research and development team has been focusing on the upgrade of current products and the development of production techniques to increase productivity. After years of continued development, our research and development department has become the core of our technological innovation efforts. As of January 31, 2021, we had 19 employees dedicated to research and development.

  

R&D Achievements

 

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

 

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

 

R&D Development Plan

 

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

 

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

 

Competition

 

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

 

Competitors of products manufactured by us

 

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

 

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

 

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Competitors of Third-party Products

 

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

 

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

 

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

 

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

 

Employees

 

As of 2018 and 2019 and January 31, 2021, we had a total of 169, 176 and 227 employees, all of which are located in China. The following table sets forth the number of our employees by function as of January 31, 2021.

 

Function  

Number of

Employees

   

% of

Total

 
Purchasing Department     9       3.96 %
Warehouse Department     14       6.17 %
Manufacturing Department     86       37.89 %
Quality Control Department     16       7.05 %
Research and Development Department     19       8.37 %
Marketing Department     57       25.11 %
Finance Department     8       3.52 %
Administration Department     18       7.93 %
Total     227       100 %

 

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

 

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

 

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

 

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

 

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

 

Properties and Facilities

 

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

 

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

 

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

 

Intellectual Property

 

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

 

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Patents

 

As of January 31, 2021, we had 12 effective patents in China. The following table sets forth the title, patent number, application date, and the category of each patent.

 

No.  Patent Title  Patent Number  Application
Date
  Expiration
Date
  Patent
Category
1  A Coarse Grinder for Chinese Medicine  CN201520922379.1  11/18/2015  11/17/2025  Utility Model
2  An Automatic Chinese Medicine Pill Maker  CN201821790286.8  10/31/2018  10/30/2028  Utility Model
3  A Chinese Medicine Boiler  CN201821787013.8  10/31/2018  10/30/2028  Utility Model
4  A Chinese Medicine Extractor  CN201821789886.2  10/31/2018  10/30/2028  Utility Model
5  A Chinese Medicine Distiller  CN201821787483.4  10/31/2018  10/30/2028  Utility Model
6  An Automatic Grinder for Chinese Medicine  CN201821789843.4  10/31/2018  10/30/2028  Utility Model
7  An Intelligent Traditional Chinese Medicine Sterilizer  CN201821787111.1  10/31/2018  10/30/2028  Utility Model
8  An Efficient Traditional Chinese Medicine Mixer  CN201821786741.7  10/31/2018  10/30/2028  Utility Model
9  A Traditional Chinese Medicine Concentration Device  CN201821795987.0  11/01/2018  5/6/2020  Utility Model
10  A Temperature-controlled Traditional Chinese Medicine Dryer  CN201821786955.4  6/18/2019  4/30/2028  Utility Model
11  A Chinese Medicine Pill Intelligent Bottling Machine  CN201821791526.6  10/31/2018  4/30/2020  Utility Model
12   Identity verification system for commercial platform based on multi-dimensional data analysis   CN201910896871.9   09/23/2019   09/22/2029   Invention

  

Trademarks

 

Through Jiangxi Universe, we currently have 22 Chinese trademarks.